I actually like reading financial reports from companies. That’s because you can learn a lot about their fiscal health.
Well, the same is true of government, although I’m not usually in the habit of reading tomes from the Treasury Department. So forgive me if I didn’t sit down and fully read the recently released Financial Report of the United States Government (FRUSG).
Instead, over the weekend I read an interesting article about this report in Investor’s Business Daily, written by Sheila Weinberg.
Weinberg is a CPA. She’s also the founder and CEO of Truth in Accounting, a nonprofit organization that does great research on government financial data.
I also love the fact that Truth in Accounting promotes transparency, and makes sense of otherwise-arcane government data. That way, you don’t have to sit there and spend your weekend trudging through the Treasury Department’s tortured fiscal language.
In her article, Weinberg pointed out one disturbing fact. As she puts it:
While the stock market has recovered from the dark days of 2008, the federal government’s financial health has continued to deteriorate in alarming ways.
One of the most-alarming ways, says Weinberg, is the big decline in the so-called "fiscal gap."
But what is this fiscal gap, and why is it so important?
Here I will let Weinberg do the explaining. She puts it both succinctly and thoroughly in the following:
The fiscal gap is a key snapshot of the government’s financial health that estimates the tax increases and spending cuts required to maintain the current ratio of national debt to GDP.
That’s a more meaningful number than the national debt alone because it also takes into account money coming into the government’s coffers, and the implications on future public policy.
If the government were an individual, that would be akin to comparing a person’s credit card bill with their pay stub.
So, what does the current fiscal gap look like?
Not good, according to Weinberg.
The ratio of debt to GDP is currently around 75%. That means that the government has borrowed a sum equal to three-quarters of all goods and services produced across the nation in a given year.
In other words, the government owes a ton of money.
The worst part of this is that the fiscal gap has surged in recent years. From 2015 to 2016, the fiscal gap increased by one-third.
Here’s how Weinberg explains it:
According to 2015 financial reporting, the government needs roughly $270 billion (annually, until 2092) to keep the debt-GDP-ratio at its current level. That works out to $2,200 for every taxpayer, every year — just to hold the debt level steady at an already concerning level. Do you have an extra two grand lying around this year for Uncle Sam?
And what’s responsible for the rising fiscal gap?
Well, readers of Uncommon Wisdom Daily likely already know the answer — and that is Social Security and Medicare.
For years, politicians have promised these politically popular benefits without increasing the taxes necessary to fund them. Not increasing taxes correspondingly has led to massive underfunding.
Social Security and Medicare expenses continue to rise year after year at the same time that less money is flowing into the system, which increases the fiscal gap.
Entitlement programs represent the federal government’s largest expense (far exceeding defense spending), but for political expediency their costs are not accounted for in the national debt.
Just think if those entitlement obligations were counted in the national debt.
The real figure would be around $100 trillion, per Weinberg, not the current $20 trillion.
Finally, Weinberg puts the issue into frightening perspective, writing:
The more holistic $100 trillion number breaks down to a $308,000 burden for every American taxpayer. These bills are real, and they’ll come due one day.
That fact is enough to strike fear into any rational human.
Unfortunately, Washington politicians from both parties refuse to be rational, choosing to put their heads in the proverbial sand in ignorance.
The only thing we can do here is choose not to do the same.
What’s your take on the fiscal gap, and are you afraid that this issue is being almost completely ignored in Washington? I’d love to know what you think about this, or any of the recent issues we’ve covered in the Afternoon Edition. And, letting me know is easy. All you have to do is leave me a comment on our website or send me an e-mail.
It was another watch-and-wait day for the markets, as the countdown to the potential (some say probable) Wednesday Fed rate hike continues. Stocks barely moved, as the S&P 500 gained 0.9 points while the Dow dropped by 21.5 points.
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Good luck and happy investing,
Uncommon Wisdom Daily