ECONOMIC DELUSIONS ARE BASED ON INADEQUATE ACCOUNTING
- IT'S ALL IN THE FIGURES
The current recession which may turn into a depression has its roots in the failure of the political class in the UK and the USA and elsewhere to understand national and government accounting and as a first requirement to provide the statistics to underpin that accounting.
In particular, what is happening is a ‘balance sheet’ recession driven by partly mis-estimated and under-recorded government liabilities. A similar situation prevails in the private sector, especially banking so that there are, in national accounting terms, mis-estimated and under-recorded liabilities. This means not only an asset ‘bubble’ but also a liabilities ‘bubble’ but the liabilities ‘bubble’ was not all recorded and is not going away.
One of the root causes of incomprehension in the UK of the liabilities ‘bubble’ and consequent self-delusion lies in the inadequate statistics provided by the British government and the bizarre focus by politicians on the ups and downs of the unreliable real GDP figure . These government-provided statistics do not feature GDP per head, they do not charge the costs of extra population through the GDP figures which only deal with aggregate income change, not with changes in the balance sheet of assets and liabilities and they do not begin to meaningfully make provision for the future implied cost of entitlements in pensions and healthcare.
Thus, policy which is not based on careful accounting is itself a source of instability.
Therefore, what is required are two proper sets of accounts comprising income and expenditure and balance sheet, one for the Government and one for the national economy inclusive of government, where the income and expenditure account takes the form of the statement of GDP.
Moreover, changes to assets and liabilities in the national and government balance sheets should be reflected, that is, debited or credited, in the income or GDP statements as gains or losses.
The fact is that the British government does not prepare a proper statement of income and a balance sheet either for the government or for the national economy as a whole according to GAAP [Generally Accepted Accounting Principles]. This is required by law for companies and other entities. Such true accounting has imposed the discipline of closing defined benefit schemes in company pensions but there is no such discipline in government accounting.
The government and the national economy are two separate entities, interrelated, but each requiring proper accounts. GDP is meaningless without a national balance sheet which also incorporates population change and external liabilities. In addition, Government spending figures are meaningless unless entitlements and balance sheet changes form part of the total government accounts and are charged against income.
Proper double-entry bookkeeping has been around since the work of Fra Luca Pacioli in the fifteenth century. Surely it is time for government to move on from simple cash accounting?
NATIONAL INCOME ACCOUNTING
Present British national income accounting is almost entirely focussed on building up to aggregate GDP figures and in particular changes in GDP growth, themselves highly unreliable and rather farcically now in a situation where nominal GDP growth is deflated to real GDP growth by an adjuster – the GDP deflator index – which is bigger than the adjusted real GDP growth figure. Slight errors in the GDP deflator therefore cause big swings in the real GDP growth figure.
Yet economic comment is massively focussed on this real GDP growth figure which is highly suspect.
The British government also produces a one-sided (pre-Pacioli) spreadsheet of capital stocks ( ) which cover some of the assets in the national economy but not all and does not provide any true balance sheet and statement of national assets and liabilities.
Broadly, US practice follows the British national accounting system – both were partly inspired by John Maynard Keynes. The US also does not produce a full national balance sheet showing assets and liabilities. The Australian government does produce a National Income Balance Sheet, albeit incomplete, reflecting changes in assets and some liabilities.
POPULATION CHANGE
One of the main consequences of the failure to produce national balance sheets is that population change is not taken into account.
Once proper national GDP and balance sheets were prepared, it would be possible to construct proper GDP and balance sheets per head and per worker which would show up the real cost of population change. Dividing GDP by the number in the population or the labour force is not good enough. This crude calculation means the balance sheet changes which are of far greater magnitude are not captured.
