WHAT SHALL WE DO WITH THE SURLPUS?:

Rising government revenue from tax collections and bailout paybacks are shrinking the federal deficit faster than expected, delaying the point when the government will reach the so-called debt ceiling and altering the budget debate in Washington.

The improving financial picture got brighter Thursday when mortgage-finance giant Fannie Mae FNMA +0.11% --which received a big dose of taxpayer aid during the financial crisis--said it would pay the U.S. government $59.4 billion in dividends at the end of June. That sum, as well as $7 billion and possibly more from fellow mortgage-finance firm Freddie Mac, FMCC -0.71% will flow straight into the federal coffers.

At the same time, steadily if historically slow economic growth and changes in tax laws that raised rates in January have pushed other government revenue up. The Congressional Budget Office now calculates the federal deficit through the first seven months of the fiscal year that began in October is $231 billion less than the deficit was at this time a year ago, thanks in part to an estimated 16% increase in tax revenue.

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