Fiscal Stewardship: A Critical Challenge Facing Our Nation
(31-JAN-07, GAO-07-362SP).
The U.S. government is the largest, most diverse, most complex,
and arguably the most important entity on earth today. The United
States is also a great nation. It has much to be proud of and
much to be thankful for. However, our nation is not well
positioned to meet the challenges and capitalize on the
opportunities of the 21st Century. We are also failing to
properly discharge one of our biggest stewardship
responsibilities to our children, grandchildren, and generations
of unborn Americans: fiscal responsibility. The purpose of this
publication is to assist both the Congress and American citizens
in understanding and evaluating the federal government's current
financial condition and long-term fiscal outlook.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-07-362SP
ACCNO: A65465
TITLE: Fiscal Stewardship: A Critical Challenge Facing Our
Nation
DATE: 01/31/2007
SUBJECT: Balanced budgets
Budget deficit
Federal debt
Financial analysis
Financial management
Fiscal policies
Future budget projections
Policy evaluation
Projections
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GAO-07-362SP
* [1]Preface
* [2]The Federal Government's Current Financial Condition--Fiscal Year
2006
* [3]Where the Money Came From (i.e., Federal Revenue)
* [4]Where the Money Went (i.e., Federal Cost)
* [5]The Federal Government's Financial and Budget Reporting
* [6]What We Own and What We Owe (i.e., the Balance Sheet)
* [7]Gross Federal Debt
* [8]The Long-Term Fiscal Outlook
* [9]Statement of Social Insurance
* [10]Major Reported Long-Term Fiscal Exposures
* [11]Long-Term Fiscal Simulations
* [12]A Way Forward
* [13]Endnotes
* [14]Related GAO Products
* [15]Ordering Information
* [16]Contacts
[17]http://www.gao.gov/cgi-bin/getrpt?GAO-07-362SP
United States Government Accountability Office
Fiscal Stewardship:
A Critical Challenge Facing Our Nation
January 2007
[18]GAO-07-362SP
Fiscal Stewardship [19]GAO-07-362SP
Fiscal Stewardship [20]GAO-07-362SP
ii
iii
United States Government Accountability Office
Fiscal Stewardship:
A Critical Challenge Facing Our Nation
January 2007
[21]GAO-07-362SP
.
Preface
The U.S. government is the largest, most diverse, most complex, and
arguably the most important entity on earth today. The United States is
also a great nation. It has much to be proud of and much to be thankful
for. However, our nation is not well positioned to meet the challenges and
capitalize on the opportunities of the 21st Century. We are also failing
to properly discharge one of our biggest stewardship responsibilities to
our children, grandchildren, and generations of unborn Americans: fiscal
responsibility. The purpose of this publication is to assist both the
Congress and American citizens in understanding and evaluating the federal
government's current financial condition and long-term fiscal outlook.
The federal government's financial condition and fiscal outlook are worse
than many may understand. Despite an increase in revenues in fiscal year
2006 of about $255 billion, the federal government reported that its costs
exceeded its revenues by $450 billion (i.e., net operating cost) and that
its cash outlays exceeded its cash receipts by $248 billion (i.e., unified
budget deficit). Further, as of September 30, 2006, the U.S. government
reported that it owed (i.e., liabilities) more than it owned (i.e.,
assets) by almost $9 trillion. In addition, the present value ^[22]1 of
the federal government's major reported long-term "fiscal
exposures"--liabilities (e.g., debt), contingencies (e.g., insurance), and
social insurance and other commitments and promises (e.g., Social
Security, Medicare)--rose from $20 trillion to about $50 trillion in the
last 6 years.
The federal government faces large and growing structural deficits in the
future due primarily to known demographic trends and rising health care
costs. These structural deficits--which are virtually certain given the
design of our current programs and policies--will mean escalating and
ultimately unsustainable federal deficits and debt levels. Based on
various measures--and using reasonable assumptions--the federal
government's current fiscal policy is unsustainable. Continuing on this
imprudent and unsustainable path will gradually erode, if not suddenly
damage, our economy, our standard of living, and ultimately our domestic
tranquility and national security.