First, the existing figures of aggregate GDP growth do not deal with the increase in population. An interesting article in The Economist on 13th March 2008 highlighted the fact that population changes meant that US GDP had to grow by one per cent per annum to maintain previous GDP per head because the US added 2.9 million to its 304 million residents in 2006/7, of which 1.37 million were new immigrants. The UK’s population grew by 388,000 (excluding illegal immigrants) in 2007, about 0.65 per cent, so GDP in the UK has to grow by 0.65 per cent simply to stand still so, on this basis, the UK was already in recession at the end of 2007 with GDP per head in decline. Constrastingly, Japan’s population shrinkage meant GDP per head was increasing even if GDP stood still.
A more sophisticated calculation would also take account of proven cultural costs or fiscal costs associated with immigration, such as language costs, diversity initiatives, policing, and national security costs.
Second, the full impact of population growth has to be calculated by looking at GDP (income) and wealth (the national balance sheet). Every addition to population requires the same share of wealth as the existing population benefits from at the start of the reference period or national wealth per head is diminished.
If the British government had proper and separate national and government accounts, according to GAAP, this cost of providing wealth for the extra population would be a debit expense against the Gross Domestic Product of the existing population in the national accounts in exactly the same way as a company passes dimunitions or additions to its assets or liabilities through its income statement (statement of recognized gains and losses).
Mr. Byrne, the then Immigration Minister, in his evidence to the House of Lords’ enquiry into ‘The Economic Impact of Immigration 2007/8’, stated that the immigration of five per cent of the existing workforce over ten years, raises resident GDP per head by 0.15 per cent p.a. (about £30 per year). So, in a single year, the increase of the workforce by 0.50 per cent (around 150,000 workers) in a year adds one tenth of that, i.e. £3 per resident, or £180 million in total.
But all these workers and their dependants require instant capital or they crowd in and reduce the wealth of natives. The calculated capital requirement in 2006 is 0.50 per cent x existing capital stock, (which National Statistics estimates at £4,649 billion) = £23 billion or £760 per head for existing workers or £380 for each native resident.
So the true entry in National Accounts to account for the immigration of 150,000 workers, if prepared according to GAAP, would be a credit of £180 million and a debit of £23 billion. This equates to a credit of £6 per head of GDP and a debit of £380 per head for natives. So, it is a massive loss even if one accepts Mr. Byrne’s calculations. Mr. Byrne calculates that for each following year there are further £3 benefits per head to residents which seem reasonable if his assertions are correct.
As for the US, by 2050 the population is expected to be 439 million (current 304 million). Broadly speaking, the US and the UK make net capital additions to capital and wealth of about 2.00 per cent of existing capital assets per annum. But half of this will be soaked up in the US in providing wealth for new immigrants so that capital and wealth per head will increase slowly and will be overtaken by countries without immigration or population increase problems.
As put by the Center for Immigration Studies, “Assuming the same ratio of population to infrastructure that exists today, the United States would need to build and pay for 36,000 schools. We would need to develop enough land to accommodate 52 million new housing units, along with places for people who lived in them to shop and work. We would also have to construct enough roads to handle 106 million more vehicles”. And a myriad of other capital additions – and none of this benefits existing residents one iota – in fact, if you are worried about the environment as many profess to be, the effects are entirely negative.
Both President Obama and John McCain favour some form of amnesty for the 12 million illegal residents in the USA. Just looking at the economic costs of this, and ignoring the moral hazards and disregard for law breaking and cultural costs, this is a promise to reduce the capital and wealth of the citizens of the US since all these illegals will require the same capital and wealth as other Americans in the form of hospitals, roads, drains, houses, etc., let alone their access to social security, medicare, etc. (Of course, some of this transfer of wealth from native Americans has, de facto, already taken place by the very fact of the illegals’ presence.) They also reduce the wages of competing native Americans. Virtually all of these illegals earn very low wages and would make a negligible fiscal contribution. And what happens next? Will it not be a draw for other illegal immigrants in the future? And so the cycle begins again. The only way the politicians will stop further immigration after an amnesty is by very strong methods which the same politicians refuse to employ at present.
