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The Financial Times Editorial - A Truer Measure of America's Ballooning Deficit

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A TRUER MEASURE OF AMERICA'S BALLOONING DEFICIT

The federal government keeps two sets of books, but the Bush administration only wants you to see one of them. There is the highly publicised "President's Budget" issued by the Office of Management and Budget, and the almost-secret "Financial Report of the United States" issued by the Department of Treasury. The budget says that the 2005 US fiscal deficit was Dollars 319bn (Euros 254bn), but the Financial Report claims it is Dollars 760bn.

Which view is correct? Is the deficit a mere 2.6 per cent of gross domestic product and shrinking, as the former OMB director and now White House chief of staff Joshua Bolten claims, or an alarming 6.2 per cent of GDP and growing, as John Snow, Treasury secretary, writes in the Financial Report?

The budget that is hand-delivered to every congressman's and senator's office is calculated on a cash basis, that is, the government only counts dollars as they are received from taxpayers and spent by government agencies. This says the "deficit" for 2005 was Dollars 319bn. In contrast, the financial report was issued without a press release and measures government activity on an accrual basis - when income is earned or expenses are incurred, although no cash may have yet been transferred. According to the report, the US obligated itself to spend Dollars 760bn more than it collected from taxpayers in 2005, so the "net operating cost" was Dollars 760bn.

The congressional budget process uses cash accounting almost exclusively. This is convenient for Republicans because it makes the deficit look much smaller than it is under modern, accrual accounting. In spite of the harmless-looking Dollars 319bn cash deficit, the Republican Senate and House leadership has had trouble passing any budget at all. If budgeting were based on the larger accrual number, budgeting would be impossible without big reforms.

What is the true deficit? Which accounting method is better? Most businessmen laugh at the question because cash accounting has been illegal in their world for many years due to its ease of manipulation. Accrual does a better job of measuring our credit-card economy in which debts are incurred long before interest or principle must be paid. Even accrual accounting fails to account for gigantic Social Security and Medicare liabilities because these are not contractual liabilities of the government.

General Motors, Ford and the United States are doing well financially if you use cash accounting. Under accrual accounting, however, all are in serious trouble, primarily due to promises made to retirees, the sick and disabled. Cash accounting ignores these vulnerable people, but accrual accounting remembers them. In spite of the way its name sounds, accrual is the only form of accounting that is not cruel.

The budget says that the national debt is Dollars 8,200bn; the report indicates that the present value of our obligations is more like Dollars 49,000bn. That unimaginable sum is how much money we must set aside today to pay the full Social Security and Medicare benefits that Congress has already promised.

The budget says Americans' personal share of the national debt is Dollars 28,000; the report says it is Dollars 156,000. That means that a family of five owes roughly Dollars 750,000. As David Walker, US comptroller-general, says, you owe your government the equivalent of a luxury home, only you do not get to live in it. You only get the mortgage.

These crushing debt burdens are getting heavier fast. According to the report, as recently as 2000, our national obligations were "only" Dollars 20,000bn, but they have more than doubled in five years. This trend, which economists politely term "unsustainable", could destroy America's greatness. President George W. Bush has already borrowed more money than all previous presidents combined. It took 204 years for America to accumulate Dollars 1,000bn in debt, but now we are borrowing that much new debt every 18 months.

Many Americans have a hard time believing that our first MBA president and our pro-business Congress would betray sound business principles when it comes to financial statements and national budgeting. After all, their speeches call for government to be run like a business. Congress can begin correcting these mistakes by using honest, accrual-based, numbers. The House budget committee voted unanimously this year to include accrual accounting in next year's budget process. The truth hurts, but it is the only way to start honouring America's promises to our seniors and veterans.

http://cooper.house.gov/newsroom/byjim/050106_truermeasure.htm

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