Fiscal legerdemain - off budget government spending

National Review, July 14, 1989 by Ed Rubenstein

THE OFFICIAL national debt-debt sold by the Treasury to finance the deficit-now exceeds $2 trillion, nearly triple what it was in 1980. This figure does not include the more than $1 trillion of federal obligations kept off the official ledger, specifically, the debt of government-sponsored enterprises (GSEs) and guaranteed federal loans:

The success of Gramm-Rudman in throttling the growth of Treasury debt since 1985 has, at the same time, spurred the use of federal loan guarantees, which do not result in budget outlays unless they go into default, and in GSEs, which are off budget and therefore immune from that law's limits.

Technically, GSEs are private corporations chartered by the U.S. Government to perform certain "public" functions, which originally meant providing credit to certain sectors of the economy. There were legitimate economic reasons for the early GSEs: the Farm Credit System helped redress the imbalances between the supply and demand for farm credit caused by restrictions on interstate banking. Fannie Mae did the same for mortgage lending. The traditional GSE is profitable and doesn't cost the taxpayer a dime.

Not so the new ones. Instead of helping privatesector businesses and individuals, their sole mission has been to channel public funds to failed government agencies or other GSEs, circumventing Gramm-Rudman. The S&L bailout, for example, will be transacted via a GSE created specifically for that purpose. The Resolution Financing Corporation (Refcorp) will be authorized to raise $50 billion by means of thirty-year bonds, none of which, if the Bush Administration gets its way, will be recorded in the budget .although taxpayers will pay interest amounting to about $5 billion per year, or $150 billion over the life of the bonds.

The sleight of hand does not end here, for Refcorp will be obliged to turn over the bond proceeds to the government, where they will be logged in as an "offsetting receipt," a type of revenue that has the effect of reducing budget outlays. Ergo, the 1990 budget can show spending on deposit insurance as declining by $14 billion from the current year.

If accounting principles were the only issue, these shenanigans would be of little interest. After all, a dollar spent off budget does not hurt us any more than one spent on budget. But by going off budget the government puts itself in the position of having to pay interest rates at least 75 basis points higher than it would on straight Treasury debt, increasing the cost to taxpayers anywhere from $2 billion to $8 billion over the life of the bonds. In addition, the phony deficit reduction gives the Administration leeway to propose new spending initiatives without offsetting spending cuts in the 1990 budget.