In a post at the New York Times' Economix blog, Bruce Bartlett discusses a recent staff discussion note from the International Monetary Fund: "Accounting Devices and Fiscal Illusions."  It is about the budget tricks or gimmicks or stratagems that governments use to get around cutting spending or raising taxes.  Or, as the discussion note puts it, "ways that headline deficits can be reduced without improving public finances–either by deferring the reporting of spending or accelerating the reporting of revenue–thus creating an illusion of fiscal adjustment."

According to the discussion note, deficit devices fit into four categories:

1. Hidden borrowing — increased reported revenue now, increased reported spending later (e.g., selling government property and then leasing it back)
2. Disinvestment — increased reported revenue now, reduced reported revenue later (e.g., securitizing future government revenues)
3. Deferred spending — reduced reported spending now, increased reported spending later (e.g., postponing a payment until the following fiscal period)
4. Foregone investment — reduced reported spending now, reduced reported revenue later (e.g., having a private company build a road and allowing it to collect tolls)

Another case is that of disappearing government, in which responsibility for spending is transferred to local governments or quasi-government agencies. 

These accounting devices are familiar here in Washington.  For example, some of the current budget proposals included a one-day delay in school apportionment payments (deferred spending).  And Sen. Keiser introduced a bill last week would securitize tobacco settlement revenues to pay for the Basic Health Plan (disinvestment). 

Washington uses cash basis accounting (see RCW 43.88.050). This means, according to the discussion note, that "this year's deficit can be reduced simply by deferring payments so that they fall in the next year."  Another accounting option is accrual basis, "in which costs are recognized when they are incurred, not when cash is disbursed."  The note finds that

Conceptually, the adoption and progressive improvement of accrual-based standards are central to the solution of the problems discussed in this note, because accrual-based measures seek, when other things are equal, to recognize transactions when economic value, not cash, is transferred. Thus, the device of delaying a payday to the next year does not reduce an accrual-based deficit, because economic value is considered to be transferred when employees work, not when they are paid.

But there are difficult judgments to be made in accrual-based reporting about when exactly economic value is transferred. This creates new kinds of accounting problems and means that not all the problems of cash accounting are solved by the adoption of accrual accounting. . . .

Lastly, the note recommends long-term forecasts as a way to mitigate the problems of the different accounting options:

Long-term fiscal forecasts provide one set of alternative fiscal indicators. The archetypal
accounting device reduces this year’s deficit at the expense of higher deficits in future years. Thus one way of ensuring that fiscal reporting is more informative is to ensure that it includes estimates of future deficits (measured on the same basis) under current policy. To be effective, the forecasts must have a long horizon, perhaps 50 years.

All in all, the discussion note was an interesting read in light of current Washington budget negotiations.