NCPA - National Center for Policy Analysis

The Possibility of Federal Bankruptcy

February 10, 1997

A new report from the U.S. Treasury Department provides fresh ammunition for both opponents and proponents of a balanced budget amendment to the Constitution. The Consolidated Financial Statement of the United States Government for Fiscal Year 1995 contains a wealth of fiscal data that appear nowhere else. It presents a more complete picture of the government's financial position than the budget because it looks at the government's total assets and liabilities.

The report shows that as of September 30, 1995 the U.S. Government had a negative net worth of $4.5 trillion, an increase of over $500 billion from the year before.

Supporters of the balanced budget amendment will see this report as confirming their worst fears about out-of-control debt. With the federal government's total liabilities at $5.8 trillion, restraining the growth of debt by eliminating annual budget deficits is clearly essential to getting the government's financial house in order. On the other hand, opponents of the amendment can say that as important as the debt is, there are many other factors affecting the government's net worth that would be unaffected by a balanced budget amendment.

Indeed, both positions are correct.

  • In fiscal year 1995 the public debt -- the bonds sold by the Treasury Department to cover the budget deficit -- was 62 percent of the federal government's total liabilities.
  • However, the biggest increase came from miscellaneous liabilities incurred by various departments.
  • For example, in recent years the Defense and Energy departments have listed tens of billions of dollars in liabilities for environmental and nuclear power plant cleanups.
  • While the public debt rose by $171 billion between 1994 and 1995, the Treasury's listing of "other liabilities" increased by $174 billion.

Another important contributor to the big decline in the government's net worth in 1995 was a drop in the value of its assets.

  • According to the Treasury, the federal government's total assets fell by more than $53 billion in 1995.
  • This appears to have been largely due to a $73 billion fall in the value of the government's property, plant and equipment.

"When national debts have once been accumulated to a certain degree," Adam Smith wrote in The Wealth of Nations, "there is scarce, I believe, a single instance of their having been fairly and completely paid. The liberation of the public revenue, if it has ever been brought about at all, has always been brought about by a bankruptcy; sometimes by an avowed one, but always by a real one." According to the Treasury, we are closer to that day than we thought.

Source: Bruce Bartlett, Senior Fellow, National Center for Policy Analysis, February 10, 1997.


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