“If the federal government were a private corporation and the same report came out this morning, our stock would be dropping and there would be talk about whether the company’s management and directors needed a major shake-up.” That was David M. Walker, comptroller general of the United States and head of the U.S. Government Accountability Office (GAO), speaking last December about the 2007 Financial Report of the United States Government.
At 182 pages, the government’s annual report for fiscal 2007 (which ended September 30) isn’t exactly a quick read. Yet, it does tell a disturbing story about the nation’s financial condition — replete with rivers of red ink, accounting black holes, and entitlement bogeymen.
Deficits and debt and unfunded obligations abound. Some liabilities would terrify the most hardened CFO. (Try $45 trillion!) There are signs of short-term hope, but also warnings of long-term fiscal disaster.
In short, there is much in the government’s consolidated financial statements to cause readers to tremble. And frightening numbers become even more so when viewed in the lurid light of the current economy.
Let’s start with the red ink. For the seventh year in a row, the government ran a budget deficit in FY 2007 — $163 billion (see “A Study in Scarlet” at the end of this article). On the other hand, for the third year in a row, the deficit shrank. At 1.2 percent of gross domestic product (GDP), the deficit was half the 40-year average of 2.4 percent of GDP, according to the Treasury Department. The government attributes the salutary trend to a stronger economy and greater tax receipts from business.
There’s the rub. With economic indicators pointing to a slowdown or recession, tax revenues are likely to stall. In January, the Congressional Budget Office (CBO) projected that the budget deficit would increase this year to $219 billion, or 1.5 percent of GDP, assuming that current laws and policies remain the same.
In two respects, the current budget deficit is worse than it seems. One, as it has been for many years, the deficit was offset by the surplus from Social Security. Subtract the surplus and the deficit more than doubles, to $344 million, according to the CBO. Two, the budget is calculated on a cash basis. If the cost of the government’s operations is calculated on an accrual basis, as it is in the report, then costs exceeded revenues in FY 2007 by $275.5 billion, thanks mostly to postemployment benefit payments.
Here’s another scary number: $5.1 trillion. That’s the amount of federal debt held by the public. About half of that was held by foreign investors (principally China, Japan, and the United Kingdom, according to the CBO). Still, as a percentage of GDP (36.9 percent), public debt could be worse. Starting in the late 1970s, growing budget deficits led to increased government borrowing, with the result that debt held by the public doubled as a percentage of GDP over 15 years. Cresting near 50 percent of GDP in the mid-1990s, public debt has receded to under 40 percent in this decade.