A couple of my astute readers have ask me the following question. Why does our debt seem to increase more than our Government reported Cash deficit would indicate? I will have to say that when I started studying this problem in earnest I had that same question. This discrepancy is quite evident if you look at the summary report U.S. Government Financial Data (1969-2012). This report shows that the total of Government Reported Cash deficits over this 44 years was $10.1 Trillion but our Debt increased from $378 Billion to $16.066 Trillion or an increase of $15.7 Trillon. So how can this happen? Bottom line is that this difference is due to Intragovernmental borrowings since this is a non-cash transaction.
The answer to this question is at the core of USAPonzi. The basic cause of USAPonzi is the agreement that was made by Congress in 1968, as they prepared the Fiscal Year 1969 budget, that they would stop funding the Trust Funds for future Social Benefit committments and use the "excess" social benefit taxes to pay for general operating expenses. This of course created what we now call Unfunded Liabilities since these Trust Funds are just that "unfunded".
So let's look at how this is handled by the Government and how it gets reported. To explain this I will use as a framework the CBO projections for Fiscal Year 2014. The CBO projects that we will have total Tax revenues of $3000B and that we will have a Cash Deficit of $514B. I do not know how the actual Tax Revenues break down between taxes for general opreating expenses and taxes to fund Social Benefits but let's make an assumption that $300B is for social benefits and $2700B is for general operating expenses. Let us further assume that one third of the taxes ($100B) collected in 2014 for social benefits will be spent in 2014 for current period commitments and the other two thirds would, with proper fiscal responsibility, be put in Trust Funds to earn interest income for future period commitments.
At the end of Fiscal Year 2013 our Federal Debt was as follows:
Gross Federal Debt $16,738B
Debt Held by the Public $11,976B
Intragovernmental Holdings $4,762B
Total Tax Revenues $3,000B
General Operation Tax Revenues $2,700B
Social Benefit Tax Revenues $300B
Social Benefit Payments in 2014 $100B
Future Soc Ben Tax Revenues $200B
Cash Deficit $514B
Cash Outflows in 2014 $3,514B Total Tax Revenues plus Cash Deficit
But the Government borrowed and spent the Future Soc Ben Tax Revenues of $200B so this has to be added to the Intragovernmental Holdings balance on the Federal Debt ledger. .
Further, since the Government's General Operating budget has previously borrowed and spent funds from other segments of the government they must pay interest on their current Intragovernmental Holdings. The interest rate on these borrowings appears to be 3.9% so this virtual interest expense also has to be added to the Intragovernmental Holdings in the amount of 0.039*$4,762B = $186B
So even though our Cash Deficit is $514B our Debt would go up by $900B with these assumptions:
Cash Deficit $514B
Borrowed from Soc Ben in 2014 $200B
Interest Expense on Prior Borrowings $186B
Total increase in Federal Debt $900B
Note: This is a hypothetical representation of what would happen with the afore mentioned assumptions and is not a prediction of what will actually happen. This analysis is intended to explain the major discrepancies between Cash Deficit and the annual change in the Federal Debt and may not explain all such discrepancies.
Next page: Fiscal Gap Accounting