Saturday, September 11, 2004


Follow up to Sept 8th's "The Alleged Budget Surplus During the Clinton Administration

I am indebted to guest commentator Walter Williams writing in The

for a clarification about the surplus claimed during the Clinton years, specifically 1997 to 2000, by both parties. (see: The Alleged Budget Surplus During the Clinton Administration).

"Nearly four decades ago, President Lyndon Johnson's political sensitivities led him and the Congress to slough off some of the costs of an escalating Vietnam War through the use of accounting gimmicks. To mask the rapid growth in the federal government's budget deficit, revenues from the surplus being generated by Social Security taxes were added into the general cash fund, without making any accounting allowance for the accompanying and increasing Social Security liabilities. This accounting-gimmicked reporting was dubbed "unified" budget accounting.

The government's accounting then, as it is now, was on a cash basis, reflecting cash revenues versus cash expenditures. There were no accruals made for monies owed by or due to the government at some time in the future.

The bogus accounting understated the actual deficit for decades and even allowed for claims of budget surpluses in the years 1998 to 2001. While there were extensive self-congratulatory comments between the President, Congress and the Fed Chairman, at the time, all involved knew there never were any actual budget surpluses. There hasn't been an actual balanced budget, let alone a surplus, since before Johnson and his cronies cooked the bookkeeping."

"In the mid-1970s, the then "Big Ten" accounting firms proposed setting up for the federal government an accrual accounting and reporting system similar to that used in the business community. Purchases of capital equipment, weapons and buildings would be booked as assets and depreciated, taxes receivable and accounts payable would better reflect near term cash needs. Accrued liabilities, such as Social Security payments due in the future, would reflect longer-term cash-flow needs.

As the project progressed, GAAP accounting was applied to the government's operations and prototype annual statements were published beginning in 1974. The appropriate accounting for Social Security liabilities, however, was discarded during the Reagan administration as being politically untenable.

Under the eventual mandate of Congress, the accounting project culminated in the U.S. Treasury publishing its first formal Financial Report of the United States Government for fiscal year 2000, consistent with GAAP, except for Social Security and similar accounts such as Medicare, Medicaid and the Railroad Retirement Fund.

To the credit of the Bush administration, later reports, published in April 2003 and April 2004 for fiscal years 2002 and 2003, indicated for the first time since the 1980s what the Social Security and related numbers would look like if they were included in the accounting, just as corporations need to account for pension and retiree health benefit liabilities."

"The gimmicked accounting standards, as established during the Johnson era, and as used today for official, unified budget reporting, show a 2003 deficit of $374.3 billion. Using GAAP reporting (without Social Security reporting), the official GAAP deficit for 2003 expands to $665.0 billion. Including accounting for Social Security and related areas, the 2003 deficit balloons to $3,702 billion, or $3.7 trillion. The accounting reflects no adjustment for the new, more expensive Medicare program." (in all cases I've added emphasis)

2004 Results

Results for the official 2004 deficit will be published in the next several months, and the numbers are projected by the Bush administration to be significantly worse than in 2003, $445 billion versus $374 billion, with the actual deficit likely to near $4.3 trillion (my estimate). The 2004 GAAP financial statements on the government will not be published until March/April


Fiscal--------"Official"----Deficit Without---Deficit With

-Year-----------Deficit------Soc. Sec., Etc.--Soc. Sec., Etc.


2004 est.---$445 Billion-----$800 Billion-----$4.3 Trillion

2003--------$374 Billion-----$665 Billion-----$3.7 Trillion

2002--------$158 Billion-----$365 Billion-----$1.5 Trillion

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