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State Spending Caps Picks Up Momentum
The 2006 Budget Numbers Show Impact of Pro-Growth Tax Policy,
But Also Continued Spending Increases
U.S. Comptroller General Warns the Nation of Economic Calamity
What's the real
U.S. Comptroller General Warns the Nation of Economic Calamity
Dave Eberhart, NewsMax.com
Aug. 3, 2006
The Comptroller General of the United States warns the nation
will go broke within a generation - unless it takes radical
steps now to rein in out-of-control federal spending.
In an exclusive interview with NewsMax, Comptroller David M.
Walker, explained his mission: Save America from the brink of
Walker has revealed America's collision course in computer
simulations that show balancing the budget in 2040 (under the
status quo of spending like there's no tomorrow) could require
cutting total federal spending by an incredible 60 percent - or
raising federal taxes 200 percent over today's level.
Serving a 15-year appointed term that began when he took his
oath of office on Nov. 9, 1998, this no-nonsense certified
public accountant is the nation's chief accountability officer
and head of the U.S. Government Accountability Office (GAO).
Walker has won plaudits from both Republicans and Democrats
for his no-nonsense straight talk about the nation's current
In his wide-ranging interview with NewsMax, Walker offered a
candid assessment of the problems and risks facing Americans
over the next several decades.
Among his key assessments:
Drugs:: Walker says that the prescription drug plan is the
"poster case for what is wrong with Washington."
He notes that when Congress first took up the matter of
Medicare prescription drugs, estimates placed the cost at $300
But he argues that both Congress and the administration
simply downplayed or ignored the true costs of the program.
Today, the nation will have to pay out for the program $8
trillion-plus in current dollar terms.
Walker also detailed that when the Medicare actuary of the
Center for Medicare/Medicaid Services calculated the true costs
of the program, he "was told he could not tell the Congress or
else he might lose his job."
"That not only was unethical but it was illegal, and nobody
has been held accountable for it," an angry Walker said.
Defense Budget: Walker argues that Defense Department
simply is out of control and that basic rules of accountability
He said that although it received a whopping $500 billion in
appropriations, the Defense Department "is the only agency in
the federal government that cannot adequately account for its
assets and its expenditures - and cannot withstand an outside
financial statement audit."
Walker grades the agency with a "D" on "economy, efficiency,
transparency, and accountability." He added, "And it has not
been held accountable."
The Nation's Debt: Walker says the United States risks
losing its pre-eminence around the globe because of its growing
status as a debtor nation.
He ominously notes that "last year was the first year since
1933 that Americans spent more money than they took home and, as
you probably recall, 1933 was not a good year for the United
Because the United States has to rely on foreign central
banks to finance its deficits, it places itself in a high-risk
"It means that other players hold an increasing percentage of
our nation's mortgage; and it means the debt service is going to
go overseas rather than domestic; and it means that we will have
less leverage on them with regard to economic, foreign policy
and national security issues - and they will have more leverage
Entitlements: The United States must rein in entitlement
programs or face economic woes, he argues.
Walker says that today the United States is "about 3 percent
short of the GDP between what we are taking in and what we are
spending, and it is going to get worse when the [baby] boomers
start to retire - primarily because of entitlement programs.
"You can't solve the problem without fundamental reform of
the entitlement programs. Medicare is going to require much more
dramatic and fundamental reforms than Social Security because
the problem is six to seven times greater than Social Security.
"It is going to take entitlement reform; it is going to take
spend constraint; and it is going to take some revenue
Walker's frequent refrain is simply, "The status quo is not
He's been telling his story to Congress, the media, and
anyone else who will listen.
His globetrotting has included speaking appearances at
Gresham College London, England; the London School of Economics;
the Atlanta Rotary Club; the National Press Foundation; and the
National Conference of State Legislatures - just to name a few.
Walker likes slide shows – to better facilitate the ominous
graphs and charts that highlight his message.
The long-term modeling that is at the heart of his warning is
adapted from work done at the Federal Reserve Bank of New York
and the various new estimates that become available from the
Congressional Budget Office and from the Social Security and
Walker is not overly impressed with the recently touted spurt
of economic growth and its accompanying windfall of unexpected
"Faster economic growth can help, but it cannot solve the
problem," the straight-shooting former public trustee for Social
Security and Medicare emphasizes.