This publication brings together selected financial statement information
from the fiscal year 2006 Financial Report of the United States Government
(Financial Report) and certain fiscal year 2006 budget information
reported by the Department of the Treasury. ^[23]2 This budget information
will also be included in the President's Budget proposal for fiscal year
2008, which will be released in February 2007. The Department of the
Treasury, in coordination with the Office of Management and Budget,
annually prepares the Financial Report and submits it to the President and
the Congress. The Financial Report is the federal government's annual
overall report of accountability to the American public and provides a
comprehensive overview of the financial condition of the federal
government, the cost of the federal government's operations, the revenue
sources used to finance them, and the implications of various long-term
federal obligations and commitments. ^[24]3 The President's Budget
includes information on revenues and spending for previous fiscal years
and presents the President's proposals for revenue and spending for the
next fiscal year. It also contains additional analytical material.
GAO is responsible for auditing the financial statements included in the
Financial Report, but we have been unable to express an opinion on them
for the 10th year in a row because the federal government could not
demonstrate the reliability of significant portions of the financial
statements, especially in connection with major financial management
challenges at the Department of Defense. Accordingly, amounts reported in
this publication taken from the Financial Report may not be reliable. GAO
also reported that the federal government did not maintain effective
internal control over financial reporting (including safeguarding assets)
and compliance with significant laws and regulations as of September 30,
2006. Further, GAO's audit report also included an emphasis paragraph for
the 3rd consecutive year noting that the nation's current fiscal path is
unsustainable and that tough choices by the President and the Congress are
necessary to address the nation's large and growing long-term fiscal
imbalance.
This publication was prepared under the direction of Gary T. Engel,
Director, Financial Management and Assurance, who may be reached at (202)
512-3406 or e [25][email protected] and Susan J. Irving, Director, Federal
Budget Analysis, Strategic Issues, who may be reached at (202) 512-9142 or
[26][email protected] if there are any questions. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on the
last page of this publication. Copies of this publication are available
upon request. In addition, this document will be available at no charge on
the GAO Web site at [27]http://www.gao.gov .
Where the Money Went (i.e., Federal Cost)
For the fiscal year ended September 30, 2006, the federal government
reported total net cost of about $2,901 billion. ^[28]6 [29]Figure 2
provides a breakout of the net cost.
Figure 2: Where the Money Went in Fiscal Year 2006
^a Medicaid costs represent $180 billion or 62 percent of Health and Human
Services's $290 billion of nonearmarked funds net costs.
Note: Data are from the fiscal year 2006 Financial Report.
The Federal Government's Financial and Budget Reporting
The federal government produces two types of measures--budget and
financial--which further break down into three different numbers that can
be seen as indicators of our current financial condition: the unified
budget deficit, the on-budget deficit, and the net operating cost.
[30]Table 1 shows the reported amounts of these for the fiscal year ended
September 30, 2006.
Table 1: Fiscal Year 2006 Budget Deficits and Net Operating Cost
^a For fiscal year 2006, there was a significant decrease in certain
actuarial costs primary due to changes in interest rates and other
assumptions.
Note: Data are from the Monthly Treasury Statement as of the fiscal year
end 2006 and the fiscal year 2006 Financial Report.
The most commonly reported measure is the unified budget deficit. This is
a largely cash-based number that represents the difference between
revenues and outlays--recorded in the period that cash is received or
paid--for the government as a whole. It is an important measure since it
is indicative of the government's draw on today's credit markets--and its
claim on today's economy. The unified budget is a comprehensive measure of
all federal activities, including those that are on-budget and off-budget.
By law the Postal Service and Social Security trust funds are designated
as off-budget. All other budget accounts are on-budget.
