Every year, the the federal watchdogs at the Government Accountability Office attempts to audit the U.S. government’s consolidated financial statements. I say “attempts” because for the last couple years, GAO’s report has essentially said: Sorry, no can do.
Just like last year, the GAO reports that it is unable to provide a judgment on the government’s 2012 consolidated financial statements “because of widespread material internal control weaknesses, significant uncertainties, and other limitations.”
The major problems that prevented an effective audit last year continued in 2012. Those problems include “serious financement management problems at the Department of Defense” making the agency’s finances “unauditable,” the inability of the federal government to “adequately account for and reconcile intragovernmental activity and balances between federal agencies” and its “ineffective process for preparing the consolidated financial statements.”
Still, the report does manage to a few opinions on the state of the U.S. government’s big-picture fiscal outlook. The GAO notes that its report is designed to help both policymakers and the public get a sense of both the trajectory of the fiscal situation and the urgency of any potential problems. On the question of trajectory, the report is quite clear: “The projections in this report indicate that current policy is not sustainable.” No surprise there: That’s the same word that the Congressional Budget Office uses to describe the country’s fiscal outlook.
And the big problem, of course, is debt. Here’s the GAO’s 75 year outlook on our debt build up:
Ouch, right? And, sadly, also not a surprise to those who've followed previous projections of debt-driven doom. But this is not just the same terrible trajectory we saw last year. It's worse. As the report also notes, in last year’s report, public debt was only expected to equal 287 percent of the economy by 2086. This year, they’re projecting that without changes it will rise to 388 percent of the economy.
As for the urgency of bending the debt curve, the GAO makes it pretty clear that sooner is better. The longer the delay, the bigger the surpluses necessary to stabilize — not eliminate, but stabilize — the nation’s debt. A fiscal reform starting next year would need to produce an immediate primary surplus equal to 2.7 percent of GDP, and keep it there for the foreseeable future. A budgetary overhaul that doesn’t kick in for a decade would need to generate a 3.2 percent surplus.
And that’s if you’re looking on the bright side. The report further warns that its estimates probably understate the cost of delay “because they assume interest rates will not rise as the debt-to-GDP ratio grows.” That’s the real worry, and where the GAO’s fiscal prognostications get seriously grim. If interest rates suddenly go up, the report says, that may result in a higher debt ratio, “potentially leading to the point where there may be no feasible level of taxes and spending that would reduce the debt-to-GDP ratio to its 2012 level.” That's a problem much worse than books too messy to audit.