Sovereign Debt Challenges and the Implications for the Accounting Profession

1. Sovereign Debt Challenges, Implications, and
Needed Actions
Global Seminar on the Sovereign Debt Crisis
International Federation of Accountants
Vienna, Austria
March 20, 2012
Hon. David M. Walker
Founder and CEO
The Comeback America Initiative
and
Former Comptroller General of the United States

2. Common International Challenges
Most industrialized nations will be facing similar challenges in the
coming decade:
Rapidly aging populations
Growing healthcare costs
Financial instability
Slowing economic growth
Unemployment and underemployment
Growing inequality in society
Deficit and debt challenges
Compiled by TCAII.
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3. Sovereign Fiscal Responsibility Index
(As of September 2011)
1. Australia (1) 18.Slovakia (16)
2. New Zealand (2) 19.Norway (15)
3. Sweden (4) 20.Austria (21)
4. Estonia (3) 21.France (23)
5. China (5) 22.Finland (22)
6. Chile (7) 23.Slovenia (20)
7. Luxembourg (6) 24.Germany (25)
8. India (12) 25.Spain (24)
9. Brazil (10) 26.Belgium (26)
10. Denmark (8) 27.Italy (27)
11. United Kingdom (9) 28.United States (28)
12. Netherlands (14) 29.Hungary (29)
13. Israel (19) 30.Iceland (32)
14. Canada (11) 31.Ireland (30)
15. Korea (17) 32.Japan (31)
16. Poland (13) 33.Portugal (33)
17. Mexico (18) 34.Greece (34)
Source: Comeback America and Stanford Graduate Students’ Sovereign Fiscal Responsibility Index. Compiled by TCAII.
Note: Based upon IMF data that was reported in September 2011 and does not take into consideration subsequent events. Numbers in parenthesis indicate prior ranking.
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4. SFRI: Calculations
Overall Fiscal Responsibility Score is composed of 3 equal parts:
• Fiscal Space (Current Position)
Sovereign Debt-to-Debt Ceiling, Total Debt-to-Debt Ceiling, and Foreign Held Debt
• Fiscal Path (Fiscal Trend/Future)
Projected future levels of debt and implied fiscal space
• Fiscal Governance (Rules responsible for Past, Present, & Future)
– Fiscal Rules
Debt limits, Deficit Targets, Expenditure Rules, and Revenue Rules
– Fiscal Transparency
Open Gov. Policies, Autonomous Budget/Audit Process, Independent Forecasting
– Enforceability
Nature of: Monitoring Body, Enforcement Body, Enforcement Mechanism, and Media Visibility of
Rules
Compiled by TCAII.
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5. Selected Key Founding Principles
• Limited but effective Government.
• Individual liberty and opportunity
• Personal responsibility and accountability
• Rule of law and equal justice under the law
• Fiscal responsibility and intergenerational equity
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6. Growth of Government
Federal Spending
1800 2011 2040
2% 23.8% 36.8%
US GDP: $8.89 Projected US GDP: $14.65 Projected US GDP: $28.54
Billion Trillion Trillion
(Constant 2010 Dollars) (Constant 2010 Dollars) (Constant 2010 Dollars)
Source: Historical Statistics of the United States, Millennial Edition On Line, Cambridge 2006; CBO, The Budget and Economic Outlook: An Update, August 2011;
CBO, CBO’s Long-Term Budget Outlook, Supplemental Data, June 2011. Compiled by TCAII.
Note: Federal Spending for 2040 is based on the Alternative Scenario Estimates.
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7. Composition of Federal Spending
(% of Total Outlays)
Defense Other Discretionary Medicare and Medicaid
Social Security Other Mandatory Net Interest
7% 6.4%
19.4%
12%
16.5%
42%
15%
16.6%
20.1%
4%
20% 21.0%
1970 2011
$944 Billion $3.49 Trillion
Source: CBO, Historical Tables. OMB, The Budget Fiscal Year 2013 Compiled by TCAII. Note: All dollar amounts are in constant 2010 dollars. .
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8. Federal Financial Hole
(For Fiscal 2000 and 2011)
In Trillions of Dollars 2000 2011
Explicit Liabilities $ 6.9 $17.4
•Publicly Held Debt 3.4 10.1
•Military & Civilian Pensions & Retiree Health 2.8 5.8
•Other Major Fiscal Exposures 0.7 1.5
Commitments & Contingencies 0.5 1.9
E.g. Pension Benefit Guaranty Corporation, Undelivered Orders
Actuary's
Trustees’
Alternative
Estimates
Scenario
Social Insurance Promises 13.0 33.7 46.1
•Future Social Security Benefits 3.8 9.2 9.2
•Future Medicare Benefits 9.2 24.7 37.0
Future Medicare Part A Benefits 2.7 3.3 8.5
Future Medicare Part B Benefits 6.5 13.9 21.0
Future Medicare Part D Benefits - 7.5 7.5
Total $20.4 $53.2 $65.5
SOURCE: Data from the Department of Treasury, 2011 Financial Report of the United States Government. Compiled by TCAII.
