When presidential candidates are asked to name their favorite book, many answer “the Bible.” Fair enough. But perhaps they should also read the 2015 Consolidated Financial Report of the U.S. Government. If they did, their campaign promises would be more honest and realizable.
Unlike the president’s budget, which is riddled with accounting gimmicks and unrealistic estimates and assumptions, the federal government’s recently issued financial statements are audited by the Government Accountability Office and are based on accounting standards as conservative as those required of U.S. corporations.
Significantly, the financial report is far more forthright than almost any corporate report, explicitly making the case that the federal government “is not fiscally sustainable.”
The seemingly good news is that the government’s primary deficit declined significantly during the past year, and the Treasury Department projects that it will decline further until it actually turns to a surplus in 2019. But starting in 2025, because of the cost of providing health care and Social Security to retiring boomers, the surplus will gradually decline, returning to deficits again by 2028.
Of course, even modest deficits need to be covered by additional borrowing and thereby require increased interest payments.
Per its balance sheet, the federal government’s negative net position (assets less liabilities) stood at $18.2 trillion as of Sept. 30, 2015. Add another $41.5 trillion in social insurance obligations, mainly Social Security and Medicare, and the negative net position would increase to $59.7 trillion. These obligations are “off the balance sheet” but are detailed in several schedules and graphs.
Because of accelerating interest costs, debt held by the public will increase from its current 74 percent of gross domestic product to an astounding 223 percent in 2090 — percentages that even the most liberal of economists would acknowledge are unsustainable.
These percentages are neither forecasts nor predictions. They are projections based on the assumption that current policies will continue indefinitely. The purpose of presenting them is to warn of the need for policy change, the kind of change the current presidential candidates should be seriously addressing.
Such change has to be some combination of decreases in spending or increases in revenue. Promises on the campaign trail may appear to make that goal relatively easy to accomplish, but the realities of the government’s spending practices bespeak otherwise.
Of the government’s expenditures, only 24 percent can be considered “discretionary. The 76 percent balance is consumed by the departments of Health and Human Services (27 percent), Social Security Administration (24 percent), Defense (15 percent), Treasury (for interest, 6 percent) and Veterans Affairs (4 percent).
Suppose that the next president decides that we provide too much foreign aid to Egypt and Israel. Let him or her eliminate the entire State Department. That would reduce federal expenditures by 0.67 percent. Maybe he or she believes that the Commerce Department is nothing more than an agent of big business.
He or she can jettison the entire department and the saving would be less than 0.24 percent. Perhaps he or she considers the projects funded by the National Science Foundation to be ivory tower dalliances. Abolish the whole department and save a whopping 0.18 percent.
Starting in 2010, Social Security payments to beneficiaries began to exceed receipts from workers. This gap will widen over the foreseeable future and will have to be compensated for by either cutting other costs or additional borrowing.
In 2034, the Social Security Trust Fund will be depleted, placing even more fiscal pressure on the government. The pattern for Medicare is similar, except that the dollar amounts are greater and the opportunities for reducing the gap less tractable.
Unquestionably the government’s fiscal problems can be mitigated by a strong national economy. But, as the report emphasizes, this will be possible only if we make significant investments in education, infrastructure and innovation.
At the same time, the report makes clear that there is no magic bullet that will solve all our fiscal problems. However, one thing is for certain. Any of our political candidates who think the answer is simply tax cuts or elimination of “waste, fraud and abuse” should acknowledge “Grimm’s Fairy Tales” as their book of choice.
Michael Granof is the Ernst & Young Distinguished Centennial Professor of Accounting and Distinguished Teaching Professor of Business and Public Affairs at The University of Texas at Austin.
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