For budget nerds, tonight's State of the Union speech is a prelude to the president's budget, which will be introduced a little over a month from now. The State of the Union usually presents a broad vision of goals and priorities, but the budget gives us details about where the administration would direct dollars to see those priorities implemented.
But even when we see the president's budget next month, we still won't have a true picture of where we stand financially and where we are going because we use a set of accounting principles that makes it hard to get a clear picture of what our obligations are. That is because the United States Government uses a cash based accounting system instead of accrual accounting, the standard accounting practice for large, complex entities.
What is the difference and why does it matter? The short version is this: Cash accounting simply tracks money in and money out, while accrual accounting takes into account all outstanding obligations. This difference matters because, under cash accounting, it is possible to ignore or underplay outstanding obligations the government must pay under existing contracts and laws. Moreover, cash accounting makes it more difficult to plan and budget for infrastructure upgrades and other major investments.
For decades, accounting professionals, presidential commissions and the Congressional Budget Office alike have recommended changing to accrual accounting as a means to make the federal budget more transparent and to encourage fiscal responsibility. The Securities and Exchange Commission requires that publically traded companies use accrual accounting and otherwise follow the so-called Generally Accepted Accounting Practices. The reason accrual accounting is favored is simple: It encourages large entities to reflect and plan for long-term fiscal health rather than simply looking at today's cash flow, which is the accounting principle version of living paycheck-to-paycheck.
Moving all federal budgeting and accounting to accrual standards seems like an obvious step. It will increase our understanding of our true deficits and debts and improve transparency and accountability across the government. So why, despite recommendations to make this change, starting as far back as the first Hoover Commission in 1949, hasn't the U.S. adopted this standard? The short answer is that making this change requires political will. And as we have seen for decades, politicians love to skew numbers to support their own positions instead of relying on vetted, neutral numbers.
Lawmakers are able to game the Congressional Budget Office scoring rules to hide long-term costs outside the 10-year budget window. Shifting to accrual accounting would shift debates about the long-term liabilities and benefits of different government actions out of the realm of political arguments and into the realm of agreed upon facts.
While it may just be budget nerds who focus on this much needed change, we would all benefit from the greater clarity and transparency we'd get from government-wide accrual accounting.
Ryan Alexander is president of Taxpayers for Common Sense.