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Appendix
DThe Treatment of Federal Receipts and Expenditures in the National Income and Product Accounts
The fiscal transactions of the federal government are recorded in two major sets of accounts that are conceptually quite different. The presentation generally used by executive branch agencies and the Congress and typically discussed in the press (and followed in this report) is the Budget of the United States Government, as reported by the Office of Management and Budget. The budget focuses on cash flows—revenues and outlays, or the collection of taxes and fees and the disbursement of cash for the various federal functions. The objectives of the budget are to provide information that can assist lawmakers in their policy deliberations, facilitate the management and control of federal activities, and help the Treasury manage its cash balances and determine its borrowing needs.
The national income and product accounts (NIPAs) also record the federal government’s transactions, but with different objectives. The NIPAs, which are produced by the Bureau of Economic Analysis (BEA), an agency within the Department of Commerce, are intended to provide a comprehensive measure of current production and related income generated by the U.S. economy.1 A well-known measure of current production in the NIPAs is gross domestic product (GDP). The accounts, which are used extensively in macroeconomic analysis, divide the economy into four major sectors—business, government, household, and the rest of the world (the foreign sector), each with its own set of accounts.2 The federal sector, which is the focus of this report, is one component of the government sector (the state and local sector is the other component).3 Because the aims of the NIPAs differ from those of the budget, the two accounting systems treat some government transactions very differently. On average, the differences cause receipts and expenditures in the NIPAs, as projected by the Congressional Budget Office (CBO), to be about 2 percent and 3 percent higher, respectively, than the corresponding budget totals for the 2009–2018 period.
Conceptual Differences Between the NIPAs’ Federal Sector and the Federal Budget
The budget of the federal government is best understood as an information and management tool. It focuses primarily on cash flows, recording for each fiscal period the inflow of revenues and the outflow of spending. The period of foremost interest in the budget is the federal fiscal year, which runs from October 1 through September 30. There are a few exceptions to the general rule of recording transactions on a cash basis, but they are designed to improve the usefulness of the budget as a decisionmaking tool. For example, when the federal government makes direct loans or provides loan guarantees (as with student loans), tracking cash flows gives a misleading view of current costs; therefore, under what is termed credit reform, the budget records the estimated subsidy costs at the time the loans are made.
The federal sector of the NIPAs has none of the planning and management goals of the budget. Instead, it focuses on displaying how the federal government fits into a general economic framework that describes current production and income within specific periods, the major sources of that production, and recipients of income by type. The main periods of interest for the NIPAs are calendar years and calendar quarters, although approximate totals for fiscal years can be derived from the quarterly estimates. (The tables in this appendix show fiscal year numbers.)
From the perspective of the NIPAs, the federal government is both a producer and a consumer. Its workforce uses purchased goods and services and government-owned capital (buildings, equipment, and software) to produce services for the public at large; because those services are consumed by the public, that consumption, by convention, is regarded as a federal consumption expenditure in the NIPAs. In addition, through its taxes and transfers, the federal government affects the resources available to the private sector. The purpose of the NIPAs is to record all of those activities consistently.
The federal sector of the NIPAs tracks how much the government spends on its consumption of goods and services, and it records the transfer of resources that occurs through taxes, payments to beneficiaries of federal programs, and federal interest payments. The federal sector’s contribution to GDP is presented elsewhere in the NIPAs (Table 1.1.5 in the accounts).
Differences in Accounting for Major Transactions
The accounting differences between the NIPAs and the federal budget stem from the conceptual differences discussed above. In attempting to properly incorporate federal transactions into the framework used to determine GDP, the NIPAs reflect judgments about the best treatment of such transactions as government investment, sales and purchases of existing assets, federal credit, and federal activities that resemble those of businesses, along with transactions involving U.S. territories. In some cases, the appropriate treatment may be to move a transaction from the federal sector to another place in the NIPAs or to exclude the transaction from the NIPAs entirely. In other cases, the appropriate treatment may involve recording as a receipt in the NIPAs an item that the federal budget reports as an offsetting (negative) budget outlay, or adjusting the timing of a federal transaction to better match the timing of related production or income flow.4
The Measurement of National Saving
Several conventions in the NIPAs are intended to show the federal government’s contribution to the NIPAs’ measure of national saving—net federal government saving (current receipts minus current expenditures). Two major departures from the budget are the treatment of federal investment spending (for such things as ships, computers, and office buildings) and the treatment of federal employees’ retirement programs. As a result of such differences, the concept of net federal saving in the NIPAs is akin to but not the same as the federal budget surplus.
