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Improving Transparency Of Federal Budget Accounts

Harold Furchtgott-Roth

As Congress moves to pass the first balanced budget resolution in over a decade, taxpayers can find some solace in the knowledge that their taxes go towards reducing the deficit, which is hundreds of billions of dollars. Our taxes also go towards reducing the national debt, which, according to the Treasury Department, stands at more than $18 trillion, or more than $56,000 for every American.

Since the founding of the republic more than 200 years ago, the federal government has kept track of finances in much the same way: recording cash flows. Cash flows to the federal government are called receipts. Cash flows away from the federal government are called outlays. Although public financial accounting has evolved over the past 200 years, it has not evolved in nearly the detail and depth of corporate accounting standards.

When the federal government speaks of “debts” and “deficits,” the public finance vocabulary does not correspond to that of corporate finance. An accountant might reasonably assume that the federal “debt” is a liability on a balance sheet maintained by the federal government. It is not. Although some federal agencies such as the Navy have the rudiments of a balance sheet, the federal government does not have a complete balance sheet of all assets and liabilities. It does not have a list of the assets of the federal government and their associated values.

Nor does the federal government keep track of changes in federal assets. The Federal Communications Commission recently auctioned off some federal spectrum for more than $40 billion. The federal government has no balance sheet that shows $40 billion of federal assets were withdrawn. Nor does the federal government have a balance sheet in which other federal spectrum was revalued upwards to reflect the increase market prices for spectrum.

The federal government does not have a complete list of its liabilities, or of any recording of national shareholder or taxpayer equity.

Nor does the federal government maintain an income statement in the same manner that would a corporation. A private company, for example, would record depreciation on an income statement. The federal government does not have a centralized record of depreciation.

The federal government is certainly aware of the effects of depreciation, but it does not show up directly in federal accounts. Of course, the federal government has a portfolio of unique assets ranging from aircraft carriers to the Washington monument, all of which depreciate at different rates. But the federal government also owns computers, trucks, buildings and other assets all of which have clear depreciation schedules developed by the federal government itself.

Instead of employing income statements and balance sheets, the federal government keeps its financial records largely as a cash flow statement. The federal government keeps track of receipts and outlays, and not very good track of much else. Cash is important to monitor, and our federal government does a fine job of keeping track of cash. When the federal government speaks of a “deficit,” it actually means negative cash flow. It does not mean that the federal government had negative income or that the federal balance sheet, if there were one, changed in any meaningful way.

The narrow focus on cash might give an accurate financial picture of the federal government if all it dealt with were cash. But that is not the case. The federal government is by far the largest property owner, the largest asset owner, the largest landlord in renting assets, the largest employer, and quite simply the largest actor on any stage in America and quite likely in the world.

Measuring cash flows precisely is also an ironic exercise for an entity, the federal government, that can and often does create new forms of cash or cash equivalents. The federal government has fewer magical powers to conjure new land, real property, or other assets. Yet it does a poor job of measuring those.

The federal government’s greatest resources, its vast powers, are not marketable, and thus it is difficult to assign a value to them. The federal government can protect individuals, or it can harm them. It can shield property from harm, or it can destroy property. It can engage in war. It can crush all that stands in it way, including any and every corporation in America. It can also bail out those corporations that it considers deserving.

Private sector accounting standards have evolved in part to give those who review corporate financial records—shareholders, potential investors, potential lenders, and others—a clear and consistent view of the finances of an entity. We are all better off for those consistent accounting standards. It is long past time to apply those standards, or similar ones, to public accounts as well.

It won’t be easy. There is much that is different about public accounts that do not readily lend themselves to the same accounting standards as private sector accounts. But difficulty alone should not be the reason to preserve the opaque and rather quaint public accounting rules.

Law-abiding Americans do much for their country. They pay taxes. They send their children to fight for the military. They comply with federal laws and rules to the best of their ability. It is not too much of them to ask for a little more transparency in federal accounts.

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