Two Federal Budget Deficit Estimates; Two Accounting Methods

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According to the Financial Report of the United States Government for the year ending September 30, 2006, which was released by the Treasury Department (DoT) on Friday, the federal budget deficit totaled $449.5 billion, nearly 81 percent higher than the $247.7 billion in the President's annual budget report published two months ago. The two different deficit estimates do not mean two sets of books, the Treasury Executive Summary says, but come from different financial reports, using two different accounting methods -- cash and accrual -- that complement each other and reflect different perspectives.

The President's budget report is prepared on a cash basis; the numbers reflect cash collected and checks sent out. The Treasury's Financial Report, prepared on an accrual basis, recognizes costs when owed but not necessarily paid -- for example, on Social Security, federal pensions, and Medicare. Revenues are recognized when owed but not necessarily received.

“There is no magic, no sleight of hand; just cost accruals to adjust for the timing of the cash outlay versus the portion of non cash-based cost attributable to the current period,” the Executive Summary accompanying the Financial Report says.

Costs declined in the current year over last year despite an increase in spending due largely to a change in actuarial assumptions regarding lower interest rates, Reuters reports.

The 2006 Financial Report is the tenth issued by the government, and for the tenth time, the Government Accountability Office (GAO) said that it could not sign off on the books because of problems in reporting, the Associated Press reports. Comptroller General David Walker, the head of GAO, said that 53 percent of the government's assets could not be audited properly. Among other problems, he cited “serious financial management problems at the Department of Defense (DoD).”

Other agencies that received disclaimers on their 2006 audits included Homeland Security, State (DoS) and NASA. The Energy Department (DoE) earned a qualified opinion, as did the Transportation Department (DoT) and the Smithsonian, reports. Audit problems included accounting for and reconciling balances across agency lines and “ineffective” processes for preparing financial statements.

In a letter accompanying the “Financial Report of the United States Government”, Treasury Secretary Henry M. Paulsen, Jr. emphasized the importance of the audited Statement of Social Insurance, which appears in the report for the first time this year.

“This report highlights the biggest long-term economic issue facing our country, the future claim on spending for our major entitlement programs: Medicare and Social Security. Without fundamental reform to ensure the sustainability of these programs, by the year 2080, the cost to the federal government of Social Security and Medicare together will nearly triple as a percentage of the U.S. economy, growing to 17 percent.”

The Treasury Department estimates a funding shortfall of $44.15 trillion over the next 80 years, up from the estimate of $40.04 trillion made in 2005.

In his letter, Comptroller General Walker echoes Mr. Paulsen's urgent message. He calls for the adoption of a new statement in the government's annual report, according to, that would prove “a long term look at the sustainability of current social insurance and other federal programs.”

The Executive Summary to the financial statements says, however, that even with the new Statement of Social Insurance, the financial statements do not reflect on an accrual basis “future costs implied by current policy, such as national defense, the global war on terrorism and hurricane cleanup efforts.”

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