Fiscal imbalance is a mismatch in the revenue powers and expenditure responsibilities of a government or any business that follows generally accepted accounting principles. It is a topic that the “dismal science” (economics) rarely addresses and politicians avoid like the plague. But it is really, for Americans today, the most important concept that must be addressed. Here is what that means.
Largely overlooked by the voting public, an overarching issue of this 2016 election is fiscal responsibility. The public has been conned by government to obscure the importance of this and to a staggering extent. You’ll hear about the national debt being $18 trillion and that this is a crisis. Indeed. In truth, however, the actual fiscal imbalance is close to $117.9 trillion as of the end of 2014 and growing rapidly. It is about seven times the national gross domestic product (GDP) and essentially twice the value of all private wealth of America, which amounts to $63.5 trillion.
This is how it is defined: Fiscal Imbalance = Present Value of Future Expenditures - Present Value of Future Revenue + Outstanding Debt
Such imbalances are greatest at the national level because state and local governments are under closer scrutiny. The fact that most Western countries have both higher tax burdens and far larger fiscal imbalances than the U.S. at 9% of GDP is a diversion from American issues. Does it matter that Germany at 14% and France at 15% of GDP face similar problems? These current debt-GDP ratios are higher than at any time in American history except for a brief period at the end of World War II when it was 106.1% in 1946, a condition that was quickly remediated. The way things are going in the U.S. as you read this, the debt-GDP ratio is expected to be 81.6% by 2024, rise to 100% in 2032 and be 200% in 2054.
Much on this topic has been reported by think tanks like Brookings Institution, which is not noted for espousing conservative philosophy. A wonderful study was written by Jeffrey Miron from the Department of Economics at Harvard University and sponsored by CATO Institute in Washington, D.C. It is a common theme among most studies that the difference between the government’s planned spending and projected revenues must be reconciled and that neither federal deficit nor annual spending nor accrueddebt provide a cohesive measure of fiscal imbalance.
Recognize that most government policies that involve expenditures do not possess their own funding. National defense and police functions require great expense but provide no revenue. While these are all fiscally imbalanced, the public endorses funding these programs. The rub comes when government establishes a policy, such as Obamacare, that costs great amounts of money every year into the future but does not adequately consider how the functions will be funded in the future.
In another swizzle by federal bureaucrats, the Social Security accounts of retired persons were changed from a system of retirement funds paid from saving accounts into SSA by allocating this money for other federal spending. Instantly, what was a prepaid program for retirees became a horrendously large fiscal imbalance.
Debt equals the sum of all past deficits and surpluses. Debt is backward-looking and does not account for future expenditures or revenues, and deficit fails to account for future expenditures and revenues implied by policies. So, neither debt nor deficit provides conclusive information on government expenditures or revenue plans for the future. Therefore, the idea of fiscal imbalance requires accommodation of the concept of “present value.” It also commands that future revenues be planned in the same vein that account for present value of those future assets.
This exciting discussion is only significant if readers take some messages to a political venue where you hold some sway. Ultimately, Congress must come to grips with changing national policies that allow the continued increase of fiscal-imbalance-driven issues. Reform of funded federal programs that litter the welfare landscape must be adjusted so that paying the piper happens now and not “off into the future.” Politicians must be on notice that they are the source of all these problems and that being honest and realistic is what citizens require.
I agree that this is hard to achieve in that (as I view them) not a single presidential candidate has a clue about these matters and is honest enough to address the issues. But when it comes to your Senators and Representative in Congress, it would be a fine idea to scare them into reality. Don’t vote for them unless they agree to fix this problem.