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Amidst all recent clamors for using TARP paybacks to reduce the deficit, there seems to be little discussion about how TARP appropriations figured in deficit estimates. To add to the overall confusion, TARP transactions can be accounted for in two ways, according to Harvard Professor Greg Mankiw:
The U.S. Treasury adopted the conventional view that these TARP expenditures should be counted like any other spending. When the banks repaid the Treasury, these funds would be counted as revenue. Accounted for in this way, TARP caused a surge in the budget deficit when the funds were distributed to the banks, but it would lead to a smaller deficit, and perhaps a surplus, in the future when repayments were received from the banks.
The Congressional Budget Office, however, took a different view. Because most of the TARP expenditures were expected to be repaid, the CBO thought it was wrong to record this spending like any other. Instead, CBO believed “the equity investments for TARP should be recorded on a net present value basis adjusted for market risk, rather than on a cash basis as recorded thus far by the Treasury.” That is, for the purposes of this program, CBO adopted a form of capital budgeting. But it took into account that these investments might not pay off. In their estimation, every dollar spent on the TARP program cost the taxpayer only about 25 cents. If the actual cost turned out to be larger than the estimated 25 cents, the CBO would record those additional costs later, and if the actual cost turned out to be less than projected, the CBO would later book a gain for the government.
The bottom line: Because of these differences in accounting, while the TARP funds were being distributed, the budget deficit as estimated by CBO was much smaller than the budget deficit as recorded by the U.S. Treasury.
So, in this context, when Treasury Secretary Tim Geithner says he doesn’t expect to use more than $550 billion of the appropriated funds and expects up to $175 billion in repayments by year end 2010 (and “ substantial additional repayments thereafter”), what does that really mean in terms of deficit reduction and costs to the taxpayer?
(Keep in mind that when the money comes back it goes back to the US Treasury and that repaying TARP is not the same as paying down the deficit.)
Using the CBO accounting method, here is what we know:
- The $700 billion TARP appropriation is expected to add $175 billion to the deficit.
- According to the CBO estimate, the US Treasury should receive $525 billion (75% of the $700 billion appropriation) in paybacks plus earnings
- $175 billion in repayments are expected in 2010
- $150 billion of TARP funds is expected to remain undeployed
- The administration has already identified $42 billion from the $364 billion in TARP funds disbursed in the fiscal year ended September 30 as unrecoverable, as well as $50 billion in TARP funds allocated to mortgage modifications, setting a minimum of $23 billion in deficit spending.
Assuming the $325 billion from expected paybacks and unused funds does not get funneled into new initiatives, a $325 billion reduction in TARP would translate into an approximate $81 billion deficit reduction by 2010. Any TARP transactions that recover money for the remaining $282 billion could be used to further reduce the deficit, up to a maximum of about $71 billion. Theoretically, then, up to $152 billion could be used to reduce the deficit.
The Administration estimates that the overall program will cost $141 billion at most, to the tune of about $35 billion dollars in deficit spending.
A potential deficit reduction figure of $140 to $152 billion is, in my view, certainly worth discussing.
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