The 2005 Financial Report of the US Government was released last week. Become a Complete Fool
While the budget deficit announced by the treasury department was $319 billion last year, on an accrual basis, the deficit was $760 billion, and the government's total liabilities and net responsibilities increased from $47.289 to $49.403 trillion. By this last measure, the budget deficit was actually around $2.114 trillion in Fiscal 2005, but there is really no way accurate to measure the true cost of our government's activities.
Debt owed to the public increased from $4.329 trillion to $4.624 trillion, $295 billion, less than the cash deficit because treasury drained slightly.
Accrued benefits owed to veterans and public employees increased from $4.062 trillion to $4.492 trillion, $430 billion. Like GM, the Govt. saves cash up front by making benefit promises it may not be able to keep. The costs don't count in the official budget totals, but the debts are real.
Total liabilities on the balance sheet went from $9.107 trillion to $9.915 trillion. Off the balance sheet, 75-year estimates for social program totals:
Social Security under funding went from $5.229 trillion to $5.704 trillion, while trust fund balances increased from $1.531 trillion to $1.687 trillion.
Medicare Pt. A under funding went from $8.492 trillion to $8.829 trillion, while trust fund balances increased from $0.256 trillion to $0.268 trillion.
Medicare Pt. B under funding went from $11.440 trillion to $12.384 trillion, while trust fund balances increased from $0.024 trillion to $0.019 trillion.
Medicare Pt. D under funding went from $8.119 trillion to $8.686 trillion.
While 75-year projections involve some mighty big assumptions about the shape of the economy in the distant future, they give a good indication of the way the trust funds will be heading over the next 10 years. Trust fund balances represent an off-balance sheet debt owed to future Social Security and Medicare recipients by the Treasury. The changing demographics and changing economic situation will likely force a depletion of trust funds in that time, with additional tax revenue sources needed to make up for the change in cash flow.
If we want to keep the existing Social insurance system and take cash from workers and give it to old folks, then the system will likely come up way short. The safety net for penniless baby boomers may evolve into a network of low-cost retirement communities out of necessity.
There are many other off-balance sheet liabilities (promises) that will eventually end up on balance sheet, along with many liabilities that are being grossly underestimated. These involve a wide range of insurance programs and guarantees made by the government.
PBGC liabilities went from $60.8 billion to $69.8 billion.
Flood Insurance liabilities went from $1.4 billion to $23.4 billion.
Hurricane relief appropriated - $62 billion, spent - $3.5 billion
Because these bills are being paid in 2006, it looks like there will be a big additional demand for cash in 2006. Interest on the debt is expected to rise by $34 Billion and tax revenues will likely decline or fail to keep up with expenses.
Corporate taxes got a big boost, largely from repatriation and went from $183.8 billion to $271.8 billion. Individual taxes and withholdings went from $1.5123 trillion to $1.6901 trillion on inflation and economic stimulation.
The 2004 report attempted to highlight the difficult situation facing the government because of the under funding of Social Security. There were multiple accounts on the unsustainability of social insurance. Total net responsibilities were featured prominently because Social Security reform was a hot political issue. The 2005 net responsibility figure is briefly mentioned in just one paragraph, whereas the 2004 figure was featured in a chart and was mentioned elsewhere with the following quote: "The reader needs to understand these responsibilities to get a more complete understanding of the Government's finances." This backfired, as the president's reform plan was defeated and the $47 trillion figure began circulating widely in economic gloom and doom circles.
This year, the focus of the report seems to be an effort to show that the government's financial situation is under control. Last year there was no mention of debt as a percentage of GDP but this year that popular argument of official denial warranted a chart and additional mention in an effort to demonstrate that has come down in percentage terms since the mid-1990s (37% vs. 50%). The argument overlooks is the way accrued liabilities (mainly benefits owed to veterans and government employees) have risen much faster than debt owed to the public (+176% vs. +28% since 1995). Measuring the government's net financial position against GDP yields a worse figure now (67% vs. about 63% in 1995). Of course if you use the more relevant $49 trillion net responsibilities figure you have a debt that is now several times larger than GDP. Additionally, the economy was in a recession in 1995, while Fiscal 2005's GDP is over stimulated by $1 trillion in new net foreign investment, $800 billion in trade gap goods and services, $319 in federal deficit spending and another $2 trillion in empty federal promises. We aren't able to stop making those impossible promises because our economy depends on them. We finally lose our sources of financing, then the economy will stall, tax revenues will shrink, and the real cash balances deteriorate at an even more alarming rate.
