Sunday, September 03, 2006

Fiscal 2006: Record YTD Increase in National Debt

by Calculated Risk on 9/03/2006 02:37:00 PM

For the first eleven months of fiscal year 2006 (starts Oct 1, 2005), the National Debt has increased $582.3 Billion to $8.515 Trillion. This new record increase eclipses the previous record of $567.7 Billion set in fiscal 2004 for the comparable period.

On an annual basis, the all time record increase in the National Debt was $595.8 Billion, set in fiscal 2004. That record will probably be broken next month.

Click on graph for larger image.
The Bush Administration (Cutting deficit ahead of goal) and the CBO (Current Budget Projections) have been projecting a lower budget deficit for fiscal 2006.

So, if the "budget deficit" is improving, why is the annual increase in the National Debt on track to set a new record?

First, a little background - the annual increase in the debt can be broken down into three components:

Components: Annual Change in the National Debt
Component2006 (1)2005
Unified Budget$260 Billion$318 Billion
Social Security Trust Funds(2)$177 Billion$176 Billion
Other Trust Funds (3)$163 Billion$60 Billion
TOTAL: change in National Debt$600 Billion$554 Billion

Note 1: Estimates. Unified budget and Social Security estimates are from CBO, August 17, 2006. The annual increase in the National Debt is my estimate.
Note 2: includes negligible amount from Postal Service.
Note 3: includes some technical adjustments.
Red = negative numbers

The unified budget is "a measure in which every function and activity of government [is] added together to assess the government's fiscal position." (from SSA: Budget Treatment). The Bush Administration reports the unified budget.

Subtracting the annual Social Security balance (currently a surplus) from the Unified budget deficit yields the General Fund or on-budget balance. Currently CBO is projecting the on-budget deficit to be $437 Billion for 2006. This is the amount required by law to be reported as the budget deficit or surplus.

Subtracting all the other trust funds from the on-budget deficit gives the annual increase in the National Debt (with some technical adjustments). Other trust funds include:

Civil Service Retirement and Disability Fund
Federal Hospital Insurance Trust Fund (Medicare Part A)
Military Retirement Fund
Unemployment Trust Fund
DOD Medicare Retirement Fund
Nuclear Waste Disposal Fund, DOE
Deposit Insurance Fund
Employees Life Insurance Fund
Federal Supplemental Medical Insurance (other Medicare)
Foreign Service Retirement & Disability Fund
Pension Benefit Guaranty Corporation
Airport & Airway Trust Fund
Highway Mass Transit and Trust Fund

And many other trust funds.
So what happened in fiscal 2006? If the Unified budget deficit is improving, why is the annual increase in the National Debt getting worse?

Looking at the chart, the answer is there was a surge in revenue for the Other Trust Funds. Any increase in these trust funds reduces the "unified budget deficit" and makes the reported number look better.

Why did revenue increase significantly to these trust funds? Unfortunately that takes looking at each fund individually, and we will not have the answers until after the end of the fiscal year.

Take for example the "Federal Supplemental Medical Insurance" trust fund. According to the unaudited monthly treasury statements, the assets of this fund increased from $17.2 Billion at the end of fiscal 2005 to $30.4 Billion at the end of July 2006 (ten months into fiscal year). This is probably due to a short term increase in revenue due to Medicare Part D (prescription drug plan). Over time, Medicare Part D will have a negative impact on the budget, but in the short term this improves the "unified budget" by $13 Billion through July 2006.

For an even more bizarre budget result, look at the Pension Benefit Guaranty Corporation (PBGC) trust fund. The PBGC insures the pensions of 44.1 million American workers and retirees. According to the unaudited treasury statements for Sept 2005 and July 2006, the assets of this trust fund have increased from $13 Billion to $37.4 Billion for the first ten months of fiscal 2006 - reducing the Unified Budget deficit by $24.4 Billion.

We will have to wait for the PBGC annual report to know the details, but a main source for increases in PBGC assets is when the PBGC assumes responsibility for an underfunded pension plan. The assets of the terminated plan go directly to the trust fund, but the liabilities are spread out over many years. On an accrual basis, the liabilities are greater than the assets for the bankrupt plan (by definition, or the PBGC wouldn't have to take responsibility). But on a short term cash basis, the more companies that go bankrupt, the more this improves the current Unified Budget deficit!

Maybe we will get lucky in '07 and GM will go bankrupt, reducing the Unified budget deficit for fiscal 2007. Talk about a perverse result! But this example shows why looking at the Unified budget is insufficient when trying to understand the fiscal difficulties of the United States.