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Future Federal Fiscal Fiasco?

Mary-Jo Kranacher, MBA, CPA, CFE

According to the Government Accountability Office's (GAO) recent report, “The Federal Government's Long-Term Fiscal Outlook: January 2010 Update,” current U.S. fiscal policy is unsustainable. Is this really something most of us didn't already know? The fact is that economic growth alone is not going to overcome our recurring structural deficits, which means we must proactively address this challenge by either increasing taxes or restraining spending—or a combination of the two.

We've all heard warnings regarding our mounting federal debt. Three major entitlement programs—Medicare, Medicaid, and Social Security—account for the growing projected increase in excess federal spending. Medicare currently has sustained annual deficits, and Social Security is expected to begin running in the red around 2016. Projections for the Social Security program's current cash surplus show that it will reach its peak this year and diminish each year from now on.

It would be irresponsible to wait until we are out of options and these essential programs are broke before moving to remedy the problem. Furthermore, if we act sooner rather than later, it will be less costly and not nearly so painful. If we don't take any action, the discrepancy between expected revenues and estimated costs of entitlement programs and other government expenditures will continue to grow and require the nation to assume more debt. This is particularly troublesome because about half of our national debt currently is held by foreign investors, which has the potential to jeopardize our freedom of self-determination.

Strategic Choices

Because our economy is still fragile, we also need to consider the fiscal effects of the continuing battle against unemployment. As we continue to spend on stimulus efforts to boost our economy and keep workers employed, our national debt grows. Yet surely having to choose between resolving an immediate economic crisis and going further into debt is not a choice at all. With unemployment in the double digits, it is morally and economically essential to mitigate the damage to individuals, families, and businesses. In addition, higher unemployment creates greater financial pressure on safety net programs such as unemployment benefits, Medicaid, and food stamps. Stemming the tide of rising unemployment now will help our nation's fiscal issues in the long term, but only if we ensure that our resources are used efficiently and cost-effectively. Job creation should be approached strategically to get the most bang for our buck.

Projects that can enhance our future, such as improving our aging infrastructure and exploring alternative, green energy options, should also receive high priority. Recent federal budgets have given disproportionate weight to the interests of the current generation and not enough to those of future generations.

Prudent Planning

One of the cardinal rules of financial management is to develop a budget and stick to it. As CPAs, we've all advised clients, family members, and friends to limit their spending to what they can afford. But Uncle Sam has significant flexibility when creating the federal budget—revenues can be increased by raising taxes or expenditures can be decreased by reducing program benefits.

Because of the demographics of our society, healthcare and retirement costs will be key drivers of future deficits. Incrementally increasing the FICA wage cap is one way to generate additional revenue for Social Security. Shoring up this safety net is especially important given the tenuous condition of most private and state-funded pension systems.

Unfortunately, a solution for Medicare and Medicaid is more complicated. Reforms that shift the cost of healthcare to individuals—by raising the eligibility age for Medicare—or to the states might improve the federal government's short-term fiscal position at the expense of other segments of the economy. This inevitably would create other problems in the long run.

There are several possible paths to sustainability but none will be without consequences. Our nation's leaders will need to cut through entrenched politics to arrive at policies that will benefit the nation as a whole. One thing is clear: If our country does not implement the changes necessary to fix our ongoing fiscal problems, we risk endangering the future of the public ideals we cherish most.

As always, I welcome your comments.

Mary-Jo Kranacher, MBA, CPA, CFE. Editor-in-Chief. mkranacher@nysscpa.org.

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