What drives changes in the deficit from year to year?
A variety of factors determine how much revenue the federal government collects and how much it spends in any year. Certain actions or conditions may affect the cash and accrual deficits differently, as described below:
Policy Decisions: Policy decisions can affect both the cash and accrual deficit, although potentially at different times. For example, a freeze in federal employee salaries would affect salary payments in the current year and be reflected similarly in both the cash and accrual deficits. Changes in future federal employee retirement benefits or insurance programs, however, would be reflected immediately in the accrual deficit but would not affect the cash budget deficit until future years when the benefits are paid.
Economic Conditions: Economic conditions, such as economic growth and inflation, also affect both the cash and accrual deficits. Both deficits are affected similarly by automatic stabilizers—tax and entitlement provisions that increase spending and decrease revenue when the economy slows (and vice versa). For example, the cash and accrual deficits would similarly reflect increases in unemployment, which automatically reduce payroll tax and income tax receipts and increase spending for some programs, such as unemployment insurance. In contrast, while the accrual deficit would reflect the impact of changing economic conditions or other changes on the expected performance of certain financial assets, such as investments in government-sponsored enterprises,Government-sponsored enterprises (GSEs) are privately owned and operated federally charted financial institutions that facilitate the flow of investment funds to specific economic sectors, such as housing and agriculture. the cash deficit would not.
Technical Reasons: The accrual and cash deficits can be affected by different technical factors. For example, the cash deficit would change if a date on which cash is scheduled to be paid or received falls in a different fiscal year. If October 1 falls on a weekend, those federal payments due on that date (such as salaries for military employees and certain Medicare payments) are paid in September; this shifts the cash outlay into the previous fiscal year. This shift does not affect the accrual deficit because these benefits are recorded as expenses when due and payable. Conversely, accrual measures are sensitive to changes in assumptions—such as future salary increases, changes to the general price level, interest rates, and technology—used to estimate future payments.