Return to story

Economy Warnings in the wilderness

August 16, 2007 12:35 am

LIKE JEREMIAH, whose prophecies of impending calamity went unheeded, David Walker, the comptroller general of the United States, who heads Congress' nonpartisan Government Accountability Office, has been traveling the land issuing ominous warnings of coming financial catastrophe without getting much response.

This past July, he spoke to the National Press Club about the long-term fiscal challenges facing not only the federal, but state and local governments in the next decade.

Using projections out to 2050, Walker forecast that Medicare and Medicaid health care costs, which have exploded from 1 percent of federal spending in 1966 to 21 percent in 2006, would continue to climb rapidly.

Unless we do something very soon, he declared, the growing financial burden on federal, state, and local governments will become impossible to sustain at current revenue and expenditure levels over the decade--with the situation steadily deteriorating out to 2050.

Walker calculated that the resulting accrued federal fiscal gap between total revenues and expenditures, including Social Security, would reach $54.5 trillion in 2007 dollars by 2050. Adding in state and local governments shortfalls, the fiscal chasm deepens to $66 trillion.

These daunting numbers are based on the accrual accounting method that's required of businesses. What that means is that if you borrow $100, you're not $100 richer, the way you would be if using a simple cash accounting system. Under accrual, that $100 is immediately offset by the $100 you now owe.

Actually you're worse off, because you also owe interest.

Well, what does this mean for us taxpayers? Walker, in a December 2006 report to Congress, pointed out that the federal government's long-term fiscal exposure had risen rapidly. As of last September, he observed, "This translates into a current burden of about $170,000 per American or approximately $440,000 per American household."

Unfortunately, that's not all the bad news. For state and local governments to keep debt at current levels over the period to 2050, he told the Press Club, "State and local tax levels would have to rise immediately and permanently by 16.8 percent, or state and local spending financed by own revenues would have to decrease immediately and permanently by 14.1 per cent."

What the federal government has been doing has been keeping two sets of books--one on a cash basis and the other (of late) on the accrual system. When the government reports a decline in the current deficit, for example, it's using the cash basis because the accrual picture looks too depressing to talk about.

Under the Government Accounting Standards Board's Standard 45, state and local governments now have to account for post-employment health care costs on an accrual basis, rather than pay-as-you-go. The idea is to present a realistic picture of governments' total future liabilities, so actual fiscal health can be better evaluated.

Similarly, Walker has been trying to tell Congress, the president, and all of us citizens about the real state of our nation's finances. It's a dismal picture that only gets gloomier when we combine federal, state, and local governments' projected shortfalls.

Driving this situation are inescapable demographics.

Our population's overall average age is increasing--and with it, the rising health care and retirement costs Walker has detailed. The additional impact of the soon-to-be-retiring post-World War II "baby boomers" makes the picture look dire even in the near term, let alone out to 2050.

If we don't like what David Walker is telling us, we can just tune him out, as most of government seems to be doing in the vain hope that our predicament will somehow miraculously resolve itself without elected officials having to make unpalatable choices.

Like Jeremiah, Walker has become a prophet without honor in his own land--but that doesn't diminish the truth of what he's telling us.

There may still be time to avert the worst consequences of our situation if we act soon. Listening thoughtfully to our new Jeremiah could help us muster the political will for the painful task ahead.