Federal Investment. In the federal budget, outlays for investment purchases are treated like other cash outlays and thus are subtracted from budget revenues in determining the size of the federal deficit or surplus. By contrast, in the NIPAs, federal investment is not counted as federal spending for the purpose of measuring net federal government saving, because new purchases of federal capital (investments) do not measure the current inputs from the existing stock of capital that are used to provide government services.5 To approximate the cost of those
capital inputs, the NIPAs include in current federal expenditures an estimate of the depreciation (consumption of fixed capital) of the stock of federal capital. The treatment is conceptually similar to that applied to the corporate business sector, which uses depreciation rather than investment purchases to compute net corporate saving (retained earnings). In the federal budget, depreciation is not tracked. Table D-1, which provides a crosswalk between the budget and the NIPAs, shows that difference in coverage in the row labeled "Treatment of investment and depreciation."6
Federal Retirement. The transactions of federal employees’ retirement programs are also handled differently in the budget and in the NIPAs. In the budget, federal employees’ contributions for their retirement are recorded as revenues, whereas agencies’ contributions on behalf of their employees (as well as interest payments from the Treasury to trust funds) have no overall budgetary effect because they are simply transfers of funds between two government accounts.7 Benefit payments to federal retirees are recorded as outlays in the budget. By contrast, in the NIPAs, the aim is to make the measurement of saving by the federal government consistent with that of the private sector. Therefore, the NIPAs treat some of the transactions of federal retirement plans as part of the household sector.8 The receipts from federal employers’ retirement contributions (and the interest earned by retirement accounts) are considered part of workers’ personal income and thus are not recorded as federal transactions (receipts or negative expenditures). Employees’ contributions are not recorded as income in either the federal or the household sector but are considered transfers within the household sector.
On the outlay side, pension benefit payments to retirees are not recorded as federal expenditures in the NIPAs because they are treated as transfers from pension funds within the household sector. Some transactions, however, are treated as part of federal expenditures even though the corresponding receipts are recorded in the household sector. The government’s contributions to its workers’ retirement are counted as federal expenditures (as part of employees’ compensation), as is the interest paid to federal retirement accounts.9 The different treatment of retirement contributions by federal employees is shown in the top section of Table D-1 under "Receipts"; the different treatment of contributions by federal employers, interest earnings, and benefit payments is shown below that, under "Expenditures."
Relationship of the Budget to the Federal Sector of the NIPAs
TableD-1.38.1.htm
Source: Congressional Budget Office.
Note: NIPAs = national income and product accounts; * = between -$500 million and $500 million; OASDI = Old-Age, Survivors, and Disability Insurance; HI = Hospital Insurance.
a. Includes Social Security and the Postal Service.
b. Includes timing differences not shown elsewhere in the table, plus discrepancies between figures in the NIPAs and in the budget that may diminish when BEA makes subsequent revisions.
c. May change in the future if BEA decides to record as capital transfers rather than as employees’ compensation the annual lump-sum payments, to amortize the unfunded liabilities of military and civilian service retirement funds.
d. Includes coverage differences not shown elsewhere.
e. On the receipts side, includes timing differences not shown elsewhere in the table, plus discrepancies between figures in the NIPAs and in the budget that may diminish when BEA makes subsequent revisions. On the expenditure side, numbers include coverage differences not shown elsewhere.
Capital Transfers and Exchanges of Existing Assets
The NIPAs’ measure of current production and income is not affected by transactions that involve existing assets. Therefore, the NIPAs do not count capital transfers or asset exchanges as part of current federal receipts or expenditures, although the budget generally does include those transactions. The NIPAs define as capital transfers—and thus exclude—estate and gift taxes (which are taxes on private-capital transfers) and investment grants to state and local governments (for air transportation, highways, transit, and water treatment plants).10 Exchanges of existing assets include federal transactions for deposit insurance and sales and purchases of government assets (including assets that are not produced, such as land and licenses to use the radio spectrum). Those differences between the NIPAs’ federal sector and the budget accounts appear on the revenue side in Table D-1 as estate and gift taxes and on the outlay side as capital transfers and lending and financial adjustments.
