Budget and Spending:

Understanding Similarities and Differences Between Accrual and Cash Deficits

GAO-07-117SP: Published: Dec 1, 2006. Publicly Released: Dec 1, 2006.

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Two key measures that have been used as indicators of the government's annual fiscal condition are the unified budget deficit measured primarily on a cash basis and the net operating cost measured on an accrual basis for financial statement purposes. The unified budget deficit has historically been the focus of budget debates and media reports in part because it closely approximates the government's short-term borrowing needs. Cash accounting can also be useful for controlling spending in the current year. However, the cash measure of fiscal condition, which is similar to keeping a checkbook, by nature excludes information about the long-term consequences of today's policy decisions and operations. Indeed, understanding our nation's long-term fiscal outlook is important because, as GAO's long-term simulations show, current fiscal policy is unsustainable. The accrual measure primarily provides more information on the longer-term implications of today's policy decisions and operations by showing certain costs incurred today but not payable for years to come, such as civilian and military pensions and retiree health care. While cash and accrual measures each serve different purposes, they present complementary information and can be used together to provide a more comprehensive picture of the government's fiscal condition today and over time. The goal of this primer is to improve understanding of the accrual deficit by describing (1) how it is similar and different from the more commonly reported cash budget deficit, (2) the key drivers behind changes in accrual deficits relative to cash budget deficits, and (3) how the two measures complement each other and give a fuller picture of the government's overall fiscal condition. In addition, see GAO-07-341SP for updates to selected information in this document.

Throughout this report, we primarily used data from the Financial Report of the United States Government, referred to in this report as the Financial Report, which is prepared by the Department of the Treasury, in coordination with the Office of Management and Budget. However, the reader is cautioned not to focus on the precise amount of the accrual deficit, its components, or their change from year to year because significant issues regarding the reliability and presentation of the federal government's financial information still need to be addressed. GAO is responsible for auditing the consolidated financial statements of the U.S. government, but we have been unable to express an opinion on them because the government could not demonstrate the reliability of significant portions of the financial statements or that the reconciling differences between accrual and cash deficits were complete. The primary reasons for this disclaimed opinion are described in this primer. The Financial Report can be found on the Department of the Treasury's website at http://www.fms.treas.gov/fr/index.html. Information on the most recent President's budget can be found on the Office of Management and Budget's website at http://www.whitehouse.gov/omb/budget/. This primer is structured in a question and answer format. The key questions are shown at the top of each page. To find the answers, flip to the page with your question highlighted. For easy reference, key terms are defined in the glossary located in appendix I--these glossary terms appear in bold type the first time they are used in the text. Many definitions come from A Glossary of Terms Used in the Federal Budget Process. Other related GAO products are listed at the end of this report. Unless otherwise indicated, the years referred to in the primer are federal fiscal years, which run from October 1 through September 30.

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