Home » Accounting » Balacing the (operating) budget

Balacing the (operating) budget

My opening shot (!) in an ongoing series that I plan on the federal deficit:

All the talk about a balanced budget ignores the fact that the government is on a cash basis in which all expenditures are treated as outflows of the period. In regular for-profit accounting, the payment of a salary is treated as an expense while the acquisition of a building, say, is treated as an investment. Government does not make this distinction. Were businesses to keep their books the way that the government does, a large number of them would be running a deficit. Yes we desperately need a balanced budget but it needs to be a balanced operating budget. Anything else is nonsensical and shows a sad misunderstanding of government accounting.

Take Texas Instruments as an example of what this does. In 2006 they had income of $2.5 billion dollars. Most of us would say that was a very fine result. In the same year, they announced expansion plans and invested a little over $3 billion dollars. Again, most of would say that was very fine and we would look forward to the extra dividends that this investment would generate. But, and this is the big but, if TI did its accounting on a cash flow basis they way that government does its accounting, the we would be looking at a cash shortfall on some $500 million. And, presumably we would all be jumping up and down demanding that TI be shut down. Or maybe not . . .?
But this is exactly what is happening with government accounting. We treat the deficit as though it were an operating loss instead of what it really is, the difference between revenues operating expense AND investments.
Now we can all have a very useful argument about whether a particular item is a good investment or not. Is a new playground in South Dallas a waste of money or a good investment? We can debate that. Is Head Start a good investment? We can debate that. But conversation about the budget is essentially meaningless if we fail to distinguish between operating expenses and things that could be considered investments in the future.

Posted earlier at  http://digitaljournal.com/blog/12771#ixzz1Y2gZyhWp

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