Budget Issues:

Accrual Budgeting Useful in Certain Areas but Does Not Provide Sufficient Information for Reporting on Our Nation's Longer-Term Fiscal Challenge

GAO-08-206: Published: Dec 20, 2007. Publicly Released: Dec 20, 2007.

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Susan J. Irving
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The federal government's financial condition and fiscal outlook have deteriorated dramatically since 2000. The federal budget has gone from surplus to deficit and the nation's major reported long-term fiscal exposures--a wide range of programs, responsibilities, and activities that either explicitly or implicitly commit the government to future spending--have more than doubled. Current budget processes and measurements do not fully recognize these fiscal exposures until payments are made. Increased information and better incentives to address the long-term consequences of today's policy decisions can help put our nation on a more sound fiscal footing. Given its interest in accurate and timely information on the U.S. fiscal condition, the Senate Committee on the Budget asked us to update our study of other nations' experiences with accrual budgeting and look at other ways countries have increased attention to their long-term fiscal challenges.

In 2000, GAO reviewed the use of accrual budgeting--or the recording of budgetary costs based on financial accounting concepts--in Australia, Canada, Iceland, the Netherlands, New Zealand, and the United Kingdom. These countries had adopted accrual budgeting more to increase transparency and improve government performance than to increase awareness of long-term fiscal challenges. Accrual budgeting continues to be used in all six countries; Canada and the Netherlands, which use accrual information selectively, considered expanding the use of accruals but thus far have made only limited changes. Since 2000, other countries have considered using accrual budgeting. For example, Denmark and Switzerland began using accrual budgeting on a selective basis. Norway and Sweden, however, rejected accrual budgeting primarily because they believed cash budgeting enables better control over resources. Countries have taken different approaches in the design of their accrual budgets. Regardless of the approach taken, cash information remains important in all the countries for evaluating the government's finances. Other countries' experiences show that accrual budgeting can be useful for recognizing the full costs of certain programs, such as public employee pensions and retiree health, insurance, veterans benefits, and environmental liabilities, that will require future cash resources. However, these other countries do not use accrual budgeting to recognize their long-term fiscal challenges that are primarily driven by public health care and pension programs. Instead, many countries in GAO's study have begun preparing fiscal sustainability reports to help assess these programs in the context of overall sustainability of government finances. European Union members also annually report on longer-term fiscal sustainability. Although no change in measurement or reporting can replace substantive action to meet our longer-term fiscal challenge, GAO believes that better and more complete information on both the full-cost implications of individual decisions and on fiscal sustainability of the government's finances can help.

Matters for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: The Budget Control Act of 2011 set up the Joint Select Committee on Deficit Reduction to provide recommendations and legislative language that would significantly improve the short-term and long-term fiscal imbalance of the Federal Government. The Committee may not vote on any of the joint committee's recommendations unless CBO provides information for consideration on the long-term budget effect of the legislation beyond the year 2021.

    Matter: To increase awareness and understanding of the long-term budgetary implications of current and proposed policies for the budget, Congress may wish to require increased information on major tax and spending proposals.

  2. Status: Closed - Implemented

    Comments: The Federal Accounting Standards Advisory Board (FASAB) adopted a new accounting standard in September 2009 requiring the federal government to issue a statement of fiscal sustainability every year as part of the government's Consolidated Financial Statements. The statement will be based on comprehensive long-term projections and help the Congress determine whether future budgetary resources will likely be sufficient to sustain public services and to meet obligations as they come due.

    Matter: Regardless of what is decided about the information and incentives for individual programs, Congress may wish to require periodic reports on fiscal sustainability for the government as a whole. Such reports would help increase awareness of the longer-term fiscal challenges facing the nation in light of our aging population and rising health care costs as well as the range of federal responsibilities, programs, and activities that may explicitly or implicitly commit the government to future spending.

  3. Status: Closed - Not Implemented

    Comments: Several bills were introduced to budget for certain programs on an accrual basis, but none were debated or voted on by the Congress.

    Matter: Congress may wish to consider requiring increased reporting of accrual-based cost information alongside cash-based budget numbers for both existing and proposed programs where accrual-based cost information includes significant future cash resource requirements that are not yet reflected in the cash-based budget. Such programs include veterans compensation, federal employee pensions and retiree health, insurance, and environmental liabilities. To ensure that the information affects incentives and budgetary decisions, the Congress could explore further use of accrual-based budgeting for these programs.


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