Here's where Walker typically clicks on one of his
attention-grabbing slides on the subject.
The audience digests as the GAO chief reads from the screen:
Closing the current long-term fiscal gap based on reasonable
assumptions would require real average annual economic growth in
the double-digit range every year for the next 75 years.
During the 1990s, the economy grew at an average 3.2 percent per
"We cannot simply grow our way out of this problem," he
When playing to a home crowd of working stiffs, Walker
follows with another body blow that penetrates the reality world
of mom and pop: It's called, benignly enough, "Our Total Fiscal
Burden." But when broken down as to show the impact on every
man, woman, and child in the country, it can knock the wind from
the collective lungs.
Up pops another eye-widening slide:
Total fiscal exposures: $46.4 trillion.
Total household net worth: $51.1 trillion.
Burden/net worth ratio: 91 percent.
Forget the accounting jargon; what's my personal bill for my
government's runaway spending?
As if to say "Glad you asked that," there follows the grim
Per person: $156,000.
Per full-time worker: $375,000.
Per household: $411,000.
Gee, that sounds a bit extreme. Can our pocketbooks handle
Just how extreme is explained by the next slide:
Median U.S. household income: $44,389.
Disposable personal income per capita: $30,431.
After learning that we are a wee bit short on the greenbacks,
Walker switches back to the macro-picture, revealing yet another
"The United States may be the only superpower, but compared
to most other OECD countries [countries belonging to the
Organization for Economic Co-operation and Development] on
selected key economic, social, and environmental indicators, on
average, the U.S. ranks 16 out of 28," announces Walker to an
Included in those OECD indicators are such down-to-earth
items as quality of life, education, and prices.
Walker, the author of "Retirement Security: Understanding and
Planning Your Financial Future," is for sure no administration
He will tell you that he is only following a grand tradition
of the bipartisan GAO, which for more than a decade has
published the results of its long-term budget simulations in
reports and testimonies.
Well, at least some of the states are doing well these days -
those increased property values and all . . .
Don't get too wound up on that front, warns Walker. States
are reeling under their own fiscal challenges, including
unsustainable Medicaid cost increases; unfunded liabilities of
state retirement systems; education funding squeezed by
competing demands; infrastructure maintenance and expansion
needs given unparalleled sprawl and congestion; and - lest we
forget - emergency preparedness response and recovery needs.
The bottom line, according to Walker: "We must make tough
choices, and the sooner the better."
The chief financial overseer advises that a multipronged
approach is needed:
Revise existing budget processes and financial reporting
Restructure existing entitlement programs.
Re-examine the base of discretionary and other spending.
Review and revise tax policy and enforcement programs -
including tax expenditures.
"Everything must be on the table," says Walker.
While not an optimist, Walker does see some progress. He
happily points out that the White House now "readily acknowledge
now that we face a huge long-range structural deficit that has
to be addressed."
Meanwhile, beating the drum for fiscal reform is but one
facet of the immense GAO workload.
Walker's agency must advise not only Congress, but the heads
of executive agencies -- such as Homeland Security, the
Environmental Protection Agency, the Department of Defense, and
Health and Human Services -- about making government more
effective and responsive.
To do the job, Walker heads up some 3,200 employees and
manages a budget of $474.5 million.
At the end of fiscal 2005, 85 percent of the 1,752
recommendations the GAO made in fiscal year 2001 had been
implemented, notes the agency. But is the all-important keeper
of the federal purse strings, the Congress, reacting to Walker's
big-picture warnings of fiscal crisis ahead?
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What's the real
How many billions (or trillions) of dollars depends on how
you do the accounting
government keeps two sets of books.
The set the
government promotes to the public has a healthier bottom line: a
$318 billion deficit in 2005.
The set the
government doesn't talk about is the audited financial statement
produced by the government's accountants following standard
accounting rules. It reports a more ominous financial picture: a
$760 billion deficit for 2005. If Social Security and Medicare
were included — as the board that sets accounting rules is
considering — the federal deficit would have been $3.5 trillion.
written its own accounting rules — which would be illegal for a
corporation to use because they ignore important costs such as
the growing expense of retirement benefits for civil servants
and military personnel.
