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US Budget Deficit: How bad is it?

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It’s bad, really bad. The worst part is that we don’t even know how bad it is.

The 2009 unified budget deficit is estimated now at $490 billion. Some of that number is expected and fine – during a recession taxes fall and certain expenses like unemployment benefits rise.

It’s still a really big number – and it turns out that the real deficit is much, much higher.

First, the number doesn’t account for $80 billion in war costs.

Next, the number is for the “unified” budget deficit. “Unified” in federal budget speak means the cash in, cash out budget. This ignores serious obligations the government has taken on this year – veterans benefits to the hundreds of thousands of troups serving overseas, Medicare and Social Security payouts to the baby boomers etc etc.

The real government budget deficit is the number that takes into account all these future liabilities. It is *probably* $200 billion higher than the fictional unified budget deficit, but no one really knows.

Congress mandated that all the major departments of the Federal government start producing auditable financial statements in 1990. Many departments are now compliant but the behemoths – Defense, Homeland Security and State departments – are not.

I love this footnote in a recent report from the General Accounting Office (the government’s internal audit staff) on budget numbers:

Data reported in the Financial Report of the United States Government, hereafter referred to as the Financial Report, for fiscal years 2001 through 2007. GAO disclaimed an opinion on the U.S. government’s consolidated financial statements for these years, other than the 2007 Statement of Social Insurance. As such, the reported amounts may not be reliable.

Or how about this snippet from the same report:

Importantly, emphasis should not be placed on the precise numbers for either a single year accrual deficit or the change from year to year. For the 11th consecutive year, the government was unable to demonstrate the reliability of significant portions of the 2007 Financial Report, from which the data in this update were taken.

The cash on cash number, while in no way an accurate assessment of the government finances is still an important number – because it tells us how much the government needs to borrow every year to pay its bills.

We can project forward 20 and 30 years and the cash on cash number starts looking really, really ugly. All those deferred liabilities start coming due. Our best guess is that they will add $600 billion a year to the current deficit. That will either mean much higher interest rates or higher taxes (50% higher) or elimination of the entire government outside of defense or some combination.

Many of our client’s have written off social security being there for them in their retirement. They are surprised to hear our view that, while we think benefits will be clipped for the wealthy, Social Security will survive. A clear majority of retirees rely on Social Security and Medicare/Medicaid for their retirement and these programs will become even more important as the post- company retirement plan generation retires. These programs cannot and will not go anywhere. We may have an overhaul, eventually, of our health care system but don’t count Social Security or Medicare out.

The good news is that there will be Social Security benefits – the bad news is that tax rates will go up, a lot.

More reading on budget unsustainability

Congressional Budget Office’s report

The GAO’s report

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