The Federal Deficit and Debt Are Much Worse Than You Have Been Told

If you are like most people, you are alarmed at the current $1.2 trillion dollar budget deficit.

I have bad news:  the actual deficit is three times that amount: the devil is in the accounting details.

Surprise!

You have been lied to.

Again.

Two common forms of accounting procedures in the United States are Generally Accepted Accounting Principles (GAAP) accounting and cash basis accounting. Generally speaking, GAAP rules are better than cash basis accounting because GAAP accounting more accurately reflects assets and liabilities of an entity (particularly if it’s of any size).

Narrowly defined, GAAP accounting rules are a specific form of accrual accounting (which is a system under which revenue is recognized when it’s earned) and expenses are recognized when incurred (although the actual payment may not be at the time when goods and services are exchanged and may be received at a later date). Thus, totals of expenses and revenues are reflected in financial statements at the end of each accounting period, irrespective of whether the payment was received or expenses were paid.

The highest authority for setting rules and guidelines for GAAP accounting in the United States is the Financial Accounting Standards Board (the FASB). The Securities and Exchange Commission specifically requires that GAAP accounting standards are used for publicly-owned companies because it gives investors and stockholders the most accurate representation of assets and liabilities in a company’s balance sheet. In addition, GAAP accounting is required by law to be used by a variety of other types of institutions as well (such as privately held companies, state and local governments and non-profit organizations).

Cash basis accounting, the second most common accounting method, is much more simple: income is recorded only when cash is received and expenses are recorded only when the cash is paid out (regardless of when the money was actually earned or the goods or services were first received). Revenue and expenses are not recorded in the financial statements at the end of every accounting period if payments have not been received or if expenses have not yet been paid.

Although the cash basis system of accounting may have merit for being simple to implement, use and understand, its major shortfall is that it leaves a time gap between when an item is bought or sold and when the consumer or entity actually pays or accepts payment for the line item. Hence, under this system of accounting, the lighter liability load might be misleading or assets might be understated simply because the two parties have not yet exchanged money for those goods or services likely already rendered. Cash basis accounting is appropriate for organizations such as small businesses which transact business mainly in cash. However, it can easily misrepresent the amount of liabilities for large companies and organizations that pay at a later date for the goods and services that they receive today.

Given that cash accounting is most suited for a small enterprise (because it fails to account for the complexity and liabilities of a large enterprise), guess which (enter: sarcasm) most accurate and transparent accounting system the Federal Government uses? That’s right: cash accounting. We’d be hard pressed to find a more complex entity in our country and yet they choose to reflect their figures as if they were a downtown mom and pop shop. NOT surprisingly, the federal budget deficit and debt are thus severely underreported – perhaps even by two-thirds.

Because of the federal government’s standard procedure of reporting financial data on a cash basis, John Williams says in his monthly Shadow Government Statistics Commentary that:

“[official government numbers] underreport the severity of the U.S. government’s fiscal circumstances. Even as reported, though, the numbers are not just unsustainable, they remain uncontainable. Taxes cannot be raised enough to put the annual results in the black and the level of program slashing needed in Social Security, Medicare, etc. to reduce costs appears to be well beyond the scope of any foreseeable political will in Washington.”

And when it comes to the federal government actually reporting its fiscal data, Mr. Williams goes on to say:

“Unfortunately, with Treasury Secretary Timothy Geithner’s cover letter sounding like it was drafted by one of President Obama’s speech writers, the 2009 Financial Report of the U.S. Government appears to have entered the realm of political expediency, reflecting accounting that might be considered questionable if it were used in the private sector.”

The GAAP-based total federal debt as of September 30, 2009,

is $70.7 trillion, which is up from $65.6 trillion from a year ago

and is almost six times the figure reported by the U.S. Treasury, which stands at $12 trillion.

Instead of the government debt being roughly one year’s American GDP production (as is often believed), this figure now jumps to a disturbing 6 times of GDP. Similarly, the federal deficit for 2009 stands at $1.4 trillion according to the Treasury but that figure is more than three times larger when using GAAP standards and stands at $4.3 trillion. When using the more respected and responsible GAAP accounting guidelines (more appropriate to the size and complexity of the reporting body), government fiscal data looks even worse than what the government reports or leads us to believe.

Ironically, such suspicious behavior would likely trigger an IRS or SEC audit from a private or public sector business following the rules this same government establishes – but apparently, is above following themselves.

The rest of the government data from 2005 is included in this summary table:

U.S. Government – Alternate Fiscal Deficit and Debt Reported by U.S. Treasury
Dollars are in either billions or trillions, as indicated. Sources: U.S. Treasury, Shadow Government Statistics.
Fiscal Year(1)	Formal Cash-Based Deficit ($Bil)	GAAP Ex-SS Etc. Deficit ($Bil)	GAAP With SS Etc. Deficit ($Tril)	GAAP Federal Negative Net Worth ($Tril)	Gross Federal Debt ($Tril)	Total(2) Federal Obligations (GAAP) ($Tril)
2009(3)	$1,417.1	$1,253.7	$4.3	$63.6	$12.0	$70.7
2008	454.8	1,009.1	5.1	59.3	10.0	65.6
2007	162.8	275.5	1.2(4)	54.3	9.0	59.8
2006	248.2	449.5	4.6	53.1	8.5	58.2
2005	318.5	760.2	3.5	48.5	7.9	53.3

(1) Fiscal year ended September 30th.

(2) Includes gross federal debt, not just “public” debt. While the non-public debt is debt the government owes to itself for Social Security, etc., the obligations there are counted as “funded” and as such are part of total government obligations.