Last year, the
audited statement produced by the accountants said the
government ran a deficit equal to $6,700 for every American
household. The number given to the public put the deficit at
$2,800 per household.
A growing number of
Congress members and accounting experts say it's time for
Congress to start using the audited financial statement when it
makes budget decisions. They say accurate accounting would force
Congress to show more restraint before approving popular
measures to boost spending or cut taxes.
bottom-line culture, and we've been hiding the bottom line from
the American people,” says Rep. Jim Cooper, D-Tenn., a former
investment banker. “It's not fair to them, and it's delusional
on our part.”
The House of
Representatives supported Cooper's proposal this year to ask the
president to include the audited numbers in his budgets, but the
Senate did not consider the measure.
Good accounting is
crucial at a time when the government faces long-term challenges
in paying benefits to tens of millions of Americans for
Medicare, Social Security and government pensions, say advocates
of stricter accounting rules in federal budgeting.
matters,” says Harvard University law professor Howell Jackson,
who specializes in business law. “The deficit number affects how
politicians act. We need a good number so politicians can have a
target worth looking at.”
financial statement — prepared by the Treasury Department —
reveals a federal government in far worse financial shape than
official budget reports indicate, a USA TODAY analysis found.
The government has run a deficit of $2.9 trillion since 1997,
according to the audited number. The official deficit since then
is just $729 billion. The difference is equal to an entire
year's worth of federal spending.
Congress and the
president are able to report a lower deficit mostly because they
don't count the growing burden of future pensions and medical
care for federal retirees and military personnel. These
obligations are so large and are growing so fast that budget
surpluses of the late 1990s actually were deficits when the
costs are included.
administration reported a surplus of $559 billion in its final
four budget years. The audited numbers showed a deficit of $484
neither of these figures counts the financial deterioration in
Social Security or Medicare. Including these retirement programs
in the bottom line, as proposed by a board that oversees
accounting methods used by the federal government, would show
the government running annual deficits of trillions of dollars.
administration opposes including Social Security and Medicare in
the audited deficit. Its reason: Congress can cancel or cut the
retirement programs at any time, so they should not be
considered a government liability for accounting purposes.
record-keeping was in such disarray 15 years ago that both
parties agreed drastic steps were needed. Congress and two
presidents took a series of actions from 1990 to 1996 that:
Federal Accounting Standards Advisory Board to establish
accounting rules, a role similar to what the powerful Financial
Accounting Standards Board does for corporations.
financial officers to all major government departments and
audited financial reports of those departments and agencies.
Treasury Department to publish, for the first time, a
comprehensive annual financial report for the federal government
— an audited report like those published every year by
These laws have
dramatically improved federal financial reporting. Today, 18 of
24 departments and agencies produce annual reports certified by
auditors. (The others, including the Defense Department, still
have record-keeping troubles so severe that auditors refuse to
certify the reliability of their books, according to the
government's annual report.)
The culmination of
improved record-keeping is the “Financial Report of the U.S.
Government,” an annual report similar to a corporate annual
report. (The 158-page report for 2005 is available online at
The House Budget
Committee has tried to increase the prominence of the audited
financial results. When the House passed its version of a budget
this year, it included Cooper's proposal asking Bush to add the
audited numbers to the annual budget he submits to Congress. The
request died when the House and Senate couldn't agree on a
budget. Cooper has reintroduced the proposal.
Accounting Standards Advisory Board, established under the first
President Bush in 1990 to set federal accounting rules, is
considering adding Social Security and Medicare to the
government's audited bottom line.
Adding those costs
would make federal accounting similar to that used by
corporations, state and local governments and large non-profit
entities such as universities and charities. It would show the
government recording enormous losses because the deficit would
reflect the growing shortfalls in Social Security and Medicare.
would have reported nearly $40 trillion in losses since 1997 if
the deterioration of Social Security and Medicare had been
included, according to a USA TODAY analysis of the proposed
accounting change. That's because generally accepted accounting
principles require reporting financial burdens when they are
incurred, not when they come due.
