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set limits on new direct loan obligations and loan guarantee commitments for all but three of the programs financed through the FFB (see Table 6).


Correcting the budgetary treatment of the FFB will improve the unified budget. It will make the unified budget more comprehensive and improve accountability by recording transactions in their appropriate places. The unified budget will become a better measure of the cash flow of the federal government, and of federal borrowing requirements. Improving the unified budget treatment of lending is, however, only a partial solution to the budget treatment of credit programs.

The unified budget is an inadequate device to control federal credit activities in several respects: first, it understates program levels; second, it overstates the long-term costs of credit programs since most loans will ultimately be repaid; and finally, it does not present clearly the long-run costs arising from subsidies and loan defaults.

The unified budget understates program levels for direct federal loans by counting only net lending--that is, new loans less repayments. The costs of guaranteed loans are recorded in the budget only when the borrowers default. To some extent, this shortcoming is addressed by the credit budget,



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Congressional Budget Office, An Analysis of the President's
Credit Budget for Fiscal Year 1984 (March 1983).

All programs limited by appropriation also were authorized.
The current budget treatment of the Tennessee Valley Authority
guarantees overstates program levels because it records refinancing of
short-term debt as new loans. The 1985 budget will remove
refinancing from the totals. CBO estimates that new loans for 1983
will be $195 million in contrast to the $5.6 billion shown.

which the Budget Committee have implemented on an experimental basis by establishing nonbinding limits on new direct loan obligations and loan guarantee commitments. The credit budget will still be necessary even after the FFB is reformed. I believe that credit budget procedures should be fully incorporated into the Congressional Budget Act.

Neither the unified budget nor the credit budget, however, accurately describes the relative cost to the taxpayer of spending, lending, and guarantees. Direct federal spending for purchases, grants, or income transfers has a different cost from direct loans of federal funds, most of which will be repaid, and from federal guarantees of private transactions, which are contingent costs to taxpayers. A dollar of income transfers is not equal to a dollar of direct loans or a dollar of guaranteed private borrowing in the amount of income generated or in long-term federal financing requirements. Since these are important cost criteria for deciding how best to deliver a government service, the absence of a common metric for these different programs can--and probably has--distorted choice. CBO has a study in progress on the relationship between spending and lending.

In closing, I see three changes as needed to improve the budget treatment of credit programs: recording agency activities financed by the FFB in the originating agencies' budgets, implementation of a Congressional credit budget, and further study of the relationship between spending and lending programs. We look forward to working with you on these issues.

Senator TRIBLE. Thank you for

your statement.


Your statement, I think, is especially helpful in that it presents in a very understandable fashion the activities of the Federal Financing Bank, something that is not easy to do, I might add.

Let me pose the following question. Some argue that Federal loans, such as the loans that we would place on budget through this legislation, should not be in the budget at all as a matter of budget principle.

How would you respond to that assertion?

Mr. PENNER. The main attempt of the unified budget, as I see it, is to show the transactions of the Federal Government on a cash basis so that we know exactly how much financing we will have to do through the sale of ordinary Government debt and through other devices.

Direct loans have to be financed by the issue of Federal debt. In that sense they are exactly like any other outlay of the Government.

It is true that they have different economic effects, and they look differently grossed up than they do on a net basis. The latter problem can be dealt with by having a separate credit budget.

The former problem, of course, is more difficult. There we need a lot more analytic information. There are differences between two different outlays as well. An outlay for a fighter plane is clearly different from an outlay for social security. We don't provide detailed analyses of these differences when we are compiling the unified deficit. We just can't go that far.

But the basic point is that a unified budget deficit is supposed to show us what we have to finance; without direct loans in the deficit number, it doesn't do that.

Senator TRIBLE. I appreciate that statement because I agree that the argument about loans in the unified budget is an argument to provide additional information, supplemental information, on the true cost of those programs rather than excluding them from the unified budget, and I think that is a point that you have made in your response.

Senator Proxmire.

Senator PROXMIRE. Dr. Penner, it is a pleasure to have a chance to meet you. I have read your writings for years. I have admired your judgment. It has been very helpful to me, as I am sure you have been to many Members of the Congress.

Mr. PENNER. Thank you, Senator.

Senator PROXMIRE. From the standpoint of the effect of the economy and the credit markets, do you think there is any appreciable difference between a 100-percent guaranteed obligation sold in the securities market by a Federal agency and the sale of Treasury security?

Mr. PENNER. Very, very little, sir. It is a fact that in the past 100-percent guarantee issues have traded at slightly higher interest rates than ordinary Federal debt.

Senator PROXMIRE. Why shouldn't they have the same budget treatment?

Mr. PENNER. I think 100-percent guarantees sold to the FFB certainly should and, indeed, that is what we are talking about. When the FFB buys them, they become direct loans, and should be included in the unified budget for the purpose of showing how much debt the Federal Government has to raise.

Senator PROXMIRE. My problem is that new guarantee issues in this bill could go directly to the market; they wouldn't be counted in the budget.

Mr. PENNER. Well, as Mr. Wright stated previously, ideally you would like to control 100-percent guarantees by insisting on their sale to the FFB, so that they would, in essence, become direct loans.

Senator PROXMIRE. Do you agree with Mr. Wright that that should be done?

Mr. PENNER. I certainly agree with his intent. I think it will be difficult to accomplish legislatively.

Senator PROXMIRE. It wouldn't be accomplished legislatively because of the political pressures?

Mr. PENNER. Yes, simply because there would be pressure when inventing a new program perhaps to state in the law that they shouldn't be sold to the FFB.


Senator PROXMIRE. Toward the end of your remarks, you say: "A dollar of income transfers is not equal to a dollar of direct loans or a dollar of guaranteed private borrowing in the amount of income generated or in long-term Federal financing requirements.'

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Then you say: "CBO has a study in progress on the relationship between spending and lending."

Haven't we been studying this for a long, long time? Is there likely to be any finding that would give us any basis for policy changes?

Mr. PENNER. That is always hard to predict, sir.

Senator PROXMIRE. What would be the possibilities?

Mr. PENNER. I think what we really want to find out in the longer term is how these various direct lending and guarantee programs do affect credit markets in some detail; that is to say, how effective are they at actually transferring real resources to the preferred activity?

While you suggested that maybe this has been studied a lot in the past, I would argue to the contrary, actually. Although there have been a few studies, it is remarkable the extent to which the academic community has ignored the credit programs of the Federal Government, as opposed to numerous studies of tax policy or other spending policy.

I would attribute that lack largely to the fact that credit programs are so well hidden in the budget. Their true importance is not a matter of real public consciousness, even in the academic community.

Senator PROXMIRE. When do you expect to have this study available?

Mr. PENNER. I am not actually sure about it. Do we have a deadline for the study?

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