For federal credit programs (loans and loan guarantees), only the estimated credit subsidy and administrative costs are included in outlays. Cash flows from loan disbursements, repayments, and interest, by contrast, are reported in what are termed financing accounts, which have no effect on outlays.
As in the budget, the NIPAs record administrative costs and generally exclude loan disbursements and repayments and other cash flows that are considered exchanges of existing assets or financial and lending transactions that are unrelated to current production. The NIPAs do not record subsidy costs. In another departure from the budget, the NIPAs include the interest receipts from credit programs (as part of federal receipts). Those differences in the treatment of credit programs are recorded in two places in Table D-1: Under the heading "Expenditures," the row labeled "Lending and financial adjustments" shows the differences in handling the loan subsidies; under "Receipts," the difference in the treatment of loan interest is captured as part of "Income receipts on assets."
The NIPAs exclude all government transactions with Puerto Rico and the U.S. territories, whose current production, according to the NIPAs’ definition, is not part of the nation’s GDP. Because federal transfers dominate those transactions, their exclusion tends to increase the NIPAs’ depiction of net federal government saving by comparison with the budget’s measure of saving—the federal deficit or surplus. That difference in coverage is shown as geographic adjustments in Table D-1.
The business activity of the Universal Service Fund, which provides resources to promote access to telecommunications, is recorded in the budget but not in the NIPAs’ federal sector. The Universal Service Fund receives federally required payments from providers of interstate and international telecommunications services and disburses those funds to local providers that serve high-cost areas, low-income households, libraries, and schools, as well as to rural health care providers. The fund is administered by the Universal Service Administrative Company, an independent nonprofit corporation regulated by the Federal Communications Commission.
Although the Universal Service Fund’s revenues and outlays appear in the federal budget, they have little net effect on the deficit or surplus. In the NIPAs, the fund’s receipts and payments are classified as intracorporate transfers (from one business to another within the corporate sector). The difference in treatment of the Universal Service Fund is so labeled in Table D-1.
In the NIPAs, federal interest receipts are grouped with other types of federal receipts (in the category designated "Income receipts on assets") rather than netted against federal interest payments, as they are in the federal budget.11 BEA’s treatment is consistent with international accounting practices, under which interest receipts and payments are reported separately. That difference in the treatment of interest receipts in the NIPAs and in the federal budget raises the NIPAs’ measure of government receipts relative to federal budget revenues and increases the NIPAs’ measure of federal spending relative to budget outlays. However, because the difference in treatment affects receipts and expenditures in the NIPAs by exactly the same amount, it has no effect on the NIPAs’ measurement of net federal government saving.
Surpluses of Government Enterprises
In the NIPAs, the surpluses (or deficits) of government enterprises, such as the Postal Service, are shown on a separate line as current receipts of the federal government. That treatment is in keeping with international accounting standards, which generally advocate reporting spending on a gross, rather than a net, basis. By contrast, surpluses of government enterprises are treated as offsetting receipts in the federal budget.
Military Sales and Assistance in Kind
The NIPAs attempt to identify contributions to GDP by sector. Therefore, they do not classify as part of federal consumption military purchases of equipment and services that are intended for sale or as gifts to foreign governments. Instead, those transactions are considered net exports in the NIPAs’ foreign transactions account (Table 14.1 in the accounts). In the case of gifts, the transactions also are recorded in the federal sector of the NIPAs as a portion of transfers to the rest of the world—a classification that parallels their treatment as outlays in the federal budget. By contrast, although the cost of acquiring the military equipment sold to foreign governments is recorded in the federal budget as outlays, the proceeds from those sales are recorded as offsetting receipts.
