Figure 1 show reported in the federal government’s financial statements. when cash payments are made. Although two countries—the Netherlands and Canada—have considered  broader expansions of accrual budgeting since 2000, thus far they have  made only limited changes. Iceland and Canada generally have  taken this approach. Iceland also uses accrual budgeting for loan programs. Cash Information Remains Important, Particularly for Monitoring a Country’s Fiscal Position

Regardless of the approach taken in use of accrual budgeting, all of the  countries consider cash information to be important, particularly for  monitoring the country’s fiscal position even where fiscal indicators are  accrual based. Accrual budgeting can also lead to improvements in financial information. Accrual Cost Information Helped Inform Some Debates That Led to Improvements in Fiscal Condition

Despite the inherent challenges, our six case study countries have  continued to use accrual budgeting and additional countries have adopted  accrual budgeting since 2000. The full costs of these agreements were not  fully realized by the public until the adoption of accrual budgeting. Countries Use Other Methods to Increase Awareness of Greatest Long-Term Fiscal Challenges

Accrual budgeting was not used to increase awareness of long-term fiscal  challenges that are primarily driven by old-age public pensions and  healthcare programs. Instead, in recent years, several countries have begun reporting  on the sustainability of the government’s overall finances over longer-term  horizons, given demographic and fiscal trends. Unlike accrual or cash budgeting, which are intended to  provide annual cost information, fiscal sustainability reporting provides a  framework for understanding the government’s long-term fiscal condition,  including the interaction of federal programs, and whether the  government’s current programs and policies are sustainable. Therefore, most  countries use more than one measure to assess fiscal sustainability. The sooner countries act to put their  governments on a more sustainable footing, the better. As we  stated in 2000 and in other GAO reports, increased accrual information in  certain areas of the budget—insurance, environmental liabilities, and  federal employee pensions and retiree health—can help the Congress  and the President better recognize the long-term budgetary consequences of today’s operations and help prevent these areas from becoming long- term issues. Failure to pay attention to programs that require future  cash resources can further mortgage our children’s future. Such reports would  help increase awareness of the longer-term fiscal challenges facing the  nation in light of our aging population and rising health care costs as well  as the range of federal responsibilities, programs, and activities that may  explicitly or implicitly commit the government to future spending. Appendix I: Objectives, Scope, and Methodology

To update the findings of our 2000 report, we examined (1) where, how,  and why accrual budgeting is used in select Organisation for Economic  Co-operation and Development (OECD) countries and how it has changed  since 2000; (2) what challenges and limitations were discovered and how  select OECD countries responded to them; (3) what select OECD  countries perceived the effect to have been on policy debates, program  management, and the allocation of resources; (4) whether accrual  budgeting has been used to increase awareness of long-term fiscal  challenges and, if not, what is used instead; and (5) what the experience of  select OECD countries and other GAO work tell us about where and how  the increased use of accrual concepts in the budget would be useful and  ways to increase the recognition of long-term budgetary implications of  policy decisions. To address these objectives, we primarily focused on the six countries in  the 2000 GAO report:    Australia,    Canada,  Iceland,  the United Kingdom. Since these countries may not provide a complete picture of  the potential limitations or the use of alternative ways to increase the  focus on long-term fiscal challenges, we also looked at two countries— Norway and Sweden—that considered expanding the use of accrual  measurement in the budget but decided against it, to understand why.
Why GAO Did This Study

The federal government's financial condition and fiscal outlook have deteriorated dramatically since 2000. The federal budget has gone from surplus to deficit and the nation's major reported long-term fiscal exposures--a wide range of programs, responsibilities, and activities that either explicitly or implicitly commit the government to future spending--have more than doubled. Current budget processes and measurements do not fully recognize these fiscal exposures until payments are made. Increased information and better incentives to address the long-term consequences of today's policy decisions can help put our nation on a more sound fiscal footing. Given its interest in accurate and timely information on the U.S. fiscal condition, the Senate Committee on the Budget asked us to update our study of other nations' experiences with accrual budgeting and look at other ways countries have increased attention to their long-term fiscal challenges.

What GAO Found

In 2000, GAO reviewed the use of accrual budgeting--or the recording of budgetary costs based on financial accounting concepts--in Australia, Canada, Iceland, the Netherlands, New Zealand, and the United Kingdom. These countries had adopted accrual budgeting more to increase transparency and improve government performance than to increase awareness of long-term fiscal challenges. Accrual budgeting continues to be used in all six countries; Canada and the Netherlands, which use accrual information selectively, considered expanding the use of accruals but thus far have made only limited changes. Since 2000, other countries have considered using accrual budgeting. For example, Denmark and Switzerland began using accrual budgeting on a selective basis. Norway and Sweden, however, rejected accrual budgeting primarily because they believed cash budgeting enables better control over resources. Countries have taken different approaches in the design of their accrual budgets. Regardless of the approach taken, cash information remains important in all the countries for evaluating the government's finances. Other countries' experiences show that accrual budgeting can be useful for recognizing the full costs of certain programs, such as public employee pensions and retiree health, insurance, veterans benefits, and environmental liabilities, that will require future cash resources. However, these other countries do not use accrual budgeting to recognize their long-term fiscal challenges that are primarily driven by public health care and pension programs. Instead, many countries in GAO's study have begun preparing fiscal sustainability reports to help assess these programs in the context of overall sustainability of government finances. European Union members also annually report on longer-term fiscal sustainability. Although no change in measurement or reporting can replace substantive action to meet our longer-term fiscal challenge, GAO believes that better and more complete information on both the full-cost implications of individual decisions and on fiscal sustainability of the government's finances can help.