Op-Ed: U.S. Annual Financial Report Is a Must-Read

 

The federal government's just released 2016 annual financial report should be required reading not only for our new president and other administration officials, but for members of Congress as well. It is where their dreams will meet reality.

The message in this year's report is clear and compelling — current trends are not sustainable.

The federal government's 274-page report is similar to public corporations' 10-K reports — financial statements that they are required to submit to the Securities and Exchange Commission. But unlike the reports of corporations, the government's annual report also includes projections of revenues, expenses and federal obligations for the next 75 years. These projections are based on current law and policies. They are not predictions. They are intended to warn of the need for changes now.

According to the report, the government's ratio of debt to gross domestic product, or GDP, a key measure of fiscal health, will probably increase from 77 percent today to 252 percent by 2091. Nearly all economists agree that a ratio that large would ruin our economy. Changing that trajectory, however, will be painful.

The main culprit is interest. Outstanding federal debt is now more than $14.2 trillion, and last year the government paid $273 billion in interest. Even if the government is able to bring down spending for other than interest, outlays for interest will increase at an accelerating rate. That's because interest, like other expenses, causes the overall deficit to increase. The only way to break this vicious circle is for the government to run sustained "primary surpluses" — that is, forcing revenues to exceed noninterest spending.

That is far easier said than done. Few politicians are willing to raise taxes, and the opportunities to significantly decrease spending are far fewer than might be apparent. As the annual report makes clear, of last year's $4.4 trillion in spending, 81 percent is, in essence, nondiscretionary. This includes outlays for defense, entitlement programs such as Social Security and Medicare, veterans benefits and interest.

There is room to eke out savings by cutting the budgets of the multitude of federal departments and agencies. Such cuts may make for boastful presidential Twitter feeds and congressional letters to constituents, but they will have only minimal fiscal impact.

Other Trump campaign promises would only advance, rather than delay, the coming day of fiscal reckoning. His across-the-board tax cuts has been estimated to reduce revenues by almost $6 trillion over a 10-year period. He has promised to strengthen the military at a cost of what some analysts say will be at least $800 billion. He has pledged to spend at least $1 trillion on infrastructure during the next 10 years.

All this won't put the government on sound financial footing, but it's not impossible to get back on solid ground. It also doesn't mean that all spending must be reduced or that no taxes should be cut.

As implied by the ratio of GDP to debt, the best way to manage the debt over the long term is to increase the GDP. That would require investments in programs that grow the economy. For example, those in basic education and job retraining, those that stimulate invention and discovery, and those that promote a healthy population. It would involve funding infrastructure projects, such as highways and airports that will facilitate commerce - but not bridges to nowhere. And it would mean carefully targeted tax cuts to low-income earners who are more likely to spend 100 percent of the cuts, and credits for investments in specified types of research and development, worker retraining and capital spending that will fuel both consumer demand and investment, as opposed to across-the-board rate reductions that result in increased debt without commensurate long-term benefits.

Fiscal profligacy must be acknowledged and understood if it is to be alleviated. That is why this year's financial report is a must-read for our president, other administrative officials, members of Congress and anyone else interested in federal fiscal policy.

Michael Granof is the Ernst & Young Distinguished Centennial Professor in Accounting at the University of Texas at Austin. This op-ed originally appeared in the Houston Chronicle

Disclaimer

The views expressed are those of the author and not necessarily The University of Texas at Austin.
 

About The Author

Michael Granof

Professor of Accounting, McCombs School of Business

Michael Granof received an A.B from Hamilton College, an MBA from Columbia University, and a Ph.D. from the University of Michigan. His research...

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