Tuesday, January 30, 2018
Donald Marron (Tax Policy Center) presents A Better Way to Budget for Government Loans, Guarantees, and Equity Investments at Georgetown today as part of its Tax Law and Public Finance Workshop Series hosted by Lilian Faulhaber and Itai Grinberg:
The federal government’s method for budgeting for loans and loan guarantees has two major flaws. First, it records the expected fiscal returns from a loan the moment it is made, rather than spreading them over its full life. Loans thus get immediate budget credit for returns that may not occur until years in the future, often beyond the standard budget window that applies to conventional tax and spending policies. This can make lending programs appear to be magic money machines and gives lending programs a budgetary advantage over other policies. Second, current practice does not distinguish the potential fiscal gains from lending from the fiscal costs of any subsidies to borrowers. This failure encourages legislators to structure policies as lending programs—which require beneficiaries to go into debt—rather than as grants. The Congressional Budget Office has proposed an alternative that levels the playing field between loans and grants. But its fair value method violates budget principles in another way, bringing non-budget factors—the cost of financial risk—into the budget.
This paper proposes two innovations to resolve these problems.
First, the budget should record the fiscal effects of loans and guarantees as they occur over time, not frontload them at origination. My preferred approach is projecting a loan’s expected returns year by year. Expected returns accurately reports a loan’s fiscal effects without violating the budget window that applies to other policies. Second, the budget should distinguish the financial returns of lending from any subsidies provided to borrowers. The budget should manage the financial returns like other financial transactions. It should manage the subsidies like conventional tax and spending programs. This disaggregation works under any budgeting approach, including expected returns and current practice. Disaggregating lending returns this way creates a level playing field between lending and grants. The same principles should guide budgeting for equity investments, including in the Social Security Trust Fund.