Missing the mark fiscally

Last week, two new federal reports showed once again the U.S. fiscal position is dangerously out of whack. And by every measure, the situation has been substantially worsened by George W. Bush's policies.

The first report is known as the Financial Report of the United States Government. The latest is for fiscal 2005, which ended Sept. 30, and was published Dec. 15 by the Treasury Department and the Government Accountability Office.

The summary shows a gross federal debt of $9.9 trillion, offset by assets of $1.5 trillion for a net debt of $8.5 trillion. At the end of fiscal 2001, the comparable numbers were $7.4 trillion for the gross debt, $926 billion for assets and a net debt of $6.5 trillion. Thus we see the national debt rose $2 trillion on Mr. Bush's watch.

However, because of accounting conventions, these figures greatly understate the rise of national indebtedness. They include only Treasury securities outstanding -- what most people think of the national debt -- plus federal employee and veterans' benefits payable, environmental liabilities, insurance and loan guarantee liabilities, accounts payable and some miscellaneous liabilities.

Completely left out are benefits payable for Social Security and Medicare. In a separate table, one can find figures for these programs' unfunded liability -- what the accountants call "negative cash flow" -- over the next 75 years, adjusted for the rate of interest.

The total indebtedness of these programs was $17 trillion in 2001: $4.2 trillion for Social Security, $4.7 trillion for Medicare Part A and $8.1 trillion for Medicare Part B. In the latest financial report, these debts have more than doubled. Social Security's indebtedness has risen to $5.7 trillion, Medicare Part A is now up to $8.8 trillion and Part B has grown to $12.4 trillion. In addition, there is now another Medicare program -- Part D for prescription drugs -- that George W. Bush rammed through Congress. The unfunded liability for just this one program is $8.7 trillion, for a total of $35.6 trillion.

Thus we see a grand total of increased indebtedness of more than $20 trillion during the Bush presidency, of which more than 40 percent is due to the Medicare drug benefit alone.

In another report also published on Dec. 15, the Congressional Budget Office looked at long-term spending and revenue projections. The numbers are deeply depressing.

According to CBO, spending for Medicare and Medicaid will more than double from 4.1 percent of the gross domestic product to 9.2 percent over the next 25 years and more than triple to 12.6 percent by 2050. But this assumes Congress will show some restraint and keep these programs from rising as rapidly as they have in the past. Under CBO's high-spending alternative -- which I find more likely -- spending for Medicare and Medicaid triples by 2030 and rises to 21.9 percent of GDP by 2050. Total federal spending on all programs is now 20.2 percent of GDP.

By contrast, Social Security, on which President Bush concentrated so much effort, is no problem at all. Its spending only rises from 4.3 percent of GDP this year to 6.6 percent by 2050 even under the high-spending scenario. Rather than waste so much time on a futile effort to reform this program, he should have spent all his time on reducing Medicare's spending growth. Instead, he vastly worsened its problem.

If revenues are held constant at their current 18.3 percent of GDP, the debt explodes, causing the government's interest expense to rise from 11/2 percent of GDP to 4.6 percent by 2030 and 12.4 percent by 2050 under the lower-spending scenario. Under the high-spending option, interest payments rise to 21.4 percent of GDP by 2050.

Under another scenario, CBO assumes that taxes will rise by allowing the Bush tax cuts to expire and Congress enacts no offsets to the growing alternative minimum tax or bracket-creep. This would raise revenues by 6.2 percent of GDP by 2050. Although this mitigates the rise in debt considerably, interest costs still rise to 4.7 percent of GDP by 2050 with lower spending and 13.6 percent with higher spending.

Moreover, allowing taxes to rise this way lowers economic growth. And because indebtedness still rises, more and more of the national income must be send abroad to pay foreign holders of Treasury securities. The result is lower standards of living for all Americans.

In the worst case, not controlling debt growth by spending cuts and sharp tax increases could lead to an economic crisis, with collapse of the dollar, sky-high interest rates and hyperinflation. The longer Congress and the White House defer budget correction, the more painful the cure will be.

Bruce Bartlett is a nationally syndicated columnist.