How is the deficit measured?
To gain a fuller picture of its financial condition, the federal government measures the deficit in different ways.
Cash deficit: This is the deficit that public debates and media reports generally focus on and is reported in federal budget documents. It is the amount by which the government’s cash outlays exceed its receipts during a given fiscal year.
For the cash deficit, receipts and outlays are primarily measured on a cash basis, which means they are recorded when cash is received or paid, similar to keeping a checkbook. The cash deficit closely approximates the federal government’s short-term borrowing needs and is a widely used and accepted measure of the government’s effect on current financial markets.
Accrual deficit: This measure provides information on the cost of the government’s annual operations and is reported in the financial statement of the U.S. government. It is the amount by which the government’s expenses exceed its revenue.
For this measure, revenues are recorded on a modified cash basisUnder a modified cash basis, revenues are essentially recorded when collected, but there is an accrual adjustment for some taxes due that have not been paid by the taxpayer and refunds due to taxpayers that have not been paid by the government., which is similar to how they are recorded in the cash budget deficit. Expenses are recorded on an accrual basis—that is, in the period when goods are used, services are performed, or other relevant events happen that affect the measurement of cost, as opposed to when the resulting cash payments are made. Expenses include estimates of amounts that will be outlays in the future and thus depend on assumptions for interest rates, inflation, and wage growth, among others. As such, it provides some information about the longer-term budget implications of current government operations.
While cash and accrual measures each serve different purposes, they present complementary information and can be used together to provide a more comprehensive picture of the government’s fiscal condition today and over time. The two measures can sometimes send different signals about the government’s financial condition. The figure below shows that in 2001 the budget was running a cash surplus, while the financial statements showed an accrual deficit. In 2010, although both measures were in deficit, the cash deficit decreased from the previous year while the accrual deficit sharply increased. Since 2010, both cash and accrual deficits have generally decreased, indicating an improvement in the government’s overall short-term financial condition.
Source: Unaudited Department of the Treasury data from the Financial Reports.