The bottom line alternate deficit figure computed using the new formula is roughly equivalent to 10 times the publicly held national debt, four years of U.S. economic output or more than 94 per cent of all U.S. household assets.
The report in the form of a pamphlet entitled “Fiscal and Generational Imbalances: New Budget Measures For New Budget Priorities” has been making the tour of Washington think tanks. Its authors use a new measure called “Fiscal Imbalance,” or FI to calculate how deep a hole the government is carving out for itself financially.
This new tool, which eschews artificial horizons such as 5, 10, or 75 years into the future and instead unblinkingly eyeballs into a sobering perpetuity, formulates that fiscal imbalance (read deficit) for the federal government equals current federal debt held by the public plus the present value of
Accountant-speak aside, the report concludes that running the numbers through the formula above results in the federal government’s total looming fiscal imbalance as equal to $44.2 trillion.
Referencing a recent Boston Globe article “written by two brilliant economists,” one of the pamphlet’s authors, Kent Smetters, told the Financial Times in an interview: “In my opinion, that piece maybe made it sound too much like some kind of a conspiracy to kill honest accounting in order to save the tax cut, or something like that. It really wasn't. The new guys [at Treasury] said, hey, this is something that could go to a press within a week, and this is just a completely radical new way of looking at the budget.”
Smetters, the former assistant deputy Treasury secretary, added, “The work was never meant to be a Treasury study. It was meant to be some internal thinking, something for [former Treasury Secretary] O'Neill. It was meant to be an internal part of thought process on how to reform the budget -- in particular, budget accounting.”
Furthermore, said Smetters, “[I]f you look at this [pamphlet] framework, the tax plan looks great. You see 99 per cent of all the liabilities are Social Security and Medicare. That's even after including the president's original $750 tax-cut plan proposal. The estimates correspond directly with the OMB [Office of Management and Budget] budget so it includes all the policy proposals he originally wanted. It included the full elimination of the dividend tax. Only a very small part of the imbalance actually comes from the rest of the government -- only $600bn of the $44,000bn. Almost all of it is Social Security and Medicare. This is hardly stuff the Administration would kill because they're afraid of the tax plan looking bad.”
Despite such assurances from Smetters, it is easy to see how John Q. Public might see the figures as less than a good omen for a tax plan that will diminish government revenues. In the language of the pamphlet:
“How large must spending cuts or revenue increases be to eliminate the current $44.2 trillion FI? We estimate that to achieve fiscal sustainability, an additional 16.6 percent of annual payrolls would have to be taxed away forever -- beginning today.
“Alternatively, income tax revenues would have to be hiked permanently by another two-thirds beginning immediately. Yet another alternative would be to permanently eliminate all future federal discretionary outlays.
“Moreover, the size of corrective policies will grow larger the longer their adoption is postponed. For example, waiting until just 2008 before initiating corrective policies would require a permanent increase in wage taxes by 18.2 percentage points rather than 16.6 percentage points beginning today.”
Pamphlet co-author, Jagdeesh Gokhale, currently on leave from the Cleveland Federal Reserve, was a little more skeptical in his own conversation with Financial Times.
When asked if he thought there had been a "deliberate" effort to understate matters in the 2004 Budget, Gokhale said, “You're putting words in my mouth. Someone felt uncomfortable with how big the numbers were, so they maybe this is a case of let's put out these 75-year numbers which are traditional, and it's enough to prepare the public for the fact that these numbers are big. Maybe they're easier to digest. I don't know. Who knows. But the decision was it would be better not to publish our numbers.”
Gokhale added, “[T]his stuff is really big. It has to be confronted at some point, and we really don't have time anymore to make those reforms. Baby-boomers are going to start retiring in five years, in another 10-15 years, these expenses are going to skyrocket. Unless reforms are initiated early -- today, yesterday -- they're going to become costlier and costlier to do anything. The point is my first requirement for anything to happen is for the accounting to be right, so people can see the numbers and properly debate the tradeoffs. Unless the accounting is done right and the numbers are out there to inform the debate, this thing is not going to be done right.”
Meanwhile, an administration spokesman noted the budget as published was certainly anything but silent on the less than rosy financial picture, explaining that the budget contained extensive traditional discussion of projected -- 75-year -- Social Security and Medicare shortfalls.
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