The Real Debt Burden
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America’s real debt burden totals over $50 trillion. That, according to a new report by Deloitte, is one of many untold stories about our government’s liabilities.
When it comes to detailing finances, governments get away with a lot. They assume the most optimistic scenarios possible and then ignore future liabilities right up until the point they come due. For those in the private sector, this is unthinkable. Transactions must be reflected when they occur. Future expectations are grounded in present realities.
Put more technically, the difference is between the government’s “cash accounting” method and the “accrual accounting” standard found in the private sector. With cash accounting at work, the United States “only” bears the burden of $15.7 trillion in debt. That total reflects an accounting of inflows and outflows of actual money. The only problem is that we’ve committed to spend much more that over the long run. Though no cash has been exchanged yet, the transactions have already been made. These are America’s unfunded liabilities.
If the government were held to the same standards as business, the debt picture would look completely different. The $15.7 trillion figure instead becomes the foundation upon which is piled another $34.3 trillion in obligations. Mandatory spending programs, such as Medicare and Social Security, account for much of this increase. As Reihan Salam pointed out, this figure may even be too small, as it doesn’t include the costs of bearing the market risks of its accumulated loan guarantees. The Federal Housing Administration alone backs some $1 trillion in home mortgages.
Accrual accounting represents a bid for budgetary transparency and a realistic look at how our government’s finances are measuring up. It lays everything out on the table, combining today’s cash flows with the inflows and outflows expected tomorrow. Applying the private sector’s accounting standards to government appears to have encouraged better fiscal health in the countries that have adopted them, such as Australia and New Zealand. One Harvard study found that, in the case of New Zealand, “many believe that the accrual measures have produced much greater fiscal discipline, especially in as much as legislators and other government officials can more easily ascertain the fiscal sustainability (or lack thereof) of government programs. Indeed, since implementing the reforms, New Zealand has in fact demonstrated strong fiscal restraint.”
As William D. Eggers, director of Deloitte Research, put it, “The accrual method of accounting is important because unlike the cash basis, which only incorporates our current state, the accrual basis looks out into the future. Using the accrual basis is an important supplement because it rewards bold moves that improve America’s long term outlook beyond the normal 10 year budgetary horizon. Similarly, it penalizes decisions with near term payoffs and long term costs. As America grapples with its debts, we need to be honest about our current fiscal situation and that means looking ahead at reality rather than just totaling past debts.”
Deloitte’s study represents more of a wake-up call than a detailed plan for reform. If Deloitte’s projections come true, the average family will end up paying $424 a month just to enable the government to meet its interest payments over the next decade. Accrual accounting highlights these challenges, but the tough choices now fall to the policymakers.