On December 17th, The U.S. Treasury released the annual Financial Statements of the United States Government for fiscal year 2007 (year-ended September 30th), prepared using generally accepted accounting principles (GAAP), audited by the General Accountability Office (GAO) and signed off on by Treasury Secretary Paulson.

The statements still show that the federal government’s fiscal woes continue to careen wildly out of control. Based on my estimate of the 2007 GAAP-based deficit exceeding $4.0 trillion (see discussion below), the term "out of control" is not used loosely. If the government were to raise taxes so as to seize 100% of all wages, salaries and corporate profits, it still would be showing an annual deficit using GAAP accounting on a consistent basis.

Separately, the GAO still refuses to express an opinion on the financial statements, with three government agencies out of 24 earning GAO disclaimers: Department of Defense, Department of Homeland Security and Department of State, which accounted for 25% of net costs in 2007. The GAO referenced "serious financial management problems at the Department of Defense." With the exception of a qualified opinion on the statements for the Department of Agriculture, the opinions on all other agency statements were unqualified.

The results summarized in the following table show the various deficit/debt/obligation measures. The official GAAP-based deficit, including the annual change in the net present value of unfunded liabilities for Social Security and Medicare narrowed to $1.2 trillion in 2007 from $4.6 trillion in 2006. Much of the reported reduction in the deficit, however, was due to a one-time legislative-related accounting change in Medicare Part B that likely will be reversed, and, in any event, needs to be viewed on a consistent year-to-year accounting basis. Further, other one-time actuarial assumption and accounting changes need to be reported on a consistent basis for annual results to be comparable. Similar circumstances in 2004 had the reported deficit at $11.0 trillion, which was $3.4 trillion (SGS estimate) net of one-time changes to the Medicare system.

My final estimate for the actual 2007 GAAP-based deficit, and basis for same, will be published in the next several weeks, as research still is necessary to work through significant obfuscation. On a consistent year-to-year basis, I currently estimate the 2007 deficit will exceed $4.0 trillion, meaningfully. Separately, as the numbers stand, total 2007 federal obligations of $59.8 trillion represent 520% of U.S. GDP.

As noted in the Flash Update of December 18th, one example of the involved accounting issues is seen in Note 22 of the financial statements on Medicare, under "SMI Part B Physician Update Factor:"

"The projected Part B expenditure growth reflected in the accompanying 2007 Statement of Social Insurance is significantly reduced as a result of the structure of physician payment updates under current law. In the absence of legislation, this structure would result in multiple years of significant reductions in physician payments, totaling an estimated 41 percent over the next 9 years. Reductions of this magnitude are not feasible and are very unlikely to occur fully in practice. For example, Congress has overridden scheduled negative updates for each of the last 5 years in practice. However, since these reductions are required in the future under the current-law payment system, they are reflected in the accompanying 2007 State of Social Insurance as required under GAAP. Consequently, the projected actuarial present values of Part B expenditure shown in the accompanying 2007 Statement of Social Insurance is likely understated [my emphasis]."

Since this was handled differently in last year’s accounting, the change reduced the reported relative deficit. The difference would be $4.4 trillion, per the government, if physician payment updates were set at zero.

With Social Security and Medicare liabilities ignored, the GAAP deficits for 2007 and 2006 were $275.5 billion and $449.5 billion, respectively. Those numbers contrast with the otherwise formal and accounting-gimmicked cash-based deficits of $168.8 billion (2007) and $248.2 billion (2006). Here, too, changes in actuarial assumptions reduced net costs for the Department of Veterans Affairs from $113.8 billion in 2006 to $59.4 billion in 2007. Consistent year-to-year reporting is needed in order to have consistent year-to-year comparisons of the results.

U.S. Government - Alternate Fiscal Deficit and Debt                    Reported by U.S. Treasury
       Dollars are either billions or trillions, as indicated.          Sources: U.S. Treasury, Shadow Government Statistics.                                                               Total        Formal      GAAP      GAAP       GAAP                 Federal        Cash-      Ex-SS    With SS     Federal     Gross     Obilga-Fiscal  Based       Etc.      Etc.     Negative    Federal    tions(2)Year   Deficit    Deficit   Deficit    Net Worth     Debt      (GAAP)(1)    ($Bil)     ($Bil)    ($Tril)    ($Tril)     ($Tril)    ($Tril)—–  ——     ——     ——     ——      ——     ——2007   $162.8     $275.5      $1.2(3)   $54.3       $9.0       $59.82006    248.2      449.5       4.6       53.1        8.5        58.22005    318.5      760.2(r)    3.5       48.5        7.9        53.32004    412.3      615.6      11.0(4)    45.0        7.4        49.52003    374.8      667.6       3.0       34.0        6.8        39.12002    157.8      364.5       1.5       31.0        6.2        35.4
(1)Fiscal year ended September 30th.(2)Revised to include grossfederal debt, not just "public" debt.(3)On a consistent reportingbasis, net of one-time changes in actuarial assumptions andaccounting, SGS estimates that the GAAP-based deficit for 2007 topped $4 trillion. (4)SGS estimates $3.4 trillion, excluding one-time unfunded setup costs of the Medicare Prescription Drug,Improvement, and Modernization Act of 2003 (enacted December 2003).(r)Revised.Link to the statements: http://fms.treas.gov/fr/07frusg/07frusg.pdf