As much as is possible, the NIPAs attempt to measure income flows when income is earned (on an accrual basis) rather than when income is received (on a cash basis).12 For example, BEA attributes corporate tax payments to the year in which the liabilities are incurred rather than to the time when the payments are actually made. That approach makes sense in an integrated system of accounts that tracks both production and income because, on an accrual basis, the value of what is produced in a given period should—measurement problems aside—match the total income generated. However, the NIPAs are not entirely consistent in that respect: Personal tax payments are counted as they are made and are not attributed retroactively to the year in which the liabilities were incurred. Because the budget is recorded mostly on a cash basis and the NIPAs’ federal sector is recorded largely on an accrual basis, there are differences in several areas in the timing of recorded transactions.
Corporate Taxes. Legislation sometimes temporarily shifts the timing of corporate tax payments (usually from the end of one fiscal year to the beginning of the next or vice versa). The NIPAs exclude such timing shifts, which are not consistent with accrual accounting. The timing adjustments for the net effects of enacted legislation are shown in Table D-1 under the heading "Receipts" in the row labeled "Timing shift of corporate estimated tax payments."
Although corporations make estimated tax payments throughout the year, any shortfalls (or overpayments) are corrected in the form of final payments (or refunds) in subsequent years. The NIPAs shift those final payments back to the year in which the corporate profits that gave rise to the tax liabilities were actually generated, whereas the budget records them on a cash basis. The results of that difference are difficult to identify for recent history and thus appear in the "Other adjustments" category under the heading "Receipts" in Table D-1.13
Personal Taxes. Although personal taxes are not recorded on an accrual basis in the NIPAs, BEA nevertheless attempts to avoid large, distorting upward or downward spikes in personal disposable income that result from timing quirks. Such quirks occur each year in April, for example, when most final settlements for the previous year’s personal taxes are paid. In the NIPAs, therefore, those settlements are evenly spread over the four quarters of the calendar year in which they are paid. (As with accrual accounting, that treatment avoids spikes. Unlike accrual treatment, however, it does not move payments back to the year in which the liabilities were incurred.) Such "smoothing" can alter the relationship of the NIPAs and the budget accounts for various fiscal years because it shifts some receipts into the last quarter of the calendar year and thus into the following fiscal year.14
Again, those adjustments are difficult to identify for recent history and thus are not shown separately in Table D-1. They appear instead in the row labeled "Other adjustments" under "Receipts."
Transfers and Military Compensation. Timing adjustments are needed on the spending side of the NIPAs to align military compensation and government transfer payments—for example, veterans’ benefits, Supplemental Security Income (SSI) payments, and Medicare’s payments to providers—with income that is reported on an accrual basis in the NIPAs. Misalignments can occur because of accelerations in the timing of payments that result from quirks in the calendar or because of legislation designed to delay payments.
For example, although SSI payments are usually made on the first day of each month, if the first of the month falls on a weekend or holiday, payments are made a day or more in advance. If that occurs for the October benefits, payments are pushed into the previous fiscal year in the budget. In such cases, the NIPAs introduce a timing adjustment that effectively moves the payments back to the first day of the month. Hence, the NIPAs’ adjustment always ensures that there are exactly 12 monthly SSI payments in a year, whereas in the budget, there may be 11 in some years and 13 in others.
For military compensation, which is normally paid at the beginning and middle of each month but may sometimes, like SSI, be paid early to avoid weekends, the adjustment in the NIPAs always ensures 24 payments in a year. In the budget, by contrast, there may be 23 payments in some years and 25 in others. The row labeled "Timing adjustments" under "Expenditures" in Table D-1 reflects that regularizing for transfers and for military pay.
In another contrast with the federal budget, the NIPAs record Medicare payments on an accrual basis rather than on a cash basis. That treatment better illustrates the link between the underlying economic activity (the medical services provided) and the associated federal transactions (payment for those services), which can be several months apart. The timing adjustment, however, has only a small effect on the NIPA measure of net federal government saving.
Both the federal budget and the NIPAs treat certain revenues as offsetting receipts when they result from voluntary transactions with the public that resemble business activities, such as proceeds from the sale of government publications. However, the NIPAs generally have a stricter view of what resembles a business transaction. In particular, Medicare premiums, deposit insurance premiums, rents, royalties, and regulatory or inspection fees are deemed equivalent to business transactions in the budget but not in the NIPAs. Consequently, those transactions (negative outlays in the budget) are treated in the NIPAs as government receipts (contributions for government social insurance, and current transfers from business—such as fines and fees, and taxes on production and imports). Those differences are recorded within the category "Netting" in Table D-1. Because they affect total current receipts and total current expenditures by exactly the same amounts, they have no effect on the NIPAs’ measure of net federal government saving.
