Director, Policy Futures
A Washington Post editorial today mistakenly implies that policymakers omit from the federal budget some of the costs of government loans by putting them “off-budget.”
In fact, the current accounting method for federal credit programs fully accounts for all the cash flows associated with loans and loan guarantees over their lifetimes. The budget estimates include all expected defaults, late repayments, changes in interest rates, and other factors that affect a loan’s cost to the government.
The approach that the Post favors — so-called “fair-value accounting” — would add a cost to the budget on top of the actual cash flows. The add-on would equal the extra amount that private lenders would charge if they, rather than the government, issued the loans or loan guarantees. It would reflect the fact that private individuals are risk-averse and dislike a loss more than they like an equal gain.
Risk-aversion doesn’t belong in the federal budget because it isn’t a cost that the federal government actually incurs. It never has to be covered by additional taxes or borrowing.
“Whatever decisions the government makes, its books should reflect their actual costs fully and realistically,” the Post says. That’s precisely what existing credit accounting already does, as we have explained. Adding a risk-aversion penalty that represents a cost that the government doesn’t bear would mean that the government’s books would diverge from actual costs.
Former Congressional Budget Office Director Robert Reischauer strongly supports the current approach to credit accounting. He writes, “A society’s aversion to risk may be an appropriate factor for policymakers to take into account in a cost-benefit assessment of any spending or tax proposal but adding a cost to the budget does not make sense.”