For example: If
Microsoft announced today that it would add a drug benefit for
its retirees, the company would be required to count the future
cost of the program, in today's dollars, as a business expense.
If the benefit cost $1 billion in today's dollars and retirees
were expected to pay $200 million of the cost, Microsoft would
be required to report a reduction in net income of $800 million.
rule is a major reason corporations have reduced and limited
retirement benefits over the last 15 years.
government's audited financial statement now accounts for the
retirement costs of civil servants and military personnel — but
not the cost of Social Security and Medicare.
The new Medicare
prescription-drug benefit alone would have added $8 trillion to
the government's audited deficit. That's the amount the
government would need today, set aside and earning interest, to
pay for the tens of trillions of dollars the benefit will cost
in future years.
concepts say that $8 trillion should be reported as an expense.
Combined with other new liabilities and operating losses, the
government would have reported an $11 trillion deficit in 2004 —
about the size of the nation's entire economy.
government also would have had a $12.7 trillion deficit in 2000
because that was the first year that Social Security and
Medicare reported broader measures of the programs' unfunded
liabilities. That created a one-time expense.
The proposal to add
Social Security and Medicare to the bottom line has deeply
divided the federal accounting board, composed of government
officials and “public” members, who are accounting experts from
The six public
members support the change. “Our job is to give people a clear
picture of the financial condition of the government,” board
Chairman David Mosso says. “Whether those numbers are good or
bad and what you do about them is up to Congress and the
The four government
members, who represent the president, Congress and the
Government Accountability Office, oppose the change. The
retirement programs do “not represent a legal obligation because
Congress has the authority to increase or reduce social
insurance benefits at any time,” wrote Clay Johnson III, then
acting director of the president's Office of Management Budget,
in a letter to the board in May.
Why the big
difference between the official government deficit and the
The official number
is based on “cash accounting,” similar to the way you track what
comes into your checking account and what goes out. That works
fine for paying today's bills, but it's a poor way to measure a
financial condition that could include credit card debt, car
loans, a mortgage and an overdue electric bill.
The audited number
is based on accrual accounting. This method doesn't care about
your checking account. It measures income and expenses when they
occur, or accrue. If you buy a velvet Elvis painting online, the
cost goes on the books immediately, regardless of when the check
clears or your eBay purchase arrives.
lets income and expenses land in different reporting periods.
Accrual accounting links them. Under cash accounting, a $25,000
cash advance on a credit card to pay for a vacation makes the
books look great. You are $25,000 richer! Repaying the credit
card debt? No worries today. That will show up in the future.
accounting, the $25,000 cash from your credit card is offset
immediately by the $25,000 you now owe. Your bottom line hasn't
changed. An accountant might even make you report a loss on the
transaction because of the interest you're going to pay.
“The problem with
cash accounting is that there's a tremendous opportunity for
manipulation,” says University of Texas accounting professor
Michael Granof. “It's not just that you fool others. You end up
fooling yourself, too.”
requires that companies and institutions that have revenue of $1
million or more use accrual accounting. Microsoft used accrual
accounting when it reported $12 billion in net income last year.
The American Red Cross used accrual accounting when it reported
a $445 million net gain.
Congress used cash
accounting when it reported the $318 billion deficit last year.
chief actuary Stephen Goss says it would be a mistake to apply
accrual accounting to Social Security and Medicare. These
programs are not pensions or legally binding federal
obligations, although many people view them that way, he says.
Social Security and
Medicare are pay-as-you go programs and should be treated like
food stamps and fighter jets, not like a Treasury bond that must
be repaid in the future, he adds. “A country doesn't record a
liability every time a kid is born to reflect the cost of
providing that baby with a K-12 education one day,” Goss says.
Tom Allen, who will
become the chairman of the federal accounting board in December,
says sound accounting principles require that financial
statements reflect the economic value of an obligation.
“It's hard to argue
that there's no economic substance to the promises made for
Social Security and Medicare,” he says.
Social Security and
Medicare should be reflected in the bottom line because that's
the most important number in any financial report, Allen says.
“The point of the
number is to tell the public: Did the government's financial
condition improve or deteriorate over the last year?” he says.
