The Fiscal Future Is Not Bright
Mark J. Warshawsky at AEI:Last week, the Treasury Department released, with no fanfare, the massive Financial Report (FR) of the US Government. Using an accrual accounting basis, rather than a cash basis, the FR shows a much poorer picture of the current finances of the federal government than the conventional budget. Even its uniformly optimistic assumptions project a clearly unsustainable future for the federal government’s budget under current policy.
The budget deficit under the conventional cash-basis terms increased from $1.4 trillion in 2022 to $1.7 trillion in 2023, or about 6.2 percent of GDP, mainly because of some weakness in tax revenues owing to a lower stock market in the prior year and the drying up of transfers from the Federal Reserve owing to higher interest rates. The alternative measure presented in the FR of the net call added this year by the federal government on the future resources of its citizens is the net operating cost, which includes accruals of retirement, disability, and health benefits to federal employees and veterans. At $3.4 trillion in 2023, or an eighth of GDP, it was double the cash basis deficit. In 2019, the net operating cost of the federal government was “only” $1.4 trillion.
Another way the FR presents the current financial status of the federal government is the net position— assets minus liabilities. In 2023, assets of $5.4 trillion include cash, inventory, loans receivable, as well as buildings, equipment, and general-purpose land. Liabilities of $42.9 trillion include federal debt held by the public of $26.3 trillion, or about 97 percent of GDP, and $14.3 trillion owed as an obligation for federal employee and veterans’ benefits payable. The net position of the federal government was thus negative $37.5 trillion in 2023, compared to $34.1 trillion in 2022. The worsening occurred mainly because debt outstanding increased by $2 trillion during the year.
The FR also does projections over the next 75 years of the conventional federal government budget measures of cash deficits and debt outstanding. It characterizes the situation as “unsustainable.” More specifically, it projects that the deficit will increase to 5.9 percent of GDP in 2028, 14.1 percent in 2047, 21.1 percent in 2070, and 29.1 percent by 2097. The causes are a growing primary deficit due to increased spending for Social Security and Medicare on the retiring baby boom generation, peaking at 4.4 percent of GDP in 2043, but mainly from the rapidly and continually growing torrent of interest spending as debt outstanding growing faster than the economy must be serviced. Indeed, debt as a share of GDP is projected to rise to 200 percent by 2047 and reach 531 percent by 2098.