Net operating cost is the amount by which costs exceed revenue. Costs are
recorded on an accrual basis--namely, in the period when goods are used or
services are performed as opposed to when the resulting cash payments are
made. Most revenues, on the other hand, are recorded on a modified cash
basis--that is, they are essentially recorded when collected. For fiscal
year 2006, the net operating cost of the federal government was comprised
of earmarked funds net operating revenue ^[31]7 of approximately $172
billion (e.g., Social Security) and nonearmarked funds net operating cost
of about $622 billion. ^[32]8
[33]Table 2 shows the relationship between these numbers.
Table 2: Relationship between Fiscal Year 2006 Budget Deficits and Net
Operating Cost
^a Comprised of $185 billion in Social Security surplus and $1 billion for
Postal Service surplus.
^b For example, increase in accrued Federal Employee and Veteran Benefits.
^c For example, purchase of capital assets (e.g., property, plant, and
equipment).
Note: Data are from the Monthly Treasury Statement as of the fiscal year
end 2006 and the fiscal year 2006 Financial Report.
What We Own and What We Owe (i.e., the Balance Sheet)
What We Own (i.e., Federal Assets)
Assets represent items of economic value owned by the federal government.
[34]Figure 3 provides a breakout of the assets that are reported with
dollar values in the Balance Sheet in the Financial Report. As of
September 30, 2006, the federal government reported total federal assets
of about $1,497 billion. In addition to these assets, certain federal
assets are instead reported in physical quantities: stewardship land
(e.g., national parks and forests) and heritage assets (e.g., national
memorials, historic structures, and museum collections). ^[35]9
Figure 3: Components of Total Federal Assets Reported as of September 30,
2006
Note: Data are from the fiscal year 2006 Financial Report.
What We Owe (i.e., Federal Liabilities)
As of September 30, 2006, the federal government reported total federal
liabilities of about $10,413 billion. These liabilities represent a
financial obligation, debt, claim or probable potential loss that is
reported in the Balance Sheet in the Financial Report. [36]Figure 4 shows
the components of these liabilities.
Figure 4: Components of Total Federal Liabilities Reported as of September
30, 2006
^a This consists of $4,866 billion of gross federal debt minus $40 billion
of net unamortized discounts plus $42 billion of accrued interest payable.
Note: Data are from the fiscal year 2006 Financial Report.
Gross Federal Debt
As shown in [37]Figure 5 , gross federal debt, which totaled about $8,530
billion as of September 30, 2006, consists of debt held by the
public--$4,866 billion--and debt held by government accounts (referred to
as intragovernmental debt holdings)--$3,664 billion. ^[38]10 The federal
government borrows excess cash receipts from earmarked (e.g., Social
Security) and certain other activities to finance general government
operations and, in exchange, issues special U.S. Treasury securities. Of
the $3,664 billion of intragovernmental debt holdings, $1,995 billion or
54 percent is held by the Social Security Trust Funds and $335 billion or
9 percent is held by the Medicare Trust Funds. Intragovernmental debt
holdings are not reported in the federal government's Balance Sheet
because under accounting principles they are treated as loans from one
part of the federal government to another part of the federal government.
^[39]11
Figure 5: Components of Gross Federal Debt as of September 30, 2006
Note: Data are from the fiscal year 2006 Financial Report.
As shown in [40]Figure 6 , debt held by the public is composed of debt
held by the Federal Reserve banking system (Federal Reserve), by state and
local governments, by domestic investors in the United States and by
foreign and international investors abroad. Over the last several years,
there has been an upward trend in the amount of Treasury securities held
by foreign and international investors. The United States benefits from
purchases of Treasury securities by foreign investors because such
investors fill part of the U.S. government's borrowing needs. However, the
interest paid on this debt is sent abroad, which adds to the incomes of
residents of other countries rather than to the incomes of U.S. residents.
In addition, this increasing reliance on foreign investors to finance the
deficits of the U.S. government presents potential risk to the U.S.
economy, especially since the U.S. gross national saving rate is low by
U.S. historical standards.
References
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21. http://www.gao.gov/cgi-bin/getrpt?GAO-07-362SP
25. [email protected]
26. [email protected]
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