If you count Social
Security and Medicare, the federal government's financial health
got $3.5 trillion worse last year.
Rep. Mike Conaway,
R-Texas, a certified public accountant, says the numbers
reported under accrual accounting give an accurate picture of
the government's condition. “An old photographer's adage says,
‘If you want a prettier picture, bring me a prettier face,' ” he
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Office of Management and
Budget recently released
final budget numbers for
the 2006 fiscal year
(FY2006), which began
October 1, 2005 and
ended September 30,
2006. These end-of-year
numbers are particularly
noteworthy because they
show pro-growth tax rate
reductions, such as
those made in 2003 tax
legislation, do boost
growth and thus expand
resulting in more tax
revenues than shown by
static estimates. But
the numbers also show
that federal spending is
still growing too fast,
a fact often
overshadowed by focus on
the budget deficit.
Moreover, the growing
burden of entitlement
programs will make
spending an even bigger
problem in the future.
The FY2006 numbers
demonstrate the benefits
pro-growth tax policies,
but also the need to
reduce spending and
Key numbers from FY2006
jumped by 11.8
in FY2005 to
in FY2006. This
more than three
than needed to
keep pace with
18.4 percent of
II average of
jumped by 7.4
in FY2005 to
in FY2006. This
about two times
needed to keep
grew by almost
20.3 percent of
share of the
fell from $319
billion in 2005
to $248 billion
percent of GDP.
debt fell as a
37.4 percent of
GDP to 37.0
percent of GDP.
This is because
numerator in the
did not rise as
in the debt/GDP
are praising these
higher tax revenues as
proof that the 2003 tax
rate reductions have
been successful. Indeed,
lower tax rates on work,
capital gains, and
dividends have boosted
economic activity. This
expansion of economic
activity has created
more taxable income,
leading to more revenue
economists call a Laffer
Curve effect. Tax
revenues in 2006 were
about $40 billion higher
projections in January
2003—before the tax cut
was enacted. This is
evidence that good tax
policy boosts economic
performance. But, this
additional revenue also
has the unfortunate
effect of masking the
problem of excessive
Indeed, new revenue
exacerbates the problem
since it encourages even
Lessons from the 2006
Good tax policy
generates a Laffer
Curve effect and can
lead to a net result
of more revenues.
some tax cuts are
more desirable than
others. The 2003 tax
marginal tax rates
on work, saving, and
growth led to the
in taxable income,
which resulted in
the boost in tax
today. The faster
in the world has
improved. The 2001
tax cut, by
contrast, with its
short-term focus on
rates were included,
but deferred until
the future—did very
little to improve
As a result, there
was little economic
benefit. The Laffer
increase in tax
revenue from the
2003 bill, however,
is a mixed blessing.
On the plus side,
now have a better
understanding of the
benefits of lower
tax rates, but they
also have less
incentive to control
Spending is the
today and in the
future, relies in
part on keeping
becoming an even
bigger burden. This
is a huge challenge
since the future
programs will make
paltry. Sole focus
on the deficit can
induce a sense of
the threat of big
government. A good
example is Sweden.
That nation has a
budget surplus, but
since taxes and
more than 50 percent
of GDP, the economy
high, and the
average Swede has
less than 50 percent
as much disposable
income as the
FY2006 budget numbers
are mixed signs of good
fiscal policy. The huge
revenue gains of 11.8
percent on the tax side
of the ledger show the
pro-growth impact of
lower tax rates. The
spending side of the
ledger disappoints as
spending jumped by 7.4
percent. This increase
in spending does not
bode well given the need
to reform entitlement
spending to prevent a
deeply worrying burden
of government. With the
entitlement challenge on
the horizon, there is
all the more reason to
ensure that pro-growth
tax policies are kept in
Daniel J. Mitchell,
is McKenna Senior
Research Fellow in the
Thomas A. Roe Institute
for Economic Policy
Studies at The Heritage
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way of a
gap in a
rate - 2
a day, I
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Movement for State Spending Caps Picks Up Momentum
Published by: The Heartland Institute
Published in: Budget & Tax News
Publication date: November 2006
Millions of Americans across the country this November will have
an opportunity to decide the course of their states' financial
future, opting for controlled government growth and financial
responsibility ... or business as usual.
