Fiscal Outlook: Measuring The Federal Deficit
A primer explaining how two key indicators can be used together to provide a more comprehensive picture of the federal government's fiscal condition today and over time.
How are cash and accrual deficits similar?
There is very little difference between how the two measures record revenue, because the financial statements primarily record revenue on a modified cash basis, an accounting method that uses elements of both measures
On the spending side, many programs are recorded similarly because the time between the transaction and the payment is relatively short. As a result, for some program areas, such as federal civilian and military employee salaries or grants to states, there is little difference between accrual and cash measures. Additionally, cash and accrual measures both exclude the value of future payments for certain fiscal exposures. For example, neither measure includes future benefits for social insurance and other entitlement programs nor possible future losses under federal insurance programs and other contingencies that are difficult to estimate.
How are cash and accrual deficits different?
The cash and accrual deficits are derived from two different processes: budgeting and financial reporting.
The federal budget processThe federal budget process largely uses obligational accounting to help control the use of funds. Obligational accounting is an administrative control through which federal agencies control, monitor, and report on the status of the funds at their disposal. provides the means for the federal government to make informed decisions between competing national needs and policies, to determine priorities, to allocate resources to those priorities, and to ensure the laws are executed according to those priorities. Primary budget data—receipts and outlays—are generally measured on a cash basis (with some exceptions). In many cases, cash accounting provides adequate information about the government's total commitment at the time budget decisions are made. Also, the cash budget deficit closely approximates the government's short-term borrowing needs and so is a widely used and traditionally accepted measure of the government’s effect on current financial markets.
The Financial Report provides an overview of the cost of the federal government’s operations, the sources used to finance them, and the sources of long-term obligations and commitments. In the Financial Report, costs are recorded on an accrual basis. As such, the accrual deficit provides some information on longer-term consequences of today’s policy decisions and operations.
The differences between cash and accrual deficits are almost entirely on the spending side. Differences arise when a cost is accrued in one fiscal year but paid in another fiscal year. The basic relationship between the cash and accrual deficits is described below.
Moving from the Accrual Deficit to the Cash Deficit (Using Reported Fiscal Year 2013 Numbers to Illustrate) (Dollars in Billions)
A number of program areas contribute to differences between the cash and accrual deficit measures. The table below shows the programs that accounted for the largest reported differences in recent years.
Table: Crosswalk between Accrual and Cash Deficits, by Fiscal Year (Dollars in Billions)
|Accrual Deficit (revenue minus expenses)||$-1,253.7||$-2,080.3||$-1,312.6||$-1,316.3||-$805.1|
|Changes in liability for MILITARY EMPLOYEE BENEFITS||25.6||164.2||35.0||111.1||-43.9|
|Changes in liability for VETERAN'S COMPENSATION||-149.2||223.8||58.9||227.9||213.2|
|Changes in liability for CIVILIAN EMPLOYEE BENEFITS||88.4||115.1||-22.0||142.8||95.0|
|Changes in ENVIRONMENTAL LIABILITIES||-1.0||-20.5||2.8||14.9||10.1|
|Depreciation expense (Related to: CAPITAL ASSETS)||59.5||57.5||68.4||59.1||62.1|
|Property, plant and equipment disposals and property reevaluations (Related to: CAPITAL ASSETS)||6.5||-9.8||-4.6||9.4||-36.2|
|Changes in INSURANCE & GUARANTEE PROGRAMS||81.1||9.4||-13.9||-5.3||-26.4|
|GSE FINANCIAL ASSETS & LIABILITIES (e.g., liquidity guarantee, valuation loss on investments, stock received)||116.0||276.1||-46.7||-264.9||-39.9|
|TARP year-end upward/(downward) re-estimate (Related to: FINANCIAL ASSETS & LIABILITIES)||-110.0||-23.6||23.3||-9.0||-8.1|
|Total (accrued expenses in excess of cash outlays)||124.2||853.0||107.1||283.7||222.1|
|CAPITAL ASSETS (Capitalized fixed assets)||-112.4||-92.5||-87.7||-70.7||-67.6|
|Investments in Government Sponsored Enterprises (Related to: FINANCIAL ASSETS & LIABILITIES)||-95.6||-52.6||-20.8||-18.6||-|
|Effect of prior year TARP downward re-estimate (Related to: FINANCIAL ASSETS & LIABILITIES)||-||110.0||23.6||-23.3||9.0|
|Changes in other assets||-93.9||-24.1||-17.2||57.8||-40.3|
|Total (cash outlays that do not involve current year expenses)||-301.9||-59.2||-102.1||-54.8||-98.9|
|Net amount of all other differences||14.3||-7.6||9.0||-2.0||1.6|
|Cash Deficit (receipts minus outlays)||-1,417.10||-1,294.10||-1,298.6||-1089.4||-680.3|
Source: Unaudited Treasury data from the Financial Reports.
Note: Click on any link for more details about that program. Numbers shown in red indicate negative differences between accrual and cash deficits.
The reason for differences between cash and accrual measures vary by program area. For program areas such as federal employee and veteran benefits, the key difference between the accrual and cash measures is the annual change in the liability, which is generally equal to accrued expenses less cash payments made to reduce the liability. As such, the change in the liability represents expected future outlays.
While capital assets and financial assets and liabilities are also treated differently in the cash and accrual deficits, the reasons are unique to those program areas.
Capital assets: When capital assets, such as structures and equipment, are purchased, the budget records an obligation for the full cost up front in order to provide decision makers with the information and incentives to make efficient decisions at the only time that they can control the cost. Outlays are recorded when a capital asset is paid for and therefore increases the cash deficit in the year that the outlay is made. However, the accrual deficit only reflects one year's worth of cost, called depreciation expense. Under the accrual basis of accounting used in the financial statements, the cost of the asset is initially recorded on the balance sheet and is then spread over its expected useful life to match the asset's cost with its use.
Financial assets and liabilities: Financial assets and liabilities include loans and loan guarantees that have generally been recorded similarly in the budget and the financial statements. That is, the net present value of the estimated cost is recorded when the transaction occurs. However changes in the estimated cost of loans and loan guarantees are reflected at different times. The re-estimated costs are reflected in the accrual deficit at fiscal year-end but are not reflected in the cash deficit until the following fiscal year.
The acquisitions of equity investments made under the Troubled Asset Relief Program were recorded similarly to loans and therefore were generally recorded similarly in the cash and accrual deficits. However, the acquisition of other financial assets, such as those acquired from the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) were treated differently. The cash deficit reflected Treasury’s direct cash payments to Fannie Mae and Freddie Mac as outlays, which increased the cash deficit. The accrual deficit, on the other hand, generally reflected the change in the assets’ value and the liability for estimated total future payments to Fannie and Freddie. A valuation gain would have reduced the accrual deficit and a valuation loss would have increased the accrual deficit.
GAO-14-319R: Published: Feb 27, 2014. Publicly Released: Feb 27, 2014.
GAO-13-271R: Published: Jan 17, 2013. Publicly Released: Jan 17, 2013.
GAO-07-117SP: Published: Dec 1, 2006. Publicly Released: Dec 1, 2006.
GAO-14-28: Published: Oct 29, 2013. Publicly Released: Oct 29, 2013.
GAO-08-206: Published: Dec 20, 2007. Publicly Released: Dec 20, 2007.