Unsustainable Fiscal Path: 2. The Federal Government’s Debt & Liabilities

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Each year, the Government Accountability Office (“GAO”) prepares the Financial Report of the United States that, among other things, tallies up all of the government’s debt and other liabilities. This article will use the Financial Report for the fiscal year ended September 30, 2017.

The GAO reports the debt/liabilities in five buckets, as follows:

  1. Debt Held By The Public: This is the total of Treasury Bills, Notes and Bonds sold to the public debt markets.
  2. Intergovernmental Debt: This is the government debt held by the various trust funds managed by the government. The largest include the Social Security Trust Fund ($2.8 trillion), the Civilian and Military Pension Funds ($1.6 trillion) and Medicare ($200 billion).
  3. Civilian & Military Pension and Other Post Employment Retirement Benefits: The government has a liability to pay pension, health care and other benefits to retired civilians, military personnel and veterans. This is the estimated total liability in excess of trust fund balances.
  4. Environmental Liabilities: Think Superfund sites, nuclear waste facilities and nuclear testing sites. This liability is the estimated future cleanup cost.
  5. Other Liabilities: A long list of many smaller items.

The chart below will show the level of government debt and liabilities for fiscal years 2016 and 2017.

Federal Government Debt and Liabilities ($ billions)

Category FY 2017 FY 2016 Change
Public Debt 14,700 14,200 +500
Intergovernmental Debt 5,600 5,500 +100
Total Debt 20,300 19,700 +600
Pension/OPEB Liability 7,700 7,200 +500
Environmental Liability 464 447 +17
Other Liabilities 1,009 954 +55
Total Non-Debt Liabilities 9,173 8,601 +572
Total Debt and Liabilities 29,473 28,301 +1,172

Source: Financial Report of the United States Fiscal Year 2017

All this costs money: lots of money. In fiscal year 2017, interest on Public Debt was $296 billion, representing 8.8% of total federal government revenues.

Interest on Intergovernmental Debt is paid annually and flows out as benefit payments. Also, much of this debt is now coming due. Both the Social Security Trust Fund of $2.8 trillion and the Medicare Trust Fund of $200 billion are forecast to be fully exhausted by 2034 and 2029, respectively. In all likelihood, the government will issue more Public Debt to fund these trust fund redemptions.

Total pension benefit payments were $145 billion in 2017. Veterans Compensation and Burial benefits were $79.4 billion. Other Post Employment Retirement Benefits, largely health care, were $37.4 billion.

Policy Considerations

 With respect to non-debt liabilities, there is little that can be done to reduce these liabilities other than meeting the obligations of the government as they arise. The government has already revised it pension and health care plans, which should help reduce the growth of these liabilities going forward. Reducing the number of civilian employees, military personnel and veterans over time would certainly slow the growth of these liabilities.

The debt balance of $20.3 trillion, on the other hand, is entirely manageable from a policy perspective. Taxes can be raised, spending can be reduced and debt can be repaid.

Is $20.3 trillion of debt too much?   Are massive annual fiscal deficits sustainable? Are there downside risks with this much debt? The next article will try to address these questions.

 

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