The Federal Reserve Budget Gimmick In The House Transportation Bill
The transportation bill that the House passed last week contains a budget gimmick worth almost $60 billion (Wall Street Journal Paywall). The provision eliminates the $29.3 billion in the Federal Reserve's capital surplus account and prevents surplus funds going forward from being used to replenish the capital surplus account, even though the federal government would have eventually received all of the Federal Reserve's profits anyway. This results in one-time savings on paper but no actual change in the amount of revenue the Treasury would receive over the long term.
Both the Washington Post Editorial Board and Former Fed Chairman Ben Bernanke have recently written that the liquidation of the Federal Reserve’s surplus account leads to no actual government savings. As Bernanke says, "the additional highway spending would be reflected dollar for dollar in increased current and future budget deficits."
The surplus account is an off-budget account where the Federal Reserve holds treasury bonds as surplus capital. The money both provides working capital and is available to offset any losses from selling securities, which could be more relevant in the future as the Fed normalizes policy. Since this money is “off-budget,” transferring it to the Treasury appears to increase revenue.
The one-time transfer shuffles money between accounts inside the government, but does not actually help the budget or produce any new resources for the government to spend on other purposes. The long-term implication is that the capital fund will no longer receive interest (which would have eventually been transferred back to the Treasury as a remittance), so the Treasury will lose future interest.
While there are other policy and financial arguments against the liquidation of this fund, from a budgetary perspective this offset is a gimmick that only works because the Federal Reserve is excluded from the unified budget.
In 2002, GAO provided the most in-depth analysis of this action:
Reducing the Federal Reserve System capital surplus account would create a one-time increase in federal receipts, but the transfer by itself would have no significant long-term effect on the budget or the economy. Amounts transferred to the Treasury from reducing the capital surplus account would be treated as a receipt under federal budget accounting but do not produce new resources for the federal government as a whole.
The Congressional Budget Office concurred in its analysis of the bill on November 17th:
It is important to note that the transfer of surplus funds from the Federal Reserve to the Treasury has no import for the fiscal status of the federal government. Although federal budget accounting does not recognize additions to the Federal Reserve’s surplus account as revenues, such additions have the same effects as if they had instead been paid to the Treasury and were counted as revenues. If the surplus funds are held at the Federal Reserve and invested in Treasury securities, then the interest generated is remitted to the Treasury. If the surplus funds are transferred to the Treasury instead, they reduce the public debt and in turn the interest payments owed by the Treasury. Because the Treasury’s receipt of interest income from the Federal Reserve would be equivalent to the Treasury’s lower interest payments, where the funds reside has no economic significance, a transfer of those funds would have no effect on national savings, economic growth, or income.
The House transportation bill generally uses the same offsets as the Senate transportation bill from this summer, except this new gimmick replaces a different Federal Reserve offset that would have reduced the Federal Reserve's payments to member banks, an offset that had significant opposition from banks. The removed offset would have actually increased funds available to the government, and it was replaced with a gimmick. The House bill also removes an offset that would have continued increased fees for Fannie Mae and Freddie Mac.
We hope that the conference committee charged with reconciling the two different versions of the transportation bill will look for real offsets instead of relying on budget gimmicks.
Read more of our coverage of budget gimmicks in these recent blogs:
This blog was updated on 11/18/2015 to add a quote from the CBO from its analysis of the provision.