Accounting & Tax

Tale of Two Deficits: It’s All in the Accounting

Federal budget gap would have been $113 billion more if the government had used the accrual method that is normal among corporations.
Stephen TaubDecember 18, 2007

The federal government on Monday announced that its budget deficit for fiscal year 2007 will be the lowest in five years, $162.8 billion.

However, that mild good news comes with a caveat. The government’s calculation was arrived at by using the cash-flow method, under which expenses are recorded when paid. The picture would look much different if, like most companies it used the accrual method, where expenses are recorded when incurred.

Using the latter approach, the federal budget deficit would have totaled $275.5 billion for the fiscal year ending Sept. 30, or 69 percent more than the official figure, according to the just released “Financial Report of the United States Government” for 2007.

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Even so, the government showed tremendous progress in cutting the deficit. Even under the accrual method it would have been down by 38.7 percent from $449.5 billion last year.

In any case, Treasury Secretary Henry M. Paulson, Jr. pointed out that record-breaking revenues of $2.6 trillion flowed into the Treasury this year, which he asserted reflect a healthy economy.

“To continue this progress, we must maintain discipline on spending,” Paulson said.

He warned that the expected revenue in years ahead will not come close to meeting the growing cost of social insurance programs. So, he challenged lawmakers to fix this problem now, “before it becomes a severe economic burden for our children and grandchildren.”

The report indicates that funding for Social Security and Medicare will come up $45 trillion short in the next 75 years. Without reform, the cost of these programs is expected to total 18 percent of GDP by 2080.

“This year’s budget results reinforce that tax relief combined with spending restraint works. This formula has helped promote economic expansion that, in turn, has helped generate higher-than-expected revenue and resulted in deficit reduction of $250 billion over the last three years,” said Jim Nussle, director of the Office of Management and Budget. “Reducing the deficit in the short term will put us in a better position for dealing with the longer-term entitlement issue, which can only be characterized as an oncoming fiscal train wreck.”

On Friday the Government Accountability Office announced that it was prevented from rendering an audit opinion of the government’s financial results, citing “serious” material weaknesses affecting the nation’s financial systems, fundamental recordkeeping, and financial reporting.

“If the federal government was a private corporation and the same report came out this morning, our stock would be dropping and there would be talk about whether the company’s management and directors needed a major shake-up,” said Comptroller General David M. Walker. He also noted this was the 11th year in row the GAO was unable to express an opinion on the consolidated financial results submitted by the Treasury Department.