Short vs. Long Term Thinking: Incorporating the Long-Term Fiscal Outlook into the Myopic Budget Process

The nation faces massive unfunded obligations in federal entitlement programs. The short-term cash-flow budget framework utilized to account for the federal government’s fiscal health appears to have contributed to the deterioration in the government’s fiscal outlook. That framework was appropriate for an earlier time, when the vast majority of federal spending was on discretionary programs. With the growth of entitlement programs, however, it has become obsolete. It fails to reveal the full financial implications of current entitlement programs, which have commitments that continue well beyond the standard 5-year or 10-year budget window.

Short-term cash-flow accounting provides an incentive for lawmakers to overpromise entitlement benefits, and such a method reduces their incentive to undertake short-term sacrifices that would improve the government’s long-run financial position. Complementing existing budget measures with newer measures that include the present value of future cash-flow shortfalls would improve the informational content of the current budget. It would also reveal more accurately the financial burden being placed on future generations.

Long-term present value measures are now included in the Social Security’s and Medicare’s Trustees’ Annual Reports. The president’s 2006 budget also proposes a “point of order” against policies that would increase present value budget shortfalls in the nation’s entitlement programs. Sen. Joseph Lieberman (D-CT) has recently introduced legislation that would expand the scope of these measurements to the entire federal budget.

This conference will discuss the merits of complementing official federal budget reports with long-term present-value measures of federal financial shortfalls, and of anchoring budget process rules to such measures.

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