As put by Professor Lawrence Kotlikoff, one of the United States’ experts on generational accounting, writing in the Federal Reserve Bank of St. Louis Review (July 2006):
“It is a mistake to think that immigrants can significantly alleviate the nation’s fiscal problems. The reality is that immigrants are not cheap. They require public goods and services. And, they become eligible for transfer payments.”
The failure to produce proper National Accounts and to draw these up both for existing residents and then for existing residents plus population growth means there is great delusion about the economic effects of population change.
There are three accounting changes produced by population change.
The first, value added by new workers and, second, any change to existing residents’ output as claimed by Mr. Byrne. These changes are captured by existing National Accounts in the GDP figures.
However, there is a third change, the division of national wealth over a larger population which is not captured by the present system although it is a far larger amount. It is not captured because of the lack of a Balance Sheet.
So, in effect, the National Accounts record the gains but not the far higher losses of immigration.
PROPER GOVERNMENT ACCOUNTING IN THE UK
The UK government does not publish a balance sheet of the entire government according to GAAP. The notes accompanying the Public Sector Balance Sheet, published only in 1997, are a wonderful example of civil servant stonewalling for not working to GAAP. Nevertheless, the US government has partly managed to adhere to GAAP.
We do not even know, in the UK every year, what the present discounted value of public sector pensions are (guess £1000 billion) PFI, National Rail, nuclear clean-ups the possible losses under the special liquidity scheme and other government liabilities and we certainly have no idea of the net present value of the pension and pension credit and health entitlements, less receipts, handed out by the British government. If in line with the US, it is thought that these costs could well increase the net amount of government liabilities to the order of £5-7 trillion – but nobody knows.
These entitlements in the UK depend on numerous variables, such as the quantum of the entitlements, the age structure of the population and the assumptions built in on economic growth and discount rates.
PROPER GOVERNMENT ACCOUNTING IN THE US
In the US, the Federal Government has published a government balance sheet since 1997, according to GAAP, entitled ‘The Financial Report of the United States Government’ – Proper Government Accounting in the US in 2007. This quoted the Comptroller General of the United States as stating, “the federal government’s fiscal exposures totalled approximately $53 trillion as of 30th September, up more than $2 trillion from September 30th 2006 and an increase of more than $32 trillion from about $20 trillion as of 30th September 2000. This translates into a current burden of about 175,000 US$ per American.” This compares with average US Household Debt, including mortgages, of $112,043.
It is worth nothing that these are the values of all liabilities, less future receipts, discounted to the present, allowing for inflation and for two per cent economic growth. Most of these liabilities do not, however, pass through the Income Statement of the Financial Report but are simply notes of the Financial Report to the Balance Sheet.
Professor Lawrence Kotlikoff, has stated the problem:
“The proper way to consider a country’s solvency is to examine the lifetime fiscal burdens facing current and future generations. If these burdens exceed the resources of those generations, get close to doing so or simply get so high as to preclude their full collection, the country’s policy will be unsustainable and can constitute or lead to national bankruptcy. Does the United States fit this bill? No-one knows for sure, but there are strong reasons to believe the United States may be going broke!”
“Countries can and do go bankrupt. The United States, with its $65.9 trillion fiscal gap, seems clearly headed down that path.”
The very fact that such an issue is discussed at the highest academic level is in itself a serious matter. Those lending to the US government for the short-term are beginning to keep a watch on the long-term liabilities.
US experts say there needs to be cuts in spending, cuts in entitlement and rises in taxes.
And this is echoed by the 2007 Financial Report of the US Government which stated that, “The government is on an unsustainable Fiscal Path”, and “The nation must change course before the deficit and debt reach unprecedented highs”.
What the US Government Comptroller General discreetly calls an increased “fiscal exposure” was actually a loss which you cannot find in the income and expenditure accounts but, as stated above, pops up in a note to the US Government Balance Sheet in the Financial Report.
