TARP: Offset or Gimmick?

In his speech today, President Obama proposed reducing the amount of money available in the TARP fund to pay for the new stimulus measure. When TARP was created, Congress authorized the Treasury to use up to $700 billion for purchasing troubled financial assets. Currently, about $300 billion remains available, and so policymakers could technically rescind part of that money to pay for new stimulus costs.

But reducing $1 of available TARP funds does not mean $1 of deficit reduction. For budgetary purposes, TARP is scored on a risk-adjusted present value basis. The calculation itself is quite complicated (see here for a more detailed explanation), but it essentially aims to estimate the net cost of any TARP spending to the deficit, based on the likelihood the loans and investments will be paid/bought back.

In its March baseline, CBO estimated roughly about 50 percent subsidy-rate, meaning it believed that around half of the program’s costs would be recovered. So that meant the $700 billion program would increase the deficit by around $350 billion.

Now, Congress wants some of this money back to use it for other purposes. And under normal scoring rules, CBO would let Congress use the money with that 50 percent subsidy rate, so reducing available TARP funds by $200 billion, for example, would give Congress about $100 billion in offsets.

The problem, though, is that the subsidy rate is completely out-of-date. Now, CBO estimates a subsidy rate closer to 35 percent. And on top of that, its August baseline estimates that $100 billion of the remaining money will not even be spent in the first place.

How can you offset a new spending program with money that would not have been spent anyway?

In fact, over the next decade, CBO projects TARP to impact the deficit by just over $100 billion total – and a chunk of that money has already been promised.

You can’t squeeze blood out of a turnip, and you shouldn’t abuse budgetary rules to pretend you can.

We applaud policymakers for trying to pay for new stimulus programs. But they should do it right, rather than using budget gimmicks and subsidy rate games to hide the true deficit impact.