The Financial Report of the US Government

Late in December, the Treasury Department released its annual Financial Report of the United States Government. The release date is fitting, since it is understandable that Treasury would put out a document with very bleak projections while everyone was heading out for the holidays.

This report is different from other budget projections, like the President's Budget or CBO's baselines, in that instead of providing snapshots of spending and revenue within given years, it uses accrual accounting methods to show governmental assets and liabilities well out into the future.

This difference can be shown first in the net operating cost of the government, which differs from the budget deficit in that the deficit only reflects what has been paid (outlays) and collected (revenue) this year. In addition to these, the net operating cost also shows the assets and liabilities that have been accrued but not paid during the fiscal year. The difference is mostly federal employee benefits, veterans benefits, and payments to government-sponsored enterprises such as Fannie Mae and Freddie Mac.

Although in past years, including FY 2010, the net operating cost of the federal government has sharply diverged from the deficit, they both were around $1.3 trillion this year. The sharp drop in the net operating cost is due to much lower expected liabilities with regards to all the categories mentioned above (employee benefits, etc).

Another measure that the Financial Report includes is total net liabilities. This measure includes the assets of the government and costs (employee benefits and debt held by the public) as well as social insurance net liabilities. The latter category is measured as the present value of all social insurance liabilities minus assets over the next 75 years. Obviously, Social Security and especially Medicare make up the vast bulk of net liabilities. As you can see in the table below, the government's liabilities have increased somewhat since last year, mostly due to increased debt held by the public and shifting the 75-year measuring window forward.

^{*Includes liabilities of federal employee benefits, veterans benefits, and other liabilities.
^Does not include federal general revenue transfers.}

The report also has more familiar measures of debt, such as the 75-year fiscal gap, or the present value of the difference between spending and revenue over 75 years. Treasury estimates the gap to be 1.8 percent of GDP, which is an improvement over the 2.4 percent gap last year (mostly because of deficit reduction legislation). However, it also points that delaying action on the debt will only allow the fiscal gap to grow wider. By 2022, we will be facing a fiscal gap of 2.2 percent of GDP, and by 2032, there will be a 2.8 percent of GDP gap.

All of these numbers in the Financial Report show, unsurprisingly, that we have a lot of work to do. It's a good thing then that momentum continues to build for a comprehensive solution.

Note: The table in this blog has been updated to include the FY 2012 assets and liabilities numbers.