The US Financial Accounting Standards Advisory Board wants the US Government to “adopt rules similar to those of corporations. The White House and the Congressional Budget office oppose the change, arguing that the programmes (Social Security and Healthcare) are not true liabilities because the government can cancel or cut them”. “The programs do not represent a legal obligation because Congress has the authority to increase or reduce social insurance benefits at any time.” [Clay Johnson, Director of Office of Management and Budget, May 2005]
Rep. Jim Cooper, Dem-Tennessee, commented in 2006, “We’ve a bottom-line culture, and we’ve been hiding the bottom line from the American people. It’s not fair to them, and it’s delusional on our part.”
Of course, in National Account bookkeeping terms, increased net entitlement liabilities by the government equal increased entitlement benefits for citizens. So, in the national balance sheet, as opposed to the government balance sheet, these entries cancel out. Unfortunately, it also generates an entry in the accounts of the government – net increases to present entitlement holders equal net liabilities for future taxpayers. In other words, a tax burden on future generations. Bob Bernanke, Chairman of the Federal Reserve, put it like this in a speech to the Washington Economic Club on October 4th 2006, “The taxes collected by the federal government would have to rise from abut 18 per cent of GDP today to about 24% GDP in 2030, an increase of about one third in the tax burden over the next twenty five years, with more increases to follow”. This estimate allows for economic growth and in a footnote, Bernanke quotes much greater possible tax increases estimated by Professor Kotlikoff.
CONCLUSION
So, what is needed is the preparation of separate government accounts and proper national accounts according to GAAP.
Once this is done, we can understand the real costs of increasing population and the real cost of entitlements. We can then make an estimate, like the US, to see what the future tax burden is likely to be and whether, like the US according to Professor Kotlikoff, we are going broke.
Moreover, policy can then be based on reality not a delusion and successive sets of accounts will refine the numbers to allow understanding of what the liabilities really are.
The economy was not growing faster than the government when both Gordon Brown and George Osborne made their spending promises in 2007. It is likely that the costs of providing infrastructure and social capital for immigrants and providing for entitlements meant that the government obligations were in fact increasing much faster than the economy and, of course, since the downturn are now doing so even more. As for growth in aggregate GDP, this does not reflect national economic health since growth in population means less GDP per head. The costs of capital additions for an increased population should be reflected as a debit against the GDP figure per head and thus reduced to reflect its true level.
FUTURUS/31 January 2009
In particular, what is happening is a ‘balance sheet’ recession driven by partly mis-estimated and under-recorded government liabilities. A similar situation prevails in the private sector, especially banking so that there are, in national accounting terms, mis-estimated and under-recorded liabilities. This means not only an asset ‘bubble’ but also a liabilities ‘bubble’ but the liabilities ‘bubble’ was not all recorded and is not going away.
One of the root causes of incomprehension in the UK of the liabilities ‘bubble’ and consequent self-delusion lies in the inadequate statistics provided by the British government and the bizarre focus by politicians on the ups and downs of the unreliable real GDP figure . These government-provided statistics do not feature GDP per head, they do not charge the costs of extra population through the GDP figures which only deal with aggregate income change, not with changes in the balance sheet of assets and liabilities and they do not begin to meaningfully make provision for the future implied cost of entitlements in pensions and healthcare.
Thus, policy which is not based on careful accounting is itself a source of instability.
Therefore, what is required are two proper sets of accounts comprising income and expenditure and balance sheet, one for the Government and one for the national economy inclusive of government, where the income and expenditure account takes the form of the statement of GDP.
Moreover, changes to assets and liabilities in the national and government balance sheets should be reflected, that is, debited or credited, in the income or GDP statements as gains or losses.
The fact is that the British government does not prepare a proper statement of income and a balance sheet either for the government or for the national economy as a whole according to GAAP [Generally Accepted Accounting Principles]. This is required by law for companies and other entities. Such true accounting has imposed the discipline of closing defined benefit schemes in company pensions but there is no such discipline in government accounting.
The government and the national economy are two separate entities, interrelated, but each requiring proper accounts. GDP is meaningless without a national balance sheet which also incorporates population change and external liabilities. In addition, Government spending figures are meaningless unless entitlements and balance sheet changes form part of the total government accounts and are charged against income.
