
According to a report by the National Taxpayers Union Foundation (NTUF), taxpayers are responsible for billions in unseen costs due to federal credit programs that mask the risks of inadequate accounting methods.
In its August 2024 report, the Congressional Budget Office (CBO) demonstrates that federal credit programs are still burdening taxpayers with billions worth in ineffective subsidies, the NTUF said. In full-year 2025, total federal credit assistance is projected to reach $1.9 trillion in new direct loans and loan guarantees from 129 different federal programs. Most of these are via mortgage guarantee programs and student loans.
The NTUF said that when borrowers default and do not repay these loans or loan guarantees, taxpayers are left holding the bag. Utilizing the Federal Credit Reform Act (FCRA) approach to measuring costs, the standard accounting method utilized by the federal government, CBO computed a $2.4 billion subsidy cost estimate. But, under the more realistic fair-value method that takes into consideration market risk, a more realistic figure is $65.2 billion.
By utilizing interest rates on Treasury securities, the FCRA methodology is based on the defective premise that federal credit activities are as low risk as government bonds. Treasury rates are low risk given that they are backed by the government, but federal credit programs rely on people and businesses paying back their loans. Utilizing Treasury rates to project these costs does not take into account the likelihood that some borrowers will not repay their debts.
When market risk is taken into account, the cost of these programs escalates as there is a considerable $62.7 billion discrepancy between the two cost estimates. The fair-value method accounts for market risk by incorporating a premium that reflects the added compensation to investors who assume the risk. Housing and real estate loans seem to be the biggest reason for the cost difference between estimates. If federal credit programs were held to the same standards as private loans in a competitive market, many would not be viewed as good investments.
According to the report, Inflation is impacting the costs of these programs. The CBO projects that costs for smaller credit programs grow at the rate of inflation. Thus, it is likely that the higher inflation in the past few years has contributed to the higher costs. Aside from inflation, higher interest rates might impact the costs of the federal government’s array of housing programs such as Fannie Mae and Freddie Mac.
The costs of federal credit programs have not been continually increasing year over year. CBO counted 129 programs in this year’s report, increasing from 78 in 2018. Even though projected credit obligations for 2025 are lower compared to the 2018 level, subsidy costs are considerably higher under both accounting methods. Inflation Reduction Act provisions have also added to these costs.
Using the fair-value approach to estimate the costs of federal credit programs offers more accurate budgetary data for lawmakers since it considers market risks associated with these loans, such as interest rate changes and potential defaults. This transparency is essential for policymakers as they consider legislation, enabling them to make more informed decisions about these programs’ fiscal impacts. Through a better understanding of the risks that taxpayers are exposed to, policymakers can ensure the government is using credit prudently and sparingly.
The Fair-Value Accounting and Budget Act (H.R. 5571), introduced by Representatives Ralph Norman (R-SC) and Glenn Grothman (R-WI), requires the federal government to utilize fair-value accounting for its credit programs. By requiring this accounting method, this bill would ensure that policymakers and taxpayers have a clear understanding of the long-term fiscal consequences of these programs, not only enhancing transparency and accountability but also protecting taxpayers from covert costs.
According to the NTUF. CBO’s latest report shows the need for greater accuracy and transparency in accounting for the true costs of federal credit programs. By using fair-value accounting standards, lawmakers can better evaluate the fiscal risks related to these programs. This helps taxpayers because they are not forced to bear as much of a burden from risky ventures funded by federal loans. Also, policies like H.R. 5571 ensure the government is only a lender of last resort so that taxpayers are protected from unnecessary liabilities.