Beware the Siren Call of Off-Budget Items
THE art of taxation, according to Jean-Baptiste Colbert, 17th-century French finance minister, is in ``plucking the goose so as to obtain the largest amount of feathers with the least possible amount of hissing.'' For years, Congress has heeded this advice in financing programs ``off budget,'' moving the account off the federal balance sheet to allow for funding by a variety of gimmicks such as loan guarantees and congressionally created ``private'' corporations. This has allowed for Congress seemingly to accomplish its objectives at little or no extra cost to the taxpayers and with no increase in the budget deficit. As the recent savings-and-loan (S&Ls) debacle evinces, however, governing through the back door with off-budget items often results in far greater costs for the taxpayer and private sector when the problem inevitably returns head-on.
In late 1987, a $10.8 billion rescue package for the Federal Savings and Loan Insurance Corporation (FSLIC), perceived by many to be grossly inadequate, was passed by Congress and enacted by the Reagan administration. The entire $10.8 billion was placed off-budget, to prevent any appearance of a taxpayer bailout for S&Ls which would increase the budget deficit in an election year. While the deficit did not increase because of the off-budget treatment of the FSLIC crisis in 1987, the eventual cost to the taxpayer and the private sector has increased with President Bush's recently proposed rescue plan.
Under the Bush administration proposal, the $100 billion-plus to save the S&L industry would once again be placed off-budget. A new corporation will be created, the Resolution Trust Company, which would issue $40 billion in government-guaranteed bonds to provide capital to take over an estimated 350 insolvent institutions and pay off depositors and creditors. While keeping the rescue off-budget in 1987 and again in 1989 has so far not resulted in any new taxes, there have been and will continue to be higher costs for the taxpayers and private sector.
Rather than have the Treasury borrow funds by including its costs in the federal budget in the 1987 $10.8 billion FSLIC rescue package, an off-budget agency known as the Financing Corporation (FICO) was created to raise the capital to close down S&Ls. FICO bonds pay a higher interest rate than Treasury bonds, imposing hundreds of millions in additional expenses, which raises the ultimate cost of saving FSLIC. Under the Bush proposal, the $50 billion in 30-year zero coupon bonds issued by the Resolution Trust Company will raise the final cost by billions more than if Treasury bonds had been utilized in an on-budget plan.
Additional costs would be absorbed in the Bush package which would not appear in the budget but would be felt by the private sector. Financial institutions would have to absorb $6 billion of the toll annually over the next 10 years for rescuing FSLIC. Raising insurance premiums for banks would result in lower interest rates on savings accounts for depositors and higher service fees for customers if the costs were passed on by the financial institutions. Employees of these institutions could receive reduced salaries and bonuses if the additional premium costs were absorbed internally. Stockholders of banks would suffer in having their shares valued less and receiving lower dividend income.
Despite this costly experience with the S&L rescue, other programs are ready to set sail as members of Congress are lured by the siren call of off-budget funding. Legislation mandating health insurance, day care, and parental leave to be provided by private industry would result in massive costs in terms of higher benefits mandated by the federal government; lost productivity and diminishing competitiveness; and increased expenses passed on in the form of either higher prices for consumers or lower remuneration for employees. The costs for these proposed programs would be placed off the federal budget but squarely upon the private sector.
Even if new programs such as day care and national health insurance are not enacted, many existing off-budget items could rise, FSLIC-like, from the ashes of previous congressional funding alchemy. The US government is the world's largest banker, with over 100 lending programs, a $250 billion loan portfolio, and more than $750 billion in guaranteed loans. The potential cost of the programs is enormous: In just one agency, the Farmers Home Administration, the General Accounting Office estimates that $36 billion of the $90 billion total is lost and would have to be covered by taxpayers eventually.
There have been some successes from off-budget activities, most notably the saving of Chrysler. But placing a program off-budget diverts it from the scrutiny it would receive if it were to be funded fully by Congress. Off-budget items create the illusion of meeting program goals without having to address the associated costs: A structure is sculpted so that something will be provided by the government for nothing in cost. No matter how elaborate the construction, however, off-budget items crumble as government programs must be based on a foundation of economic reality, not a fa,cade of bookkeeping revision.