The Bureau of Economic Analysis (BEA) relies on the Treasury Department’s Monthly Treasury Statement (MTS) as a data source to calculate estimates of federal government defense consumption expenditures and gross investment in the national income and product accounts (NIPAs). The MTS shows outlays for Department of Defense-Military Programs, which is where the majority of defense spending is recorded. Other defense outlays appear in the Department of Defense-Civilian and Office of Personnel Management accounts, both of which are related to compensation. Defense outlays also appear in the Department of Energy and in a few other agencies.
Although BEA’s defense estimates are based on outlays from the MTS, there are notable differences between the two measures because of adjustments BEA makes to the MTS data in order to produce estimates that adhere to economic accounting guidelines. There are two major types of adjustments made to the MTS defense outlays – timing and coverage.
Timing adjustments are necessary because outlays in the MTS are recorded on a cash basis while BEA records defense spending on an accrual basis in the NIPAs. In other words, the timing of expenditures recorded in gross domestic product (GDP) is intended to align with when economic activity takes place. For example, certain payments to fund retirement benefits for defense personnel are paid out once a year and are recorded in the MTS in the month that they are paid. In the NIPAs, these once-a-year payments are distributed across the year to align them with when the production of defense services takes place.1
Coverage adjustments are necessary because certain transactions that are included in the MTS are excluded from BEA’s defense consumption expenditures and gross investment (and vice versa). For example, certain payments made to other countries through the Department of Defense are included in MTS outlays but are recorded as transfer payments to the rest of the world in the NIPAs and not as part of spending on defense services. In other cases, BEA records transactions that are out of scope for the MTS. For example, BEA includes a depreciation-like measure called consumption of fixed capital (CFC) in consumption expenditures as a partial measure of the services of government capital, while the MTS does not include such a value.
1For more information about payments to retirement funds, please see the FAQ “How does BEA treat Federal payments to the Military and Civil Service Retirement Funds?”