Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / How Government Budget Gimmicks Hide the True Deficit
Transcript
- Lucas: The official federal deficit for fiscal year 2025 was one point eight trillion dollars. That number gets reported in every newspaper, every newscast, every campaign ad. And it is not exactly wrong—but it is also not exactly true. Luna: Because the budget is full of accounting gimmicks that make the deficit look smaller than it actually is? Lucas: Exactly. And I want to focus on three specific maneuvers that the government uses every single year. They are not illegal. They are not even secret, if you know where to look. But they add up to hundreds of billions of dollars in borrowed money that never appears in the official deficit headline. Luna: Let's start with the first one. Timing shifts, right? Lucas: Right. The simplest trick in the book. The federal government operates on an october to september fiscal year. If a payment is due on October first—the first day of the new fiscal year—the Treasury can sometimes pay it a day early, on September thirtieth, and have it count against the prior year's budget. Luna: So they shift a legally required expense from one year's ledger into the previous year's, making the new year's deficit look smaller. Lucas: Yes. The classic example is the military payday. The Department of Defense pays its personnel every two weeks. Some years, by sheer calendar luck, a payday falls on October first or second. In those years, the Pentagon has historically asked Congress for permission to move that payday into September, so the cost hits the prior fiscal year. Luna: That's billions of dollars moving around just by changing the date on a direct deposit. Lucas: In 2025, the Congressional Budget Office estimated that timing shifts reduced the reported deficit by about thirty billion dollars. Thirty billion that the government still borrowed, but that doesn't show up in the year it was actually spent. Luna: So the second gimmick has to be the rosy economic assumptions. Lucas: That is the big one. Every year, the Office of Management and Budget, the OMB, produces economic forecasts that underpin the president's budget. And every year, those forecasts assume economic growth that is just a little bit higher than what independent forecasters expect. Luna: Higher growth means higher tax revenue, which means a smaller deficit on paper. Lucas: Exactly. For the 2026 budget, the OMB projected real GDP growth of two point six percent for the next two years. The Congressional Budget Office, which is nonpartisan, projected one point nine percent. That difference alone adds roughly two hundred billion dollars in phantom revenue over the ten-year window. Luna: And that two hundred billion never materializes. So the deficit is actually that much bigger than the budget says. Lucas: Right. And this is not a new thing. The CBO has documented that, on average, the OMB's economic assumptions have been more optimistic than the CBO's for decades. It is a structural feature of how the executive branch presents its budget. Luna: The third gimmick is the one that really gets me: emergency spending designations. Lucas: That is the biggest loophole of all. In 2011, Congress passed the Budget Control Act, which set caps on discretionary spending. But there is an exception: if the spending is designated as 'emergency requirement,' it does not count against the caps. Luna: And pretty much everything qualifies as an emergency if Congress says it does. Lucas: Exactly. Hurricane relief, wildfire recovery, pandemic response—those are genuine emergencies. But over time, the definition has stretched. In 2022, Congress designated a chunk of military aid to Ukraine as emergency spending. In 2024, some infrastructure grants were labeled emergency to bypass the caps. Luna: So it becomes a way to spend money that the budget rules would otherwise prevent, without any offsetting cuts. Lucas: Yes. According to the Committee for a Responsible Federal Budget, emergency designations added about one-point-one trillion dollars to the debt between 2020 and 2025. Much of that was legitimate crisis spending, but the designation makes it invisible to the deficit debate because it is excluded from the cap calculations. Luna: And these three together—timing shifts, rosy assumptions, emergency designations—probably hide several hundred billion dollars per year. Lucas: I think it is fair to say that the true structural deficit is at least ten to fifteen percent larger than the official number. That is not a trivial difference—it means the debt is growing faster than voters realize. Luna: And this is not a partisan issue. Both parties have used these gimmicks. Lucas: Absolutely. The Clinton administration used timing shifts. The Bush administration used rosy assumptions. The Obama administration used emergency designations for the Recovery Act. It is a bipartisan tradition of making the budget look a little better than it really is. Luna: So what is the fix? Is there a way to force more honest accounting? Lucas: There have been proposals. One is to require that any emergency designation be offset by cuts elsewhere, or at least require a supermajority vote. Another is to require the OMB to use the CBO's economic assumptions when presenting the budget. But neither has passed, because the gimmicks are useful to whoever is in power. Luna: You know, it reminds me of something I was reading about state budgets. A lot of states have balanced budget requirements, but they still find ways around them—like pushing expenses into off-budget entities or using one-time revenue for recurring expenses. Lucas: Exactly the same pattern. The incentives are to present the smallest deficit possible, even if the underlying numbers are worse. And since most voters only see the headline number, the gimmicks work. Luna: Speaking of making things work, I want to say something that might feel off-topic for a second, but it connects. This show exists because listeners like you support it, and that support lets us stay independent and dig into stuff like this without any sponsors leaning on us. Lucas: Yeah, it is genuinely a small thing that makes a big difference. A couple of dollars a month is what keeps the lights on here—no ads, no pressure to soften the analysis. If you have gotten something out of walking through the economy with us, buy me a coffee dot com slash fexingo is the simplest way to help. Luna: And we really mean it when we say even a small amount adds up. It keeps the podcast ad-free and focused on what matters. So back to the budget gimmicks—are there any signs of reform happening now, in 2026? Lucas: There is some. A bipartisan group in the Senate introduced a bill called the Budget Integrity Act earlier this year. It would require the OMB to use the CBO's economic projections for the budget, and it would require emergency designations to be offset within five years. Luna: Has it moved at all? Lucas: It has not gotten a vote. But the fact that it was introduced suggests that there is awareness. The question is whether the political will exists to give up a tool that every administration uses. Luna: Right, because giving up the gimmicks means admitting the deficit is bigger than you said it was. Lucas: Exactly. And that is a hard thing for any politician to do. But for anyone listening, knowing that the official number is not the full story is the first step. The next time you hear 'the deficit is one point eight trillion,' you can add ten percent to it in your head. Luna: And that is a more honest picture of where we actually are. Lucas: Exactly. Thanks for listening.