Budgetary Three-Card Monte

War spending aside, federal budget shenanigans continue.

Lawrence Lindsey, President George W. Bush's first National Economic Council director, was fired in 2002 after estimating publicly that the war in Iraq could cost upward of $200 billion, about four times as much as the administration was predicting. Lindsey's numbers were off, it turns out, but not in the direction the White House claimed: The Iraq war has ended up costing at least $700 billion to date.

You wouldn't be able to deduce that last number by looking through Bush's budgets. That's because his administration funded the Iraq and Afghanistan wars almost entirely through emergency supplemental bills. Emergency spending is effectively off budget, immune to caps and other constraints, and shielded from public criticism through obfuscation. Supplementals are an effective way for lawmakers to avoid making difficult tradeoffs in policy areas ranging from war to public education.

Last year President Barack Obama vowed to change Bush's opaque practice of supplemental spending. "I am committed," he said during his February 2009 address to a joint session of Congress, "to restoring a sense of honesty and accountability to our budget. That is why this budget looks ahead 10 years and accounts for spending that was left out under the old rules—and for the first time, that includes the full cost of fighting in Iraq and Afghanistan. For seven years, we have been a nation at war. No longer will we hide its price."

So far the president has delivered admirably on his promise to budget the cost of war. But that doesn't mean that the era of White House budget gimmickry is over. The incentives for using tricks to disguise the size of the budget deficit and to bypass formal budget process requirements are as powerful as ever.

Responding to voters' demands for fiscal discipline, most lawmakers (including Sen. Obama on the campaign trail) claim to be budget hawks. Hence the various rules meant to tie Congress' hands and slow down spending. But in reality, voters only favor cuts in programs from which they do not personally benefit. And since most voters think they benefit from most programs, politicians have little incentive to make real cuts. Instead they resort to budget tricks that disguise the cost of government.

A classic gimmick is keeping spending off the official budget, and the emergency spending supplemental is not the only way to do that. Some off-budget items, such as the U.S. Postal Service and the Social Security and Medicare trust funds, are treated that way by law. Politicians keep other spending items off the record informally. According to the Congressional Budget Office (CBO), the government-run mortgage lenders Freddie Mac and Fannie Mae are on track to cost taxpayers $64 billion between 2011 and 2020, on top of the $110 billion in taxpayer money they have already spent.  But none of that is included in the official budget.

Federal employee retirement funds are among the largest off-budget accounts, and the financial commitment they represent is never publicized. If the federal government had accounted, as a private firm would, for its future pension liabilities, there would have never been a budget "surplus" at the end of the 1990s. 

Worse, the off-budget game takes advantage of the fact that most government trust accounts bring in more than they spend in the short term, even though they have substantial unfunded liabilities in the long run. Congress and the president routinely raid the short-term surpluses in these funds to pay for current spending on other programs, thereby making the budget deficit seem smaller. It's a neat trick to mask today's fiscal irresponsibility by locking in tomorrow's. 

Then there are the timing tricks, such as manipulation of the "budget window." The health care bills in both the Senate ($848 billion) and the House ($1.05 trillion) were structured so that their 10-year "scores" from the CBO would be based on a full 10 years of revenue but less than 10 years of spending (six years in the Senate bill, seven years in the House bill). Programs seem cheaper when they're funded for three years without providing any benefits.

The use of delayed payments is another common timing trick. Large payments to contractors or vendors due by the end of the fiscal year (September 30) are often paid on October 1—the next fiscal year. That lets Congress "save" money in the current year, though at the cost of having to double up on expenses the year after. 

Another trick is the use of advance appropriation, also called forward funding. This gimmick provides spending for a future fiscal year without counting it in any year's budget. For the last 20 years, about $20 billion of "forward funding" per year has paid for everything from housing vouchers to education programs such as Head Start. 

While some gimmicks are detectable only by budget geeks, an easy one to spot is the rosy projection trick. Obama's latest budget proposal, for example, relies on revenue estimates that assume real gross domestic product growth of 4.3 percent in fiscal year 2011, followed by another 4.3 percent increase in 2012. The CBO does not share his optimism, projecting a little more than half that growth (2.3 percent) during those two years. 

The obvious benefit of these rosy projections is that billions of dollars in phantom revenues can cover up the size of a deficit or a new increase in spending. In his proposed budget, Obama pencils in an 18.5 percent increase in revenue between fiscal year 2010 and fiscal year 2011. That "increase" allows him to pretend the deficit will shrink from $1.6 trillion this year to $1.2 trillion next year.

Budget gimmicks are not always about hiding the cost of government. Sometimes they're used to overstate a program's fiscal burden to boost the case for government intervention. Take the White House's projections about long-term health care costs. Unlike previous administrations, Obama's rejected the Medicare Trustees' projections in favor of its own number, which happens to be twice as big. As the American Enterprise Institute economist Andrew Biggs recently explained in The American, "The effects of this change are staggering: the administration's 2010 budget, which followed the Trustees' assumptions, projected Medicare costs of 9.6 percent of GDP by 2080. The 2011 budget, which uses White House assumptions, projects Medicare will consume 22 percent of GDP by 2085." The lower estimate undercuts the administration's contention that increased federal control of health care is necessary to reduce Medicare and Medicaid costs.

Voters' and lawmakers' appetites for spending have turned the budget process into a cheating machine, and not just in Washington. Since most state and local governments are required to balance their budgets, they have turned hidden borrowing into an art form. Borrowing from state employee pension plans, underfunding them (which amounts to the same thing), and selling future tobacco tax settlement revenues at a steep discount are some of the more popular schemes.

One response to this widespread abuse is to pass stricter budget rules. But while such rules may be preferable, legislators will always find loopholes. The only long-term solution is to get the government out of more areas of our lives, rather than pretending to limit the rate at which it can increase spending. 

Contributing Editor Veronique de Rugy ([e-mail]) is a senior research fellow at the Mercatus Center at George Mason University.