NOTE: Estimates for the Actuary’s Alternative Scenario are found in note 26 of the 2010 Financial Report of the United States. Future liabilities are discounted to present value based on a real
interest rate of 2.9% and CPI growth of 2.8%. The totals do not include liabilities on the balance sheets of Fannie Mae, Freddie Mac, and the Federal Reserve. Assets of the U.S. government not
included.
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9. Our Fiscal Future
Revenues
50%
45% 8%
Other
40% Spending
35% 14%
8% Federal
Percentage of GDP
30% Healthcare
Outlays
25%
9% 11% 6%
20%
Social Security
12%
15% 8% 6%
10%
6% 19%
6%
Net
5% 11%
5% Interest
5%
0% 1%
2011 2024 2040 2055
Source: Congressional Budget Office, Long-Term Budget Outlook (June 2011), Summary Data for the Alternative Fiscal Scenario. Compiled by TCAII.
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10. Historical Debt Burden
(1800 through 2011)
Intragovernmental Debt Public Debt
140%
120%
100%
Percentage of GDP
80%
60%
40%
20%
0%
1800 1810 1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Source: Congressional Budget Office, Long Term Budgetary Outlook 2009, Supplemental Data; Office of Management and Budget, Historical Tables, Table 7.1- Federal Debt
at the End of the Year 1940 through 2016. Compiled by TCAII.
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11. Growing Foreign Dependency
Foreign Held Debt
1970 1990 2011
Total Public Debt Total Public Debt Total Public Debt
$283 Billion $2,412 Billion $10,127 Billion
5% 19% 46%
Source: Office of Management and Budget, Historical Tables; Department of Treasury, Major Holders of Treasury Securities, October 18, 2011, Debt to the Penny.
Compiled by TCAII.
Note: 2011 public debt and foreign held public debt reflect data from September 2011.
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12. Burden of Public Health Care
10%
9%
8%
Public Expenditures on Healthcare
7%
As a Percentage of GDP
6%
5%
4%
3%
2%
1%
0%
OECD Average Canada France Germany Italy Sweden United Kingdom United States
Public Health Expenditures as a Percentage of Total Health Expenditures
72.2% 70.6% 77.9% 76.9% 77.9% 81.5% 84.1% 47.7%
Source: OECD, Health Data, 2011. Compiled by TCAII.
Note: Based on 2009 expenditures.
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13. Comparative Health Costs
9,000
$7,960
8,000
The United States spends more than double the OECD average with below average
health care results.
7,000
Per Capita Healthcare Costs
6,000
U.S. Dollars
5,000
$4,363 $4,218
$3,978
4,000 $3,722
$3,361 $3,487
$2,983
3,000
2,000
1,000
0
OECD Average Canada France Germany New Zealand Sweden United Kingdom United States
Source: Organization for Economic Cooperation and Development, OECD Health Data 2011. Compiled by TCAII.
Note: Per capita health expenditures for 2009 uses purchasing power parity for all dollar amounts.
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14. Relative Defense Spending
800
The United States spent more on defense in 2010 than the 15 highest defense budget combined.
$712 Billion
700
$673Israel
Billion
Turkey
Canada
600 Australia
South Korea
In Billions of Constant 2010 Dollars
Brazil
Italy
500
India
Germany
400
Saudi Arabia
U.S.A
Japan
300
Russia
France
200
United Kingdom
100
China
0
SOURCE: Stockholm International Peace Research Institute, SIPRI Military Expenditure Database 2011; Bureau of Labor Statistics, Inflation Calculator. Compiled by TCAII.
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15. Overall Infrastructure Ranking
OECD
OECD Rank Country (World Rank) Rank Country (World Rank)
1 Switzerland (1) 18 United Kingdom (28)
2 France (3) 19 Czech Republic (29)
3 Denmark (5) 20 Estonia (31)
4 Finland (6) 21 Chile (32)
5 Iceland (7) 22 Slovenia (33)
6 Austria (8) 23 Turkey (34)
7 Germany (10) 24 Australia (37)
8 Sweden (11) 25 Israel (38)
9 Portugal (12) 26 Norway (42)
10 Japan (13) 27 Hungary (46)
11 Netherlands (14) 28 New Zealand (50)
12 Canada (15) 29 Ireland (53)
13 Luxembourg (16) 30 Greece (62)
14 Belgium (17) 31 Mexico (73)
15 Korea (18) 32 Slovak Republic (74)
16 Spain (22) 33 Italy (79)
17 United States (24) 34 Poland (87)
Source: World Economic Forum, World Competitiveness Report, 2011. Compiled by TCAII.
