Academic journal article The Public Manager

Our Nation's Financial Condition and Fiscal Outlook: Shaping the Future of the Federal Government

Academic journal article The Public Manager

Our Nation's Financial Condition and Fiscal Outlook: Shaping the Future of the Federal Government

Article excerpt

I have been speaking out lately on a subject that deserves far more attention: the U.S. government's worsening financial situation and long-term fiscal imbalance. Despite the current economic recovery and the reassuring messages conveyed by some government officials, the truth is that our nation faces a long-term structural deficit that is set to increase significantly as the baby boomers retire.

Crunch Is Coming

A crunch is coming, and eventually all of government will feel its impact. Although defense and homeland security have so far avoided the budget constraints affecting other discretionary spending, these areas also face lean times ahead. As budgetary pressures build, federal managers will be uniquely challenged to provide the level of government services that the public demands and deserves.

It seems only yesterday that many economists and government officials were projecting surpluses for years to come. Several of the underlying conditions for a long-term structural deficit, however, existed even during the recent years of annual budget surpluses. Namely, largely because of rising health care costs, a looming demographic tidal wave unprecedented in American history, and reduced federal revenue as a percentage of the economy, we now face decades of deficits. Difficult choices are inevitable.

If we look at changes in federal spending over time, the powerful effects of long-term trends become clear. In 1964, two-thirds of the federal budget was discretionary, and nearly half was spent on national defense. In 2004, less than 40 percent of the federal budget was discretionary, and about 20 percent was spent on national defense. Steady growth in entitlement programs has crowded out other government expenditures: Two out of every five federal dollars are spent now on Social Security, Medicare, and Medicaid.

The status quo, however, is unsustainable. Take Social Security, for example. In 1950, more than sixteen workers were paying into the system for every retiree drawing benefits. By 2040, that ratio will have dwindled to two to one. Without changes to current policy, the twin burdens of paying for costly medical care and supporting a growing elderly population will put increasing pressure on the nation's spending and tax policies.

Keeping Score

Unfortunately, the way in which our government keeps score provides an incomplete and misleading picture of our true financial condition and fiscal outlook. For instance, the Congressional Budget Office's (CBO's) "baseline" projections, which are designed to be a reference point against which to measure policy changes, are often misinterpreted as projections of likely budget outcomes. But CBO is required to assume that discretionary spending will rise at the rate of inflation, that recent tax cuts will be phased out, and that there will be no changes to current law. Historically, however, discretionary spending has generally exceeded the rate of inflation, and considerable support exists to extend at least some of the tax cuts passed in recent years. Moreover, spending pressures continue to mount for such big-ticket items as the war in Iraq and homeland security. On the revenue side, current law assumes that a growing number of taxpayers will pay higher taxes under the alternative minimum tax--an assumption with which many taxpayers and elected officials are likely to take issue.

Timely, reliable, and useful financial and management information on current government operations can also be difficult to come by. This year, my agency, the U.S. Government Accountability Office (GAO), was unable for an eighth consecutive year to express an opinion as to whether the U.S. government's consolidated financial statements were fairly stated. The good news was that eighteen of the twenty-four major federal agencies received an unqualified opinion on their individual financial statements, which they issued in record time. …

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