The US budget deficit shrank to $319bn (£180bn) last year as better economic conditions boosted tax revenues.
Despite falling from 2004's record $412bn figure, the federal deficit for the fiscal year ending last month was still the third highest on record.
US Treasury Secretary John Snow hailed the fall, which was larger than had been projected, as "encouraging news".
However, this year's deficit is likely to be swelled by $30bn of spending on post-Hurricane Katrina reconstruction.
Katrina costs
According to figures from the US Treasury Department, only $4bn of the $62bn allocated by Congress in emergency aid for Hurricane Katrina was spent in the last fiscal year.
When it reconvenes on Monday, the House of Representatives will begin the task of identifying $35bn worth of cuts to federal spending needed to offset hurricane recovery costs.
Lower taxes and pro-growth economic policies have created millions of jobs
John Snow US Treasury Secretary
The 2005 fiscal year deficit amounted to 2.6% of GDP, below the 3.6% recorded in 2004 and the post World War Two high of 6% in 1983.
"While deficits are never welcome, the fact that we finished fiscal year 2005 with a much-lower-than-expected deficit is encouraging news," Mr Snow said.
"Lower taxes and pro-growth economic policies have created millions of jobs and a growing economy that has swelled tax revenues over the past year," he added.
Robust growth
The US economy has enjoyed robust growth, expanding by more than 3% in each of the past nine quarters.
However, the Treasury Department believes Hurricane Katrina could reduce growth by 0.5% in the current quarter.
Katrina contributed to a fall in the number of people in work last month, the first monthly decline in two years.
The White House initially forecast a 2005 deficit of $427bn at the start of the calendar year, but has steadily revised the figure downwards since then.