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16. G-7 Corporate Tax Rates
Statutory Corporate Rate Effective Marginal Corporate Rate
50%
45%
42.9%
40%
39.5% 39.2%
35%
34.4%
33.0%
32.3%
30% 31.3%
30.2%
29.2%
28.3%
27.6%
25% 26.0%
24.0%
23.3%
20%
15%
10%
5%
0%
Canada France Germany Italy Japan United Kingdom United States
Source: U.S. Department of the Treasury, Office of Tax Analysis. Compiled by TCAII.
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17. Comparative Debt Burdens
2011 2016
180%
160%
140%
120%
Percentage of GDP
100%
80%
60%
40%
20%
0%
Greece Italy Portugal Ireland Spain United Kingdom United States
SOURCE: International Monetary Fund, World Economic Outlook Database, Sept. 2011. Medicare and Social Security Trustees Reports, 2011.Compiled by TCAII.
Note: Data for 2011 and 2016 are estimates. Gross debt consists of all liabilities that require payment or payments of interest and/or principal by the debtor to the creditor at a date or
dates in the future. This includes debt liabilities in the form of SDRs, currency and deposits, debt securities, loans, insurance, pensions and standardized guarantee schemes, and other
accounts payable. Thus, all liabilities in the GFSM 2001 system are debt, except for equity and investment fund shares and financial derivatives and employee stock options.
Debt can be valued at current market, nominal, or face values (GFSM 2001, paragraph 7.110). United States gross debt includes intra-governmental holdings of debt (black bars) and are illustrative.
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18. Best Solution or (B.S.) Test
Fiscal Reforms Must Pass a B.S. Test:
1) Do they make economic sense?
2) Are they socially equitable?
3) Are they culturally acceptable?
4) Do they pass a math test?
5) Are they politically feasible?
6) Can they achieve significant bipartisan support?
Compiled by TCAII.
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19. Phrases of the Political Trade
There are a number of phrases that politicians use that differ from
the general public’s understanding and usage:
– “Trust Funds”
– “Spending Cuts”
– “Public Investment”
– “Military Requirements”
– “Middle Class”
Compiled by TCAII.
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20. Management 101
for Government
• What should government do?
• What level of government should do it?
• What type of government approaches should be used?
• Who should do the work?
• What are the key goals and objectives?
• How do you measure success?
• How should it be paid for?
• Are you applying best practices and lessons learned?
• Is it future focused results oriented, affordable and sustainable?
Compiled by TCAII.
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21. Key European Decisions
The European Union must rationalize itself. It should focus on
the following:
1. Maximize the European Free Trade Area
2. Rationalize the Euro Zone
3. Have a coordinated fiscal policy, with enforcement
mechanisms
4. Expand ECB authority in a crisis
Compiled by TCAII.
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22. International Standards
There needs to be international standards for Accounting,
Reporting, and Audit that are principle based and keeps politics
out of professional standard-setting:
This will reduce complexity
Increase transparency and consistency
Make cross border comparisons easier
Improve credibility
Compiled by TCAII.
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23. IFAC Reforms Goals
The 2003 IFAC reforms were designed to:
– Strengthen standard-setting processes
– Achieve convergence to high-quality international standards in
auditing, professional ethics, and accountancy education, as a means to
support effective and efficient capital markets—leading to lower costs
of capital, higher investment, greater innovation, and more job
opportunities
– Enhance performance by the accountancy profession
– Build investor confidence in financial reporting, in the work of
auditors, and in financial securities markets worldwide
– Ensure that the international accountancy profession is responsive to
the public interest
Compiled by TCAII.
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24. Needed Government
Financial Reporting Reforms
• Needed Accounting/Financial Reporting Reforms
– Government’s should be required to record a liability for all debt, including
intra-governmental debt where an exchange has occurred (e.g., Social Security
and Medicare “trust funds” for the U.S.)
– Additional transparency for tax expenditures and off-balance sheet obligations
– Fiscal sustainability and intergenerational equity
– Inter-governmental dependency
– Performance related information
– Absolute, trend and comparative information
• Needed Audit Reforms
– Report on the system of internal controls
– Greater use of “emphasis paragraphs”
– Differentiate responsibility for projection and performance information
Compiled by TCAII.
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25. What Can You Do?
• Test your fiscal knowledge by going to
www.fiscalIQ.net
• To educate others use this Fiscal Facts presentation and
notes which can be found on TCAII’s website.
• For further information about:
– Non-partisan facts and possible solutions on fiscal sustainability and
responsibility
Sign up at
The Comeback America Initiative’s website
www.TCAII.org
Follow us on Twitter @DaveWalkerCAI and Like us on Facebook
Compiled by TCAII.
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