We no longer need a balanced budget; we need surpluses
The Government Accountability Office has consistently warned that Washington’s spending is on an unsustainable path
By William R. Titera – Jan 19, 2022
When George Washington delivered the first State of the Union message in January 1790, he spoke of “the rising credit and respectability of our Country — the general and increasing good will toward the Government of the Union …” It’s unlikely those words will be used in the next state of the union message. Interestingly, President Joe Biden’s message was delayed until March, which is about the time the nation’s annual audit report will be issued.
If the past is indicative, the audit report will again warn that the nation is on an unsustainable fiscal path. The Government Accountability Office (GAO), “the independent, nonpartisan ‘congressional watchdog’” charged with auditing the nation’s financial statements has been saying that for a long time. In 2007, the GAO testified to Congress, “the federal government is on an imprudent and unsustainable long-term fiscal path.”
This is neither a popular message nor a political message. But it is the truth. Auditors have a way at getting at the truth. Perhaps for that reason, the nation’s audited financial statements are highly consistent, whether issued under a Democrat or Republican administration.
What’s behind the GAO’s warning? Two key drivers cited in last year’s audit were:
- “Spending for the major health and retirement programs will increase more rapidly than GDP in the coming decades, in part because of an aging population and projected continued increases in health care costs.”
- “Spending on net interest (primarily interest on debt held by the public) will surpass Social Security spending and becomes the largest category of spending in 2034. Net interest is projected to increase from 1.6% of GDP in fiscal year 2020 to 8% in fiscal year 2039 and to 28.2% percent in fiscal year 2095.”
In last year’s annual report, Biden’s Treasury Department agreed with the auditors and went further, explaining the urgency and magnitude of remedial actions. Among other things, the Treasury focused on the need to move from deficit spending to a scenario where for an extended period (they use 75 years) non-interest spending is consistently less than revenues (“primary surpluses”).
- “Closing the fiscal gap requires running substantially positive primary surpluses, rather than simply eliminating the primary deficit.”
- “Immediate reform would require increasing primary surpluses by 5.4% of GDP on average between 2021 and 2095 (i.e., some combination of reducing spending and increasing revenue by a combined 5.4% of GDP on average over the 75-year projection period).” (To put this in perspective, needed reforms exceed the entire discretionary Defense budget, which amounted to 3.3 % of GDP in 2021)
Unfortunately, there is a huge disconnect between what the financial experts are saying and what the politicians are doing. But that may be about to change. Interesting thing about long-term projections — if they are any good, in time they become current realities.
Consider today’s realities.
- Inflation, fueled by excess federal spending, is here, and it’s the worst in 40 years. It’s not going away any time soon. Inflation is a tax on all, but is felt the most by those least able to afford it — lower income earners and seniors. Inflation is forcing the Fed to modify its easy money policies.
- Interest rates are on the rise, making home buying less affordable. Higher rates tend to depress stock market returns, which will show up in individual IRA and 401(k) returns. Higher rates will greatly exacerbate our national debt problems. As more of our taxes are used to pay interest, less will be available for other needed goods and services. Interest pays for what we got yesterday. It provides nothing today — no new infrastructure, no new services, no defense against new threats — nothing.
- Social security benefits currently paid exceed amounts collected, which is depleting the “trust fund.” Once gone, absent policy changes, benefits will be cut by 21%. Because the program is unfunded and not even a legal liability of the Federal government (unlike other federal pension plans), unless you are a member of Congress or some other federal worker, your retirement benefits are at risk.
For years, forward-thinking members of Congress have been calling for a balanced budget amendment. The closest it came to passage was in 1995, when it passed the House by a vote of 300-132, but fell two votes short of the needed two-thirds majority in the Senate, which voted 65-35.
Borrowing from an old adage, the best time to act was decades ago — the second-best time to act is now. Sadly, if the Treasury department is right, we now need more than a balanced budget — we need primary budget surpluses.
William R. Titera, a retired CPA, is a retired Ernst & Young national office audit partner and former chair of the AICPA’s Assurance Services Executive Committee.