The Heritage Foundation

Executive Summary #1818 on Federal Budget

February 3, 2005

February 3, 2005 | Executive Summary on Federal Budget

Executive Summary: Time for the Federal Budget Process to IncludeUnfunded Entitlement Obligations

Federal spending grew to $20,705 per house­hold in 2004-the highest level since World War II and an increase of $3,000 per household over the average spending during the 1990s. After passage of the omnibus spending bill, discretion­ary spending was projected to increase 8.7 per­cent in 2005.

This is worrisome enough, but it pales in com­parison to the fiscal nightmare of the Medicare prescription drug benefit, which increased the government's unfunded obligations by $8.1 trillion over the next 75 years.

One reason for this spending growth is that the budget process does not force lawmakers to recog­nize the long-term costs of policy choices. The budget process should be changed to include a measure of the federal government's long-term lia­bilities and obligations-especially those of enti­tlement programs such as Medicare and Social Security. This would force Congress to acknowl­edge the fiscal threat that these obligations pose and begin to deal with them.

Today's taxpayers are paying the cost of entitle­ment obligations entered into by lawmakers many years ago. Total "mandatory" spending now consti­tutes 54.3 percent of total federal spending, most of which is devoted to entitlement programs, which already consume 6.8 percent of gross domestic product (GDP)-8.2 percent when net interest is included-and will require far more resources in the future.

By 2050, spending for Social Security and Medi­care is expected to increase sharply to nearly 25 percent of federal spending as baby boomers begin to retire, and total federal spending could con­sume nearly one-third of the national economy. According to David Walker, Comptroller General of the United States, the debt from these and other programs translates to a burden of $350,000 for every worker in America. As Walker notes:

Without reform, known demographic trends, rising health care costs, and projected growth in federal spending for Social Security, Medicare, and Medicaid will result in massive fiscal pressures that, if not effectively addressed, could cripple the economy, threaten our national security, and adversely affect the quality of life of Americans in the future.

Fixing a Dysfunctional Process

In the private sector, future obligations require regular payments or are at least disclosed on a company's annual balance sheet, but because the federal budget process excludes any measure of entitlement obligations and does not require that money be set aside to finance them, lawmakers continue to ignore the harsh fiscal reality that enti­tlements impose.

In fact, under the current budget process, Mem­bers of Congress and the President have every incentive to increase future commitments for these programs and no incentive to provide for their payment. The recent Medicare drug bill is an excellent example of this dysfunctional process. The amount budgeted for the Medicare prescrip­tion drug benefit over the next 10 years was only the tip of the iceberg. Its real cost is an $8.1 trillion increase in unfunded entitlement obligations.

The private sector, by contrast, has a regimented process that requires a business to record and report its obligations on its financial statements each year as they are incurred, even if these obliga­tions are to be paid in the future. This gives key decision makers such as shareholders, investors, and oversight entities a more complete and accu­rate assessment of a business's financial condition.

Amending the federal budget process to include this principle of planning for future obli­gations would:

  • Impose responsible fiscal management on the budget process. Significant policy under­takings such as the Medicare drug benefit should contain a sound financial plan and make an annual allocation toward any liability or obligation.
  • Require recognition of future liabilities and obligations in annual budget planning. The budget is now written on a cash basis and does not plan for the huge liabilities and obligations that will come due in the future. This would provide Congress with a long-term budgetary context for proposals to fix entitlement pro­grams within which new costs would be evalu­ated against future savings.
  • Force lawmakers to recognize the true cost of proposed future entitlements in the annual federal budget. This would require Congress to begin to rein in the federal govern­ment's commitments that will come due in the future and discourage lawmakers from voting for new benefits and passing on the cost to future Congresses.

Conclusion

Congress should include a formal measure of liabilities and obligations in the budget process to present a realistic assessment of the huge fiscal challenges confronting the nation. While this action alone would not be a panacea for fiscal responsibility, entitlement reform, or the preserva­tion of pro-growth tax policies, Congress needs a strong warning mechanism as it makes budget and policy decisions.

The ultimate success of such a change will depend on other steps taken to control the federal budget and whether Congress reacts in a wise way. One thing is clear, however: The United States cannot afford to ignore the real threat to its fiscal health. A budget process that would force Con­gress to take action on entitlements now is vital to protecting future generations from inheriting a debt that they cannot afford.

Alison Acosta Fraser is Director of the Thomas A. Roe Institute for Economic Policy Studies at The Heri­tage Foundation.

About the Author

Alison Acosta Fraser Senior Fellow and Director of Government Finance Programs
Domestic and Economic Policy

Related Issues: Federal Budget