Sovereign Debt Challenges, Implications, and              Needed Actions         Global Seminar on the Sovereign Debt Cris...
Common International ChallengesMost industrialized nations will be facing similar challenges in thecoming decade:         ...
Sovereign Fiscal Responsibility Index                                                                (As of September 2011...
SFRI: CalculationsOverall Fiscal Responsibility Score is composed of 3 equal parts:• Fiscal Space (Current Position)      ...
Selected Key Founding Principles• Limited but effective Government.• Individual liberty and opportunity• Personal responsi...
Growth of Government                                                                   Federal Spending                   ...
Composition of Federal Spending                                                            (% of Total Outlays)        Def...
Federal Financial Hole                                                                    (For Fiscal 2000 and 2011)      ...
Our Fiscal Future                                                                                      Revenues           ...
Historical Debt Burden                                                                        (1800 through 2011)         ...
Growing Foreign Dependency                                                                      Foreign Held Debt         ...
Burden of Public Health Care                             10%                                    9%                        ...
Comparative Health Costs                              9,000                                                               ...
Relative Defense Spending                                         800                                               The Un...
Overall Infrastructure Ranking                                                                                   OECDOECD ...
G-7 Corporate Tax Rates                               Statutory Corporate Rate                                          Ef...
Comparative Debt Burdens                                                                          2011                    ...
Best Solution or (B.S.) TestFiscal Reforms Must Pass a B.S. Test:        1) Do they make economic sense?        2) Are the...
Phrases of the Political TradeThere are a number of phrases that politicians use that differ fromthe general public’s unde...
Management 101                           for Government• What should government do?• What level of government should do it...
Key European DecisionsThe European Union must rationalize itself. It should focus onthe following:                     1. ...
International StandardsThere needs to be international standards for Accounting,Reporting, and Audit that are principle ba...
IFAC Reforms GoalsThe 2003 IFAC reforms were designed to:        – Strengthen standard-setting processes        – Achieve ...
Needed Government                      Financial Reporting Reforms• Needed Accounting/Financial Reporting Reforms        –...
What Can You Do?• Test your fiscal knowledge by going to  www.fiscalIQ.net• To educate others use this Fiscal Facts presen...
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Honorable David Walker, Founder and CEO, the Comeback America Initiative and Former Comptroller General of the US - IFAC Seminar Presentation

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Sovereign Debt Challenges and the Implications for the Accounting Profession

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Transcript of "Honorable David Walker, Founder and CEO, the Comeback America Initiative and Former Comptroller General of the US - IFAC Seminar Presentation"

  1. 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. 2. Common International ChallengesMost industrialized nations will be facing similar challenges in thecoming decade: Rapidly aging populations Growing healthcare costs Financial instability Slowing economic growth Unemployment and underemployment Growing inequality in society Deficit and debt challengesCompiled by TCAII. 2
  3. 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. 3
  4. 4. SFRI: CalculationsOverall 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 RulesCompiled by TCAII. 4
  5. 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 5
  6. 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. 6
  7. 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 TrillionSource: CBO, Historical Tables. OMB, The Budget Fiscal Year 2013 Compiled by TCAII. Note: All dollar amounts are in constant 2010 dollars. . 7
  8. 8. Federal Financial Hole (For Fiscal 2000 and 2011) In Trillions of Dollars 2000 2011Explicit 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 1.5Commitments & Contingencies 0.5 1.9 E.g. Pension Benefit Guaranty Corporation, Undelivered Orders Actuarys Trustees’ Alternative Estimates ScenarioSocial 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 7.5Total $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. 8
  9. 9. Our Fiscal Future Revenues 50% 45% 8% Other 40% Spending 35% 14% 8% FederalPercentage 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. 9
  10. 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. 10
  11. 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. 11
  12. 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. 12
  13. 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. 7,000Per 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. 13
  14. 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 0SOURCE: Stockholm International Peace Research Institute, SIPRI Military Expenditure Database 2011; Bureau of Labor Statistics, Inflation Calculator. Compiled by TCAII. 14
  15. 15. Overall Infrastructure Ranking OECDOECD 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. 15
  16. 16. G-7 Corporate Tax Rates Statutory Corporate Rate Effective Marginal Corporate Rate50%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 StatesSource: U.S. Department of the Treasury, Office of Tax Analysis. Compiled by TCAII. 16
  17. 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. 17
  18. 18. Best Solution or (B.S.) TestFiscal 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. 18
  19. 19. Phrases of the Political TradeThere are a number of phrases that politicians use that differ fromthe general public’s understanding and usage: – “Trust Funds” – “Spending Cuts” – “Public Investment” – “Military Requirements” – “Middle Class”Compiled by TCAII. 19
  20. 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. 20
  21. 21. Key European DecisionsThe European Union must rationalize itself. It should focus onthe 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 crisisCompiled by TCAII. 21
  22. 22. International StandardsThere needs to be international standards for Accounting,Reporting, and Audit that are principle based and keeps politicsout of professional standard-setting: This will reduce complexity Increase transparency and consistency Make cross border comparisons easier Improve credibilityCompiled by TCAII. 22
  23. 23. IFAC Reforms GoalsThe 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 interestCompiled by TCAII. 23
  24. 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 informationCompiled by TCAII. 24
  25. 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 FacebookCompiled by TCAII. 25

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