The overlooked report from the U.S. Treasury you should know about

Devoted consumers of Washington news face a growing cognitive danger: billions-and-trillions overload. In mere weeks we’ve had to get a grip on a pandemic relief bill ($1.9 trillion), a proposed infrastructure bill ($2.2 trillion), and a new White House budget request ($1.5 trillion), with a complete proposed federal budget (to be determined, in the trillions) due later this spring. One wants to hold informed opinions on all of them—each is full of contentious issues—but how? The 13-digit figures swim before one’s eyes in a monetary miasma until the only number that matters is the number of beers in the refrigerator.

Happily, a solution awaits. (Don’t worry, you can still have the beers.) It’s a little-known report published annually by the U.S. Treasury; the new edition appeared last month. It presents the endless details of federal taxing and spending in a comprehensible context spanning the entire government and a broad sweep of time, from decades ago to decades ahead. Each day’s news focuses on part of the picture, but here we see it as a coherent whole.

And by the way, we can’t resist mentioning that this supremely useful document exists because of a 1973 Fortune article.

The report’s deceptively bland name is Financial Report of the United States Government. The concept is simple: to present the finances of the federal government as if it were a business, with assets and liabilities, income and expenses, and divisions (the cabinet departments plus other agencies) with finances of their own. True wonks can delve into the results as deeply as they could ever wish to—the new edition is 256 pages—while the interested citizen with other things to worry about can quickly get the big picture and see how each day’s fiscal news fits in.

The report finds that the big picture is brutally clear: “Current policy is not sustainable,” it declares. The report has been preaching that message for years under administrations of both parties, and every year the numbers get worse. In 2020 they got much worse because of the pandemic. At the end of the federal fiscal year last September 30, the U.S. government’s assets were $6 trillion and its liabilities were $33 trillion. On a corporate balance sheet, assets minus liabilities equals shareholders’ equity; on the federal balance sheet the result is termed “net position.” Either way, the amount is -$27 trillion. In corporate finance there’s a term for companies with negative shareholders’ equity: bankrupt.

Of course, the government isn’t a company, and because it prints its own money, it can’t go bankrupt. But that doesn’t mean all is well. The government version of a company’s profit-and-loss statement shows a 2020 “loss”—called “net operating cost”—of $3.8 trillion. That’s even larger than the widely reported staggering $3.1-trillion budget deficit of for the same period, essentially because the Financial Report’s figure includes liabilities that government bookkeeping ignores (for details, see the report).

Washington’s net operating cost was especially deep in the hole in 2020 because of the pandemic, but it has been negative every year for 20 years, and the report’s projections show it getting rapidly more negative. That’s the really frightening news. If current policy continues, the report says, interest payments on the federal debt will decrease briefly from the pandemic spike and then will increase steadily. Interest will become the government’s largest expense—more than Social Security or Medicare—in the 2030s. It will become larger than all other government expenses combined around 2080 and will continue to grow rapidly.  

Since that trend cannot continue indefinitely, the big question for the country—the overarching question to keep in mind during today’s Washington debates over tax and spending—is how and when the trend will stop. The “how” is obvious. Leaving interest payments aside, the government must spend less than it takes in, enabling it to reduce debt over time. That will be painful, and the longer we wait, the more painful it gets. The “when” is the great policy issue. “Future generations are harmed by a policy delay,” the report explains, because with each passing year “the greater is the difference between the taxes they pay and the programmatic spending from which they benefit.” To avoid the pain of confronting reality now, we’re handing far worse pain to our kids and grandkids.

As for the report’s origin: “It all began with an article entitled ‘An Annual Report for the Federal Government’ by Carol Loomis for Fortune magazine in 1973,” writes Allan Lund, a former Treasury employee who worked on the report’s prototypes and early editions. Carol, now retired, remains Fortune’s all-time MVP writer. She recalls that she first proposed the article in the mid-1960s, but the magazine’s editor wasn’t interested; she tried again in 1973, under a new editor, who “loved the idea of the story from the moment I mentioned it.”

The project proved monumental, requiring Carol to dissect and then reassemble virtually all the government’s finances according to the rules of corporate accounting. She had to separate the Defense Department’s capital expenses from its operational expenses, for instance. She had to choose appropriate depreciation schedules for the government’s assets; the Panama Canal, for example, was “written off almost entirely” by 1973.

The article caught the attention of Arthur Andersen & Co. chairman Harvey Kapnick, who persuaded Treasury Secretary William Simon that the Treasury ought to produce a report based on Carol’s model. Simon assembled an advisory committee of experts from government, the accounting profession, and business, plus Carol. Much work ensued, including prototype reports.

After Simon resigned upon the inauguration of Jimmy Carter in 1977, the committee eventually disbanded and interest in the project waxed and waned for years. But it wasn’t forgotten. Finally, the Government Management Reform Act of 1994 mandated that the Treasury produce the report annually by March 31. The first edition appeared in March 1998, and it has appeared every March since.

Carol marvels that her article was responsible for this substantial U.S. Treasury project that’s enshrined in law. “It’s still strange to think that nobody had kicked around the idea before we ran the story,” she says. But nobody had, or at least nobody had made the idea reality.

Today the report is the persistent voice of conscience that speaks up every year, reminding policymakers and voters that we’re loading an ever-weightier burden on future generations, and it can’t continue. When we’re finally forced to change course, painfully, no one will be able to say we hadn’t been told.

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