Presentation of the Federal Government’s Receipts and Expenditures in the NIPAs
As in the budget, the federal sector of the NIPAs classifies receipts by type, but the categories differ (see Table D-2). The NIPAs’ classifications help determine measures such as disposable income and corporate profits after taxes. There are five major categories of current receipts. The largest, current tax receipts, includes taxes on personal income, corporate income, and production and imports (excise taxes and customs duties), as well as taxes from the rest of the world. The next-largest category—contributions for government social insurance—consists of Social Security taxes, Medicare taxes and premiums, and unemployment insurance taxes. The remaining categories are current transfer receipts (fines and fees), income receipts on assets (interest, rents, and royalties), and current surpluses of government enterprises (such as the Postal Service).
Baseline Receipts and Expenditures as Measured by the NIPAs
TableD-1.38.1.htm
Source: Congressional Budget Office.
Note: NIPAs = national income and product accounts.
a. Includes Social Security taxes, Medicare taxes and premiums, and unemployment insurance taxes.
b. May change in the future if BEA decides to exclude from consumption the increase in the annual lump-sum payment to amortize unfunded liabilities of the military and civilian service retirement funds.
c. Includes Social Security and the Postal Service.
In the NIPAs, the government’s expenditures are classified according to purpose. The major groups, which are fewer than in the federal budget, are consumption expenditures, or spending on goods and services, including costs of capital depreciation (with separate estimates for defense and nondefense spending); transfer payments (to individuals, state and local governments, and the rest of the world); interest payments; and subsidies to businesses and to government enterprises.
Consumption of goods and services (for defense and nondefense purposes) consists of spending by the government for its immediate use in production. (The largest portion of such consumption is the compensation of military and civilian federal employees.) Among the government’s consumption expenditures, the consumption of fixed capital—depreciation—represents a partial measure of the services the government receives from its stock of fixed assets, such as buildings or equipment.
Transfer payments (cash payments made directly to individuals and the rest of the world, as well as grants to state and local governments or foreign nations) constitute another grouping. Social benefits make up most of the transfers to individuals. Grants-in-aid are payments the federal government makes to state or local governments, which generally use them for transfers (such as benefits provided by the Medicaid program) and consumption (such as the hiring of additional police officers). Current transfers to the rest of the world include federal purchases of military equipment for delivery to foreign governments.
The NIPAs’ category for federal interest payments shows only payments and thus differs from the budget category labeled "Net interest." In the NIPAs, federal interest receipts are classified with other federal receipts.
The NIPAs’ category labeled "Subsidies" primarily consists of payments by the federal government to businesses, including state and local government enterprises, such as public housing authorities. Federal housing and agricultural assistance have long dominated that category.
Net federal government saving in the NIPAs is the difference between the current receipts and the current expenditures of the federal sector.15 It is a component of net national saving (which also includes net saving by the state and local government sector, personal saving, and corporate retained earnings) and thus is a partial measure of how much of the nation’s income from current production is not consumed in the current period. Net federal saving (or dissaving) is akin to the federal surplus or deficit measured in the budget. However, net federal government saving is not a good indicator of federal borrowing requirements because, unlike the budget deficit or surplus, it is not a measure of cash flows.16
The discussion of the national income and product accounts in this report generally refers to Table 3.2 in the accounts, "Federal Government Current Receipts and Expenditures," which most closely resembles the presentation in the budget. For other discussions of the NIPAs, see Department of Commerce, Bureau of Economic Analysis, "Federal Budget Estimates for Fiscal Year 2008," Survey of Current Business (March 2007); and Budget of the United States Government, Fiscal Year 2008: Analytical Perspectives.
Some accounts in the NIPAs, such as the domestic capital account (which shows saving and investment), focus on components of gross domestic product or income rather than on a specific sector, and they bring together relevant information from all four sectors.
More formally, BEA regards the federal government and state and local governments as subsectors. The treatment of state and local governments’ transactions in the NIPAs closely resembles that of the federal government’s transactions.
