The federal budget deficit fell sharply in January compared to a year earlier, as an improving economy lifts income tax revenue.

The deficit is on track to shrink this year, but the red ink will still run deep: it is forecast to top $1 trillion for the fourth year in a row. That's likely to mean that budget issues in Congress will remain high-profile and contentious this year.

The deficit declined to $27 billion last month, from $50 billion in January 2011, the Treasury Department said Friday. Most of the drop was due to several accounting changes. The biggest resulted in some benefit payments being made in December rather than January.

Even excluding the impact of those changes, the budget gap declined 18 percent last month, mostly because of higher tax receipts.

The Congressional Budget Office, a nonpartisan agency, forecast last week that the budget gap will be nearly $1.1 trillion in budget year 2012, which began Oct. 1. That's down from $1.3 trillion in the previous year.

The highest budget deficit on record was $1.4 trillion in 2009, nearly triple the previous record of $458 billion in 2008. The imbalance was $1.29 trillion in 2010.

In the first four months of the 2012 budget year, the deficit fell by $70 billion to $349 billion, the department said.

Higher corporate tax receipts have boosted the government's revenue, the department said, which totaled $790 billion from October through January.

Spending fell to $1.14 trillion in the same period, though excluding the accounting changes it was largely flat.

Still, the picture hasn't improved as much as the CBO had estimated it would last year. In August, the agency projected that the deficit would come in at $973 billion this year. But last week, it boosted its estimate, citing lower than expected tax revenues.

Congress has shown little ability recently to make difficult changes to tax levels or spending programs to reduce the deficit. They will face another big challenge at the end of this year, when tax cuts that were first enacted in 2001 and 2003 are set to expire. And a set of automatic spending cuts totaling about $1.2 trillion over 10 years is also scheduled to kick in.

Those changes, along with several other provisions that will automatically take effect under current law, would substantially reduce the deficit in future years.

But the CBO estimates that if Congress extends the tax cuts, as many observers expect, and if they block the spending cuts, the deficit will remain near $900 billion or higher for the next 10 years.

President Obama is set to release his annual budget proposal Monday. It will include a set of economic projections, including that unemployment will average 8.9 percent this year. White House officials dismissed the figure Thursday as outdated. The rate fell to 8.3 percent in January.