WASHINGTON (AP) -- The federal deficit for the just-finished 2010 budget year was a little under $1.3 trillion, the Congressional Budget Office estimated Thursday.

The CBO puts the deficit about $125 billion below the $1.42 trillion record posted for 2009.

That means the government borrowed 37 cents out of every dollar it spent as tax revenues continued to lag while spending on food stamps and unemployment benefits went up as the economy slowly pulls out of the recession.

The CBO figures are based on preliminary data but should be very close to the Treasury Department's official tally due in a week or so.

The report provides a fresh reminder of the government's fiscal problems, a major issue in midterm elections less than a month away. It's a slight improvement from prior CBO estimates.

The near-record deficits come as Democrats and Republicans are battling over extending Bush-era tax cuts. The chief difference between the combatents -- about $700 billion over the coming decade -- is whether to extend tax cuts for individuals making more than $200,000 and families making over $250,000. Both sides generally agree on extending $3.3 trillion in other Bush tax cuts.

Republicans and a few Democrats want to preserve the tax cuts for upper-income taxpayers. Democratic leaders opted to avoid the confrontation and the risk of being branded tax hikers and adjourned the Congress for the matter to be resolved after the elections.

The decline in the deficit from last year's record is due to $108 billion in repayments and other revenues from the unpopular Troubled Assets Relief Program, the 2008 bailout of the financial services sector.

The ultimate cost of the $700 billion bailout is turning out to be considerably less than previously estimated -- just $50 billion under latest Treasury Department estimates -- but the success of the TARP program hasn't made it any more popular with voters.

The continuing weakness in the economy means that income and Social Security tax revenues both dropped relative to 2009, despite the fact that the economy has begun to grow again after the worst recession since the 1930s. Income tax revenues are down 1.6 percent and payroll taxes are down 3.2 percent, reflecting continued weakness in job growth.

At the same time, unemployment benefits jumped 34 percent as the jobless rate hovered near 10 percent nationwide and Congress renewed benefits for the long-term unemployed.

The 2010 deficit equaled almost 9 percent of the size of the economy, far more than the 3 percent or so that economists say is sustainable over the long term. Estimates vary, but the deficit is expected to drop to perhaps $800 billion or so in a few years before unsustainable spending on federal retirement programs -- Medicare and Social Security -- kick in.

Deficits of $1 trillion in a single year had never happened until two years ago. The $1.4 trillion deficit in 2009 was more than three times the size of the previous record-holder, a $454.8 billion deficit recorded in 2008.

One bright spot in 2010 was an almost 40 percent increase in corporate tax receipts.