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

Visible links
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  21. http://www.gao.gov/cgi-bin/getrpt?GAO-07-362SP
  25. [email protected]
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