Proper double-entry bookkeeping has been around since the work of Fra Luca Pacioli in the fifteenth century. Surely it is time for government to move on from simple cash accounting?
NATIONAL INCOME ACCOUNTING
Present British national income accounting is almost entirely focussed on building up to aggregate GDP figures and in particular changes in GDP growth, themselves highly unreliable and rather farcically now in a situation where nominal GDP growth is deflated to real GDP growth by an adjuster – the GDP deflator index – which is bigger than the adjusted real GDP growth figure. Slight errors in the GDP deflator therefore cause big swings in the real GDP growth figure.
Yet economic comment is massively focussed on this real GDP growth figure which is highly suspect.
The British government also produces a one-sided (pre-Pacioli) spreadsheet of capital stocks ( ) which cover some of the assets in the national economy but not all and does not provide any true balance sheet and statement of national assets and liabilities.
Broadly, US practice follows the British national accounting system – both were partly inspired by John Maynard Keynes. The US also does not produce a full national balance sheet showing assets and liabilities. The Australian government does produce a National Income Balance Sheet, albeit incomplete, reflecting changes in assets and some liabilities.
POPULATION CHANGE
One of the main consequences of the failure to produce national balance sheets is that population change is not taken into account.
Once proper national GDP and balance sheets were prepared, it would be possible to construct proper GDP and balance sheets per head and per worker which would show up the real cost of population change. Dividing GDP by the number in the population or the labour force is not good enough. This crude calculation means the balance sheet changes which are of far greater magnitude are not captured.
First, the existing figures of aggregate GDP growth do not deal with the increase in population. An interesting article in The Economist on 13th March 2008 highlighted the fact that population changes meant that US GDP had to grow by one per cent per annum to maintain previous GDP per head because the US added 2.9 million to its 304 million residents in 2006/7, of which 1.37 million were new immigrants. The UK’s population grew by 388,000 (excluding illegal immigrants) in 2007, about 0.65 per cent, so GDP in the UK has to grow by 0.65 per cent simply to stand still so, on this basis, the UK was already in recession at the end of 2007 with GDP per head in decline. Constrastingly, Japan’s population shrinkage meant GDP per head was increasing even if GDP stood still.
A more sophisticated calculation would also take account of proven cultural costs or fiscal costs associated with immigration, such as language costs, diversity initiatives, policing, and national security costs.
Second, the full impact of population growth has to be calculated by looking at GDP (income) and wealth (the national balance sheet). Every addition to population requires the same share of wealth as the existing population benefits from at the start of the reference period or national wealth per head is diminished.
If the British government had proper and separate national and government accounts, according to GAAP, this cost of providing wealth for the extra population would be a debit expense against the Gross Domestic Product of the existing population in the national accounts in exactly the same way as a company passes dimunitions or additions to its assets or liabilities through its income statement (statement of recognized gains and losses).
Mr. Byrne, the then Immigration Minister, in his evidence to the House of Lords’ enquiry into ‘The Economic Impact of Immigration 2007/8’, stated that the immigration of five per cent of the existing workforce over ten years, raises resident GDP per head by 0.15 per cent p.a. (about £30 per year). So, in a single year, the increase of the workforce by 0.50 per cent (around 150,000 workers) in a year adds one tenth of that, i.e. £3 per resident, or £180 million in total.
But all these workers and their dependants require instant capital or they crowd in and reduce the wealth of natives. The calculated capital requirement in 2006 is 0.50 per cent x existing capital stock, (which National Statistics estimates at £4,649 billion) = £23 billion or £760 per head for existing workers or £380 for each native resident.
So the true entry in National Accounts to account for the immigration of 150,000 workers, if prepared according to GAAP, would be a credit of £180 million and a debit of £23 billion. This equates to a credit of £6 per head of GDP and a debit of £380 per head for natives. So, it is a massive loss even if one accepts Mr. Byrne’s calculations. Mr. Byrne calculates that for each following year there are further £3 benefits per head to residents which seem reasonable if his assertions are correct.
