On December 15^th, the U.S. Department of the Treasury quietly issued the U.S. federal government's 2004 financial statement. The statement includes a report from the nation's top accountant, David Walker, Comptroller General of the United States. The Comptroller and his staff at the General Accountability Office (GAO) are required to audit the financial statement, and what they found is quite worrisome:

• Walker refused to sign off on the government's books because of unreliable information. Walker and his staff identified significant problems in the federal government's accounting and financial reporting systems. Mr. Walker, in the terminology of accountancy, could not render an opinion on the reliability of the information contained in the financial statement.
• The nation faces $46 trillion in long-term debt. At $46 trillion, the nation's long-term liabilities and commitments are huge-four times larger than the total U.S. economy-and growing. This translates into $350,000 per full time worker, according to Walker, and is a real threat to the future of the country if allowed to remain unchecked.

Balancing the Books

Sound policy and financial decisions require complete, accurate, and reliable financial information. The sad truth is that the financial information that the President, Congress, and the American people use to evaluate policies does not meet these basic criteria. For example, 5 out of 23 federal agencies failed to get a clean audit report, and ten out of 23 agencies had to correct significant errors in last year's report. The government is routinely unable to account for all the money that it spends: Last year, various agencies spent $24 billion with no record of where the money went, while this year, agencies reported $3 billion more in expenses than actually went out the door. The Treasury Department was forced to "plug" the difference on the financial statement. In addition, certain information required by Generally Accepted Accounting Principles-the hallmark standard for financial reporting-was not even included in this report.

These shortcomings and others are so pervasive that Walker cautions readers that the information contained in the financial report may not be reliable-yet the President, Congress, and government managers are making decisions based on it.

Government Debt or Family Debt?

Of even greater concern is the growing federal debt, which is now at over $7 trillion. The public holds more than half of this debt, about $4.3 trillion, and various other liabilities, such as $249 billion for environmental cleanup of contaminated nuclear weapons facilities, make up the rest. In total, the debt today is about two-thirds the size of the U.S. economy, or, as Walker puts it, about $25,000 per person. And don't forget that the debt is still growing; Congress had to increase the federal government's debt limit in November because it did not control spending growth.

But that is nothing compared to the government's other obligations. Add in what Social Security and Medicare are unable to pay in future benefits, and the nation owes nearly $46 trillion, which is four times the size of economy or $145,000 for every man, woman, and child in America, according to Walker. Put differently, that is $350,000 every full-time worker will have to shoulder-nearly ten times more than the median full-time income of $36,945 and almost enough to buy two homes (the median existing home price was $188,500 in the third quarter of 2004).

Fiscal Imbalance, Finances out of Whack

As Walker points out, this problem stems mainly from spending growth in entitlement programs like Social Security and Medicare, though there are other factors.

• Changing demographics will drive up costs when the baby boomers begin to retire in 2008. More and more people will draw benefits with fewer and fewer workers to support them. Fifty years ago, 16 workers paid Social Security payroll taxes for every single retiree drawing benefits. Today, just over three workers pay in for every retiree, and that is expected to decrease to 2 workers as the baby boomers retire.
• Health care costs are growing quickly and are projected to grow one percentage point faster than the economy over the long run.
• Commitments to homeland security, defense, and other spending programs are causing nonentitlement spending to grow.
• Without major changes, federal government spending will continue to increase to unprecedented levels, potentially exceeding 35 percent the economy. Historically, it has hovered around 19.6 percent. Revenues, though, will hold steady near the historical level of about 18 percent of the economy, even with the President's tax cuts made permanent, according to the Congressional Budget Office.

The Threat

Walker warns that without effective fixes to these spending programs, resolving these massive spending pressures will require action of unprecedented scope:

• Major reductions in nonentitlement spending;
• Major tax increases that boost rates well above historical levels; and
• Large, persistent, and growing deficits.

These options would require such dramatic change as to render them unfeasible. Dramatically reducing nonentitlement spending would be unworkable politically and practically and would not completely resolve the problem, in any case. Likewise, according to Walker, running even larger deficits than today or raising taxes would cripple the economy, threaten national security, and adversely affect all Americans' quality of life.

Addressing the Challenge

Walker is rightly concerned that, as Congress and the President work to resolve these pressures on the budget, they will find it difficult to make prudent policy decisions with financial information that is unreliable, incomplete, or just plain wrong. Moreover, argues Walker, additional budget controls are needed that force Congress and the President to review, reassess, and prioritize all federal government spending programs. No expense or program should ever be automatically deemed either necessary or prudent without such review. Simply reducing expenses across the board will not get the job done. Walker concludes that the government's financial reporting and budgeting must be based on truth and transparency if the nation's long-term budget problems are to be tackled. This means the federal government's existing commitments must be accurately and publicly disclosed.

Conclusion

U.S. Comptroller General David Walker has done a service to all Americans in describing the huge threat to our well being posed by the huge and growing debt and commitments the nation faces. Rather than presenting each full-time worker with bill for $350,000 for the nation's obligations, Congress and the President must fix programs like Social Security and Medicare. And they must have a financial system that will give them information they can rely on, one that requires full and reliable public disclosure of all the nation's commitments in the government's financial statements and budget.

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