The Fiscal Outlook
The cover letter in the report from Treasury Secretary John Snow contains the bad news. Whereas the budget deficit for fiscal 2005 was officially given as $319 billion, "the government's accrual-based net operating cost . . . was $760 billion in 2005."Most economists agree with this analysis. As I noted in a previous post, the federal government faces tough choices going forward.
That $760 billion is the real difference between the money the government received and the obligations it added in the past year -- in other words, the unfunded costs being passed on to our children and grandchildren.
For years, the federal budget has been stated in cash terms, not the accrual accounting method, which [Congressman] Cooper said has been in use for five centuries and is now mandated for all private corporations. The difference, as he explained it, is this:
If you go to Target and buy an item for cash, it's felt in your wallet immediately. If you buy the same item on a credit card, unless you are using accrual accounting, it is disguised until the bill arrives.
The U.S. government has been running up bills -- notably the promises of pensions and health-care benefits for military veterans and millions of other retirees -- without putting the obligations on the books....
The message is clear: Congress is balking at even minimal actions needed to get a grip on the budget. The long-term problem is far tougher and will require more leadership and courage than can be found today.
Differences arise over the optimal policy response to these facts. Conservative economists would like to see the fiscal adjustment occur through lower government spending. Liberal economists would like to see the fiscal adjustment occur through higher taxes. And there are many possible intermediate outcomes. Deciding where on this spectrum we end up is, in large part, what the next several elections will be about.