As for the US, by 2050 the population is expected to be 439 million (current 304 million). Broadly speaking, the US and the UK make net capital additions to capital and wealth of about 2.00 per cent of existing capital assets per annum. But half of this will be soaked up in the US in providing wealth for new immigrants so that capital and wealth per head will increase slowly and will be overtaken by countries without immigration or population increase problems.
As put by the Center for Immigration Studies, “Assuming the same ratio of population to infrastructure that exists today, the United States would need to build and pay for 36,000 schools. We would need to develop enough land to accommodate 52 million new housing units, along with places for people who lived in them to shop and work. We would also have to construct enough roads to handle 106 million more vehicles”. And a myriad of other capital additions – and none of this benefits existing residents one iota – in fact, if you are worried about the environment as many profess to be, the effects are entirely negative.
Both President Obama and John McCain favour some form of amnesty for the 12 million illegal residents in the USA. Just looking at the economic costs of this, and ignoring the moral hazards and disregard for law breaking and cultural costs, this is a promise to reduce the capital and wealth of the citizens of the US since all these illegals will require the same capital and wealth as other Americans in the form of hospitals, roads, drains, houses, etc., let alone their access to social security, medicare, etc. (Of course, some of this transfer of wealth from native Americans has, de facto, already taken place by the very fact of the illegals’ presence.) They also reduce the wages of competing native Americans. Virtually all of these illegals earn very low wages and would make a negligible fiscal contribution. And what happens next? Will it not be a draw for other illegal immigrants in the future? And so the cycle begins again. The only way the politicians will stop further immigration after an amnesty is by very strong methods which the same politicians refuse to employ at present.
As put by Professor Lawrence Kotlikoff, one of the United States’ experts on generational accounting, writing in the Federal Reserve Bank of St. Louis Review (July 2006):
“It is a mistake to think that immigrants can significantly alleviate the nation’s fiscal problems. The reality is that immigrants are not cheap. They require public goods and services. And, they become eligible for transfer payments.”
The failure to produce proper National Accounts and to draw these up both for existing residents and then for existing residents plus population growth means there is great delusion about the economic effects of population change.
There are three accounting changes produced by population change.
The first, value added by new workers and, second, any change to existing residents’ output as claimed by Mr. Byrne. These changes are captured by existing National Accounts in the GDP figures.
However, there is a third change, the division of national wealth over a larger population which is not captured by the present system although it is a far larger amount. It is not captured because of the lack of a Balance Sheet.
So, in effect, the National Accounts record the gains but not the far higher losses of immigration.
PROPER GOVERNMENT ACCOUNTING IN THE UK
The UK government does not publish a balance sheet of the entire government according to GAAP. The notes accompanying the Public Sector Balance Sheet, published only in 1997, are a wonderful example of civil servant stonewalling for not working to GAAP. Nevertheless, the US government has partly managed to adhere to GAAP.
We do not even know, in the UK every year, what the present discounted value of public sector pensions are (guess £1000 billion) PFI, National Rail, nuclear clean-ups the possible losses under the special liquidity scheme and other government liabilities and we certainly have no idea of the net present value of the pension and pension credit and health entitlements, less receipts, handed out by the British government. If in line with the US, it is thought that these costs could well increase the net amount of government liabilities to the order of £5-7 trillion – but nobody knows.
These entitlements in the UK depend on numerous variables, such as the quantum of the entitlements, the age structure of the population and the assumptions built in on economic growth and discount rates.
PROPER GOVERNMENT ACCOUNTING IN THE US
In the US, the Federal Government has published a government balance sheet since 1997, according to GAAP, entitled ‘The Financial Report of the United States Government’ – Proper Government Accounting in the US in 2007. This quoted the Comptroller General of the United States as stating, “the federal government’s fiscal exposures totalled approximately $53 trillion as of 30th September, up more than $2 trillion from September 30th 2006 and an increase of more than $32 trillion from about $20 trillion as of 30th September 2000. This translates into a current burden of about 175,000 US$ per American.” This compares with average US Household Debt, including mortgages, of $112,043.