That is the choice in a series of ballot initiatives known by a
variety of names but sharing the aim of limiting growth in taxes
and government spending.
While there are differences from state to state, all of the
spending cap initiatives seek to limit annual state spending
increases to the rate of inflation plus increases in state
population, a measure known as P+I.
Following a P+I formula, the caps would not force a budget cut
in real dollars in lean years. State governments would be able
to spend at least as much in any given year as they did the year
before. Excess revenue would fill reserve funds that would be
used only during budget crises. Remaining excess revenue would
be returned to taxpayers annually.
many states, government is growing at a rate much faster than
the economy. When aligned with the P+I index, government
spending as a percentage of gross domestic product (GDP) would
Initiatives Coast to Coast
The states where voters are considering spending caps are a
diverse bunch. They range from Maine in the Northeast to Oregon
in the Northwest and include Michigan, Missouri, Montana,
Nebraska, and Oklahoma in between.
press time, the Missouri measure was tied up in court, awaiting
a ruling from the state supreme court on whether to put the
measure on the ballot. In mid-September a tax and spending
limitation in Nevada was struck down by that state's supreme
"We are shocked that these big government union front groups
were able to muscle their way past the will of the people," said
Bob Adney, executive director of the Tax and Spending Control
Initiative (TASC) for Nevada. "Nevadans want TASC, and it
shouldn't be taken away from the ballot just because government
unions and special interests will say and do anything to keep
people from voting on this issue."
While not everybody is a fan of imposing financial discipline on
state governments, the various initiative efforts have quickly
Petitions Well Received
"The measure has been received very well in Nevada," said Adney.
"We needed to collect 83,184 valid signatures to get on the
ballot and we turned in 156,254. I think this shows just how
popular the measure truly is."
Scott Tillman of Michigan's Stop Overspending Committee
reported, "We had people lining up to circulate [petitions] and
we had people lining up to sign." His organization ultimately
turned in 503,000 signatures when only 317,000 were required to
achieve ballot status.
Likewise, Matt Evans, spokesperson for Oregon's Rainy Day
Amendment Committee, said, "the rainy day amendment is being
very well received as we travel around the state discussing it.
Oregonians recognize the need for the state government to be
prudent, and set something aside for the inevitable 'economic
rainy day' in our state."
Oregon activists gathered 161,652 signatures--well beyond the
Government Unions Upset
Another common denominator among the spending cap efforts is the
nature of the opposition. Evans characterized the main opponents
of the Rainy Day Amendment as "the big government employee
Adney identified "the AFL-CIO and other government employee
unions" as the major opponents in Nevada.
Tillman noted his main opposition was the Defend Michigan
Coalition, which he described as "a coalition of people who
spend tax dollars."
The Defend Michigan Web site lists dozens of member
organizations, prominently featuring both associations of
government agencies and government employee unions such as the
American Federation of State, County, and Municipal Employees
and American Federation of Teachers.
NEA Spending Millions
Spending cap opponents have not been shy about committing major
resources to the efforts to defeat the initiatives.
"The National Education Association recently pledged $2 million
to defeating the Rainy Day Amendment," said Evans.
"Our opponents have been brutal here in Nevada," said Adney.
"They've sued us every step of the way on everything they can
throw at us. Also, they used 'blockers' during the petition
gathering stage of the campaign. These were hired thugs that
used intimidation, threats, coercion, slander, and even physical
force to try to stop us. We finally had to ask a judge for a
temporary restraining order against the group."
Still, the campaigns report they believe they are winning the
battle for public opinion.
Before the Nevada Supreme Court's decision to keep the TASC off
the November ballot, newspaper polls showed the measure with a
54 to 59 percent approval rating with only 20 percent opposed
and the rest undecided, Adney said.
"Our internal polling shows it in the 60 percent support range,"
Michigan's Tillman pointed to a recent newspaper poll that had
initiative supporters "up by 10 points."
Oregon's Evans echoed his colleagues elsewhere, saying the Rainy
Day Amendment enjoys a "substantial lead" in polling.
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