The report repeatedly states that a large portion of the net operating costs were actuarial, meaning they just represented an updating of the government's previous estimates of how much would be needed to be invested now to fund the future costs that are being incurred now. While this is passed off as a meaningless statistical fluctuation, it hardly seems insignificant to me. The war isn't going as well as they originally assumed it would when the president was asking for funding. More soldiers are fighting and dying, and as a result we have to add another $288 billion in burial and veterans benefit actuarial costs. These are very real costs being incurred right now.
Despite the government's efforts to make it sound like the country isn't bankrupt, the numbers and direction suggest otherwise. How did we get in this predicament?
Looking at the net costs of the various government expenditures, we have from 1 to 10:
$677.0 Billion - Defense Department
$583.8 Billion - Dept. of Health and Human Services
$574.1 Billion - Social Security Administration
$273.2 Billion - Dept. of Veterans Affairs
$181.2 Billion - Interest on Debt Held by the Public
$92.7 Billion - Department of Agriculture
$79.2 Billion - Dept. of the Treasury
$70.9 Billion - Dept. of Education
$67.9 Billion - Dept. of Homeland Security
$61.8 Billion - Dept. of Transportation
-Currently Health and Human Services and the Social Security Administration take in more money than they spend, effectively reducing the budget deficit by about $160 billion.
-All other government programs combined don't come close to equaling the money spent on Defense and Veteran's affairs. Some departments (like Energy) also have large military related costs that don't show up on the defense department's budget.
-That famous example of government pork, the Dept. of Transportation, doesn't spend a tenth of what the Defense Department spends.
-That famous example of government inefficiency, the U.S. Postal Service, actually brought in $12.9 Billion and helped reduce the budget deficit.
While many would like to believe that our national debt is under control, it appears to me that the government is already insolvent.
If the country had reversed course in the Reagan years the debt could have been stabilized. Instead, to in a continuous shortsighted attempt to keep economic activity growing, the government has taken on ever more debt, made promises it can't hope to keep, and has welcomed in ever more foreign investment. Trillions of dollars worth of promises will have to be broken when the US government's debt bubble bursts.
Rising interest rates should be seen as a sign that the debt bubble is in trouble. As rates rise due to supply and demand issues, interest on the debt will also rise, demonstrating the government's hopeless financial position. At some point there will likely be a run on the bank (US Treasury), with cash rushing out of the US economy the same way it has rushed out of Argentina, Russia, and multiple Asian countries in the past 10 years. The economic impact will likely be the same as it was in those countries, with dramatic slowdowns in economic activity as credit dries up almost overnight and businesses close down amidst a large number of of personal and corporate bankruptcies.
Eisenhower's warning about the military industrial complex was ignored, and our government has squandered our nation's wealth on bombers, ballistic missiles and bases around the globe. Extreme levels of defense spending over the past 40 years have rendered the country non-competitive, drained its wealth and dismantled its industrial base. The military should be the first thing to go as bills come due, but instead we'll likely see Congress squeezing a few billion at a time out of social programs and infrastructure projects in a feeble attempt to demonstrate fiscal restraint. Politics will likely play a major role in determining what gets cut up front, but eventually the entire economic system will need to be stripped down and restructured for inefficiency if the country hopes to get back on stable ground.
2005 was a year of tremendous foreign investment into mortgage backed securities, corporate debt and equities. If those numbers can be topped in 2006, then the economy can continue growing on the surface while rotting away at the core. More likely, 2006 will be a year of slowly rising US interest rates and economic stimulation abroad, as the world's governments and central bankers struggle to keep the debt bubble from unwinding too rapidly. An economic shock is not in the interests of those in power and I suspect they'll postpone one as long as possible, even if it means the end result will be much worse.
Join the best community on the web! Becoming a full member of the Fool Community is easy, takes just a minute, and is very inexpensive.
The 2005 Financial Report of the US Government was released last week.
Become a Complete Fool