It is worth nothing that these are the values of all liabilities, less future receipts, discounted to the present, allowing for inflation and for two per cent economic growth. Most of these liabilities do not, however, pass through the Income Statement of the Financial Report but are simply notes of the Financial Report to the Balance Sheet.
Professor Lawrence Kotlikoff, has stated the problem:
“The proper way to consider a country’s solvency is to examine the lifetime fiscal burdens facing current and future generations. If these burdens exceed the resources of those generations, get close to doing so or simply get so high as to preclude their full collection, the country’s policy will be unsustainable and can constitute or lead to national bankruptcy. Does the United States fit this bill? No-one knows for sure, but there are strong reasons to believe the United States may be going broke!”
“Countries can and do go bankrupt. The United States, with its $65.9 trillion fiscal gap, seems clearly headed down that path.”
The very fact that such an issue is discussed at the highest academic level is in itself a serious matter. Those lending to the US government for the short-term are beginning to keep a watch on the long-term liabilities.
US experts say there needs to be cuts in spending, cuts in entitlement and rises in taxes.
And this is echoed by the 2007 Financial Report of the US Government which stated that, “The government is on an unsustainable Fiscal Path”, and “The nation must change course before the deficit and debt reach unprecedented highs”.
What the US Government Comptroller General discreetly calls an increased “fiscal exposure” was actually a loss which you cannot find in the income and expenditure accounts but, as stated above, pops up in a note to the US Government Balance Sheet in the Financial Report.
The US Financial Accounting Standards Advisory Board wants the US Government to “adopt rules similar to those of corporations. The White House and the Congressional Budget office oppose the change, arguing that the programmes (Social Security and Healthcare) are not true liabilities because the government can cancel or cut them”. “The programs do not represent a legal obligation because Congress has the authority to increase or reduce social insurance benefits at any time.” [Clay Johnson, Director of Office of Management and Budget, May 2005]
Rep. Jim Cooper, Dem-Tennessee, commented in 2006, “We’ve a bottom-line culture, and we’ve been hiding the bottom line from the American people. It’s not fair to them, and it’s delusional on our part.”
Of course, in National Account bookkeeping terms, increased net entitlement liabilities by the government equal increased entitlement benefits for citizens. So, in the national balance sheet, as opposed to the government balance sheet, these entries cancel out. Unfortunately, it also generates an entry in the accounts of the government – net increases to present entitlement holders equal net liabilities for future taxpayers. In other words, a tax burden on future generations. Bob Bernanke, Chairman of the Federal Reserve, put it like this in a speech to the Washington Economic Club on October 4th 2006, “The taxes collected by the federal government would have to rise from abut 18 per cent of GDP today to about 24% GDP in 2030, an increase of about one third in the tax burden over the next twenty five years, with more increases to follow”. This estimate allows for economic growth and in a footnote, Bernanke quotes much greater possible tax increases estimated by Professor Kotlikoff.
CONCLUSION
So, what is needed is the preparation of separate government accounts and proper national accounts according to GAAP.
Once this is done, we can understand the real costs of increasing population and the real cost of entitlements. We can then make an estimate, like the US, to see what the future tax burden is likely to be and whether, like the US according to Professor Kotlikoff, we are going broke.
Moreover, policy can then be based on reality not a delusion and successive sets of accounts will refine the numbers to allow understanding of what the liabilities really are.
The economy was not growing faster than the government when both Gordon Brown and George Osborne made their spending promises in 2007. It is likely that the costs of providing infrastructure and social capital for immigrants and providing for entitlements meant that the government obligations were in fact increasing much faster than the economy and, of course, since the downturn are now doing so even more. As for growth in aggregate GDP, this does not reflect national economic health since growth in population means less GDP per head. The costs of capital additions for an increased population should be reflected as a debit against the GDP figure per head and thus reduced to reflect its true level.
FUTURUS/31 January 2009