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Clash of spending measures affects the 'austerity' debate

Updated at 3:04 pm ET Two thirds of the way through the current fiscal year, federal spending is a bit higher -- 1.2 percent higher to be exact -- than it was for the same period last year, the Congressional Budget Office reported Thursday.

But wasn’t it just one week ago that the Commerce Department’s Bureau of Economic Analysis -- the scorekeeper for gross domestic product figures -- reported that federal spending was down 5.9 percent in the first quarter of the year? Can both reports be right? Yes, both numbers are accurate, but the agencies’ different accounting methods lead to the clashing estimates.

This clash of numbers matters for the ongoing election year debate over “austerity.”

Carolyn Kaster / AP

President Barack Obama talks about the economy, Friday, June 8, 2012, in the briefing room of the White House.

At his press conference Friday, President Barack Obama called for a new burst of federal spending to help state and local government retain and hire public school teachers, firefighters, and other public sector workers and warned against reducing government spending too quickly in the short term.

Both in Europe and in the United States, he said, "If you are engaging in too much austerity too quickly” then that makes it harder for governments and individuals “to pay off their debts."

For Obama and the Democrats, “austerity” has become the mantra; trying to convince voters that leaner federal spending isn’t what the economy needs now because the government is already -- or is about to be -- in austerity.

One piece of evidence that austerity isn’t yet in effect: federal spending so far in the current fiscal year is about one-third higher than it was at the same point in 2007 -- the last pre-recession year.

When Federal Reserve chairman Ben Bernanke testified Thursday to the congressional Joint Economic Committee, he was prodded by Rep. Maurice Hinchey, D-N.Y., to agree that -- in Hinchey’s words, “Europe has clearly proven that austerity was the wrong policy to pursue” -- and that the United States ought to not follow that path.

President Obama takes questions from reporters at a White House press conference Friday.

To figure out whether the United States is now in -- or about to enter into -- austerity, it helps to know how the BEA’s accounting methods differ from the CBO’s.

Here are some of the differences:

•       CBO is reporting its figures in current dollars -- which is the way we normally think of dollars in our everyday spending. CBO does not adjust the figures for inflation, the depreciation in the purchasing power of the dollar over time. But when BEA reports on gross domestic product, it is using inflation-adjusted dollars. In other words, it is reporting what economists call “real” spending, accounting for changes in the dollar’s value and also accounting for quality changes in the products being purchased. So if an F-35 fighter that the Defense Department buys this year is more technologically capable than a prior version, which will result in a decline in prices, all else being equal.

•       As the BEA explains on its blog, “the timing of expenditures recorded in gross domestic product is intended to align with when the economic activity takes place.” That means that, for example, if the Defense Department pays Lockheed Martin $16 million in this quarter for a F-22 fighter as it is being built, and then another $16 million next quarter for that fighter, etc., BEA does not record the money as an expenditure until the Defense Department takes delivery of that particular plane. But CBO is reporting outlays shortly after they are being made.

•       Timing: In its reporting on gross domestic product, the BEA is measuring quarter-to-quarter changes during the calendar year. So the reported 5.9 percent drop in the first quarter of this year is a decline from the last quarter of 2011. In contrast, the CBO reports on each month in the federal government’s fiscal year which begins on Oct. 1 and ends on Sept. 30.

•       CBO’s spending report includes what economists call “transfer payments” by the government to individuals– such as Social Security benefits. When the BEA report on gross domestic product came out last week, some news reports cited the figure that said real federal government spending decreased 5.9 percent in the first quarter, but under the BEA’s rules that figure did not include such transfer payments.

One reason why Obama referred throughout his Friday press conference to employment by state and local government: that’s where one can see some evidence of austerity.

Local government employment is down 2.8 percent since the recession started in December of 2007, according to data from the Bureau of Labor Statistics. State government employment is down about 1.3 percent. (But federal government headcount is up by about 2.3 percent since the recession began.)

When adjusted for inflation, compensation paid at all levels of government to public-sector workers was down slightly (one-half of one percent) in the first quarter of this year, compared to 2011 levels, according to the BEA. 

And those figures are a reminder that to get a full measure of government spending one must look at all levels of government: federal, state and local.

According to the International Monetary Fund, which has its own accounting rules to compare government outlays among countries, government expenditures in the United States at all levels of government in 2012 will amount to 40 percent of GDP.

Data source: International Monetary Fund

That is down from 2011 when it was 41.4 percent and down from the most recent peak year (2009) when government spending reached 44 percent of GDP

But in the last “normal” or economically healthy year -- 2007 -- government spending was only 36.7 percent of GDP.

In a recession, government spending grows as a percentage of GDP due to higher outlays on unemployment benefits and Medicaid -- and partly because the non-government sectors of economy are not growing, so government outlays make up a bigger part of the total.

Government outlays in the United States put it in the same league with countries such as Canada (41.7 percent of GDP) Japan (41.1 percent of GDP) and Brazil (38.6 percent of GDP).

But government spending is smaller here than in places such as France (55.8  percent of GDP) or Denmark (56.8 percent of GDP.)

Of course, spending in one year alone -- or over a stretch of five years -- does not tell the story of future liabilities.

In its long-term forecast this week the CBO warned -- as did Bernanke in his testimony Thursday -- that the federal government’s fiscal course is unsustainable over the next few decades.

“The aging of the U.S. population and the rising costs for health care mean that the combination of budget policies that worked in the past cannot be maintained in the future,” the CBO report said.

Deficits and debt will reach “unsustainable levels,” unless Congress and the president find ways to “increase revenues substantially” and “decrease spending significantly” from projected levels.

The original version of this story said if an F-35 fighter that the Defense Department buys is more technologically capable than a prior version, it will result in a decline in real spending. In fact it would cause a decline in price, but an increase in real spending.