Elon Musk of the Department of Government Efficiency has sought to find $1 trillion or $2 trillion to cut from the federal budget. That is a noble target, but neither Mr. Musk nor anyone in the federal government has a complete view of federal finances. It turns out that federal budget accounting rules are archaic, little more than a cash flow statement for most agencies.
We demand and receive higher precision in accounting from large American corporations. They hire chief financial officers who, although well compensated, face legal and professional risks if the financial records are not complete and in accordance with various regulations and Generally Accepted Accounting Practices. The CFO can readily produce and defend income statements, balance sheets, and cash flow statements.
GAAP accounting protects investors and the general public from financial opacity and fraud. For example, a company that only shared a cash flow statement might be hiding large amounts of future liabilities or vast troves of unrecorded assets. Such a business would be viewed by the investing public with suspicion.
If it were a business, the federal government would be largest in the world with substantial holdings of land and other valuable assets and employing millions of Americans in producing various government services including the military. Yet federal budget accounting, with rules little changed in more than a century, is little more than a cash flow statement.
What is the federal deficit in FY 2025? The Congressional Budget Office estimates it at $1.9 trillion for 2025 under federal budget accounting rules. That is a knowable number of a cash flow basis. But how much additional liability will the federal government incur in FY 2025? How much will the value of federal assets change in FY 2025? What are the total assets and liabilities of the federal government? No one asks, much less answers, these and related questions.
They are important questions both to ask and to answer. Current trends in federal cash flow of roughly $2 trillion deficits as far as the eye can see are unsustainable, but the financial solution also depends on the unmeasured federal income statement and balance sheet. A popular solution on Capitol Hill are asset sales—such as federal land, mineral rights, wireless spectrum. Asset sales may make sense with a clear understanding of the value of the entire portfolio of federal assets and liabilities, but no one is responsible for maintaining such information.
While some government leaders seek to sell federal assets, others seek to expand federal debt through new spending programs or through forgiveness of federal loans. President Biden sought to forgive much of the $1.6 trillion federal student loan portfolio thereby attempting to expand federal debt by executive order. Natural disasters such as the wildfires in Southern California and hurricanes in the Southeast bring calls for new government grants and loan programs. Asset sales and debt forgiveness may look prudent on a cash flow basis but far less prudent on a balance sheet basis.
The federal budget problem is getting worse, not better. Fifty years ago when the Budget Impoundment and Control Act of 1974 passed, the debt was less than $500 million. As recently as 2001, the federal debt stood at $6 trillion. In the past 24 years, nearly $30 trillion have been added to the federal debt. It is difficult to see that the federal government or the American people have much to show for it. Under current programs, the federal debt will increase an additional $30 trillion in less than 15 years.
The FY 2025 federal budget is projected to have approximately $7 trillion in outlays and only $5 trillion of revenues. More than $4 trillion of the outlays are for “mandatory” spending programs such as Social Security, Medicare, and Medicaid. Less than $2 trillion of the outlays are for so-called discretionary spending. Interest on the debt is over $1 trillion. The current budget system is unstable and unsustainable. In the absence of more complete financial information, it is difficult to find robust financial solutions.
Complicating matters, important federal institutions such as the Federal Reserve Board and other federal financial entities operate outside the federal budget. Yet these entities create substantial debt obligations for the federal government.
No responsible investor would invest in a company with incomplete financial records. Much of the American public has a sense that the finances of the federal government are out of control. It is past time for the federal government to bring its accounting system in line with corporate America.
By executive order, the President could require the Office of Management and Budget to prepare a parallel system of accounts, one reflective of GAAP. A competitively-bid contract should attract major accounting firms to help establish a new parallel set of accounts and accounting practices for all federal agencies and the creation of income statements, balance sheets, and cash flow statements. Informed with better financial information, our government leaders should make better decisions about how to correct our unsustainable federal budget.
