As accountants, we know that when we are consolidating the accounts of related entities, we must eliminate all intra-group transactions to ensure that transactions are not included more than once when determining the group’s financial position. This consolidation process should logically be applied to the federal and state underlying cash balance when announcing a federal surplus or deficit.
But the closest the Federal Government gets to consolidation is the National Fiscal Outlook, which is still not a full consolidation as we know it. When consolidated properly, the largest sector for spending is health and education, which is contradictory to the common perception that the nations spending is dominated by welfare payments, based on individual economic budgets and the National Fiscal Outlook.
So, is it as easy as it seems to view the big picture of national economic performance? Unfortunately, no. Since the federal government calculates the federal underlying cash balance on a cash basis and the states use accrual accounting, we may as well be comparing apples and oranges. This discrepancy allows governments to creatively present their economy’s performance and thus divert our attention in times of poor political performance.
As a common market, perhaps our economic performance and overall budget surplus or deficit should employ the concepts of accounting consolidation before being presented to the public.
As it stands, we are given microeconomic data, which we must extrapolate to draw a macroeconomic conclusion. But then again, it is in the politicians’ best interest for us to draw these unsupported conclusions.