U.S. Credit Costs Need a True Accounting : Loans Might Not Look So Deceptively Cheap if We’d Budget the Price

Amid the whirlwind of activities surrounding the budget this year, a somewhat arcane and complex issue deserves a spot on the congressional agenda. The issue is how the federal government accounts for billions of dollars of direct and guaranteed loans.

Largely directed toward home owners, farmers, students and businessmen, credit programs add up to a lot of money. In fiscal 1986 the government disbursed $42 billion in new direct loans and provided $159 billion in loan guarantees. Despite the fact that the federal government is potentially liable for more than $700 billion of loans, the budget does not provide complete information about the actual costs of credit programs.

Imagine trying to manage your household budget without knowing about the costs that you may incur for loans that you co-signed for relatives or friends. If one of them defaulted, you would be liable. Obviously you would want to put some money aside in case a co-signed loan goes bad. Doing so might mean that you have to make some tough decisions about other items in your household budget--some purchases might have to be delayed or your summer vacation might have to be shorter. But knowing your liabilities and planning for them is better than being caught short later.

The current method of accounting for federal credit programs gives a distorted picture of how much money the government is spending on such programs.

For example, the cost of a new direct loan is overstated in the first year because the entire amount is recorded as an outlay, even though the government will be paid back over a period of time. By the same token, the ongoing cost--the subsidy element in the loan--is not recorded in later years.

Guaranteed loans do not even show up in the budget until they go bad and the government has to pay up. Given tight federal resources, no wonder loan guarantees have become increasingly popular. In fact, the growth rate for loan guarantees has been more than double that of domestic spending.

Although the costs may not be evident when guaranteed loans are made, they do have an effect on taxpayers. About $8 billion was paid out by the government for defaulted loans in fiscal 1986.

To correct the distortions caused by the way credit programs currently are handled, the actual costs of the loans should be included in the budget. Then we could fairly compare the price tags of solving a problem with direct loans, loan subsidies, grants or tax subsidies. They all have costs, but current accounting makes loans look deceptively cheap.

Credit programs, like ordinary government spending programs, cost the government money and use economic resources that could be employed in other activities. In many cases the government lends out taxpayer money at lower rates and with more generous terms than otherwise would be available to the borrower. The Office of Management and Budget has estimated that the actual subsidy costs for credit programs were more than $18 billion in fiscal 1986.

Identifying the subsidy costs of credit programs in the budget is not a new idea. Three different commissions appointed by Presidents Dwight D. Eisenhower, John F. Kennedy and Lyndon B. Johnson suggested it. The executive and congressional budget offices and the General Accounting Office all have spent considerable time in studying the issue. Credit reform has broad bipartisan support--the need for it is agreed on by experts from across the ideological spectrum.

We are not challenging the purposes of federal credit programs. They serve important national goals like providing financial assistance for home ownership and access to higher education. But just because these programs address worthwhile goals does not mean that their costs should be inadequately accounted for in the budget.

One approach to solving this problem is credit-reform legislation that would be co-sponsored by Democrats and Republicans alike. This approach and others need to be discussed by Congress. As long as we are thinking about reforming the budget process, coming up with a better way to keep track of credit costs should be on the menu.

In a time of large budget deficits we have seen it become increasingly difficult for Congress to choose among competing priorities for scarce resources. Why make our job even harder by disguising the true costs of using government credit to solve national problems?