The resulting differences between the numbers in the NIPAs and the budget are sometimes divided into three groups: coverage, timing, and netting. Although all three types of differences can affect total revenues or outlays, netting differences have no effect on the federal deficit or surplus because they affect revenues and outlays equally.
Federal investment, along with private investment spending, is shown in the NIPAs in the domestic capital account, which displays saving and investment (Table 5.1 in the accounts; see also Table 3.9.5, which shows both federal investment and consumption).
The estimates and the presentation of the reconciliation between the budget and the NIPAs in Table D-1 are based on CBO’s interpretation of the methodology for the accounts as detailed in Department of Commerce, Bureau of Economic Analysis, Survey of Current Business (June 2003), and in BEA’s reconciliation of the Administration’s budget for fiscal year 2008 and the accounts, published in the Survey of Current Business (March 2007).
In the budget, contributions by an agency for its employees’ retirement are considered outlays for that agency and offsetting receipts (negative outlays) elsewhere within the budget. Thus, those intragovernmental transfers result in no net outlays or receipts for the total budget. That treatment is the same as the treatment of the federal government’s contributions for Social Security and Medicare for its employees.
Transactions of the National Railroad Retirement Investment Trust are part of the federal sector in the NIPAs. In addition, Social Security contributions and benefit payments for private and government employees alike are recorded in the federal sector as receipts and expenditures rather than moved to the household sector.
However, in the future BEA may consider recording the annual lump-sum payments to amortize the unfunded liabilities of the military and civilian service retirement funds as a capital transfer rather than as employees’ compensation. That treatment would reflect the view that such payments are not related to current production, see www.bea.gov, "Frequently Asked Questions," Answer ID 480.
Another type of capital transfer that BEA does not include in the NIPAs is an annual lump-sum payment from the Treasury to the Department of Defense Medicare-Eligible Retiree Health Care Fund—a trust fund that in October 2002 began to pay for benefits received by retired members of the armed forces who are eligible for Medicare and by their dependents. Those payments to the trust fund are for accrued but unfunded liabilities for benefits attributable to work performed before 2003; BEA excludes those payments from federal expenditures because they are not related to current production. Those annual payments are made by the Treasury and recorded as outlays. However, the Treasury also records offsetting receipts (negative outlays) elsewhere within the budget. Because those annual payments have no net effect on federal spending either in the NIPAs or in the budget, there is no corresponding reconciliation item in Table D-1.
About half of the NIPAs’ interest receipts, mainly from penalties on late tax payments, are recorded as revenues in the federal budget.
See United Nations, System of National Accounts (1993), paragraph 3.19, which emphasizes reporting transactions on an accrual basis. Many of the conceptual changes to the NIPAs have been based on guidelines from that U.N. document. See also Department of Commerce, Bureau of Economic Analysis, "The NIPAs and the System of National Accounts," Survey of Current Business (December 2004), pp. 17–32.
"Other adjustments" include timing differences not shown elsewhere in Table D-1, plus discrepancies between figures in the NIPAs and the budget that may diminish when BEA makes subsequent revisions.
A change in the relationship between receipts in the budget and in the NIPAs is projected to occur after certain changes in tax laws, such as the changes scheduled to take effect in 2011. CBO’s baseline for revenues incorporates the assumption that those changes do, indeed, occur.
Gross federal saving—a component of gross national saving—equals net federal saving plus depreciation (consumption of fixed capital).
As an addendum to the NIPAs’ Table 3.2, BEA publishes a measure labeled "Net lending or net borrowing," which is closer to a cash or financial measure in several ways. Like the budget, it includes investment purchases as expenditures because those purchases must be financed from current receipts or from federal borrowing. At the same time, it excludes consumption of fixed capital because those accounting charges are not a drain on current financial resources. In addition, it includes receipts from the sale of existing assets and capital transfer receipts (for example, estate and gift taxes) and capital transfer payments (for example, investment grants to state and local governments), which are not part of current receipts or expenditures in the NIPAs but do affect cash flows. Despite those adjustments, net federal lending or borrowing in the NIPAs differs from the budget deficit or surplus because of all of the other differences in timing and coverage that distinguish the NIPAs from the budget. BEA presents those differences in Table 3.18, which is similar to Table D-1 presented here.
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