Mexico floods will not affect proposed 2013, 2014 budget deficits -government

MEXICO CITY, Sept 28 | Sat Sep 28, 2013 3:13pm EDT

MEXICO CITY, Sept 28 (Reuters) - Mexico's proposed budget deficit goals for this year and 2014 will not be affected by some of the worst storm damage in decades, the Finance Ministry said on Saturday.

Mexican President Enrique Pena Nieto had previously said Congress would revise its proposed 2014 budget in the wake of the storms this month, which killed at least 147 people and left large swaths of the country under water, buckling bridges and destroying highways.

However, the Finance Ministry said the government would now shuffle existing funds to pay for the cleanup - estimated by Mexico's insurers' association to top 75 billion pesos ($5.7 billion), the highest bill ever from a natural disaster in the country.

"The costs associated with reconstruction will be met with available resources through the reorientation of some funds, but without affecting in any way the public deficit proposed for this year, or next," the ministry said in a statement.

The government has a 12.5 billion peso emergency fund, but will seek to divert 5 billion pesos from road-paving to spend on reconstruction, it ministry said.

Mexico's government will therefore stick to its aim, announced earlier this month, of widening the budget deficit next year to 1.5 percent of gross domestic product.

The government has also asked Congress to approve a deficit of 0.4 percent of GDP for 2013 after an economic slowdown this year hurt government revenue. Congress had passed a balanced budget for 2013 last year.

Finance Minister Luis Videgaray said on Friday that tropical storms Ingrid and Manuel will likely knock off about 0.1 percentage point from growth in 2013 and would temporarily boost inflation by no more than 0.15 percentage points.

Videgaray also said the economy, which contracted between April and June, would see stronger growth in the third quarter.

Mexico's economy is heading for its weakest performance since 2009, barely growing in the first half of the year and sparking fears that the country is flirting with recession.

Pessimism about prospects for Latin America's second biggest economy has increased due to the flooding, a poll of analysts this week by Reuters showed. ($1 = 13.17 Mexican pesos) (Reporting by Gabriel Stargardter; Editing by Simon Gardner and Christopher Wilson)

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How the Government Calculates the Cost of Student Loans

Analysts disagree over the method used to calculate student loan profits and costs.

A couple of weeks ago, the Student Loan Ranger detailed some of the proposals Congress is pondering to provide short- and long-term fixes to the imminent doubling of interest rates on subsidized federal direct loans. Part of that debate is data released last month by the Congressional Budget Office that shows a fiscal year 2013 "profit" of $50.6 billion for the Department of Education.

But it's not as simple as finding a fair way to help students by lowering interest rates. Some analysts argue that the government is using an inaccurate accounting method that vastly overestimates the amount the government will make both in the coming fiscal year and beyond.

[Learn more in our College Loan Center.]

In fact, they argue, the government will lose money in the long run so it should keep interest rates the same or even raise them. As this Congressional Budget Office publication explains, the current estimates that show a government profit are based on principles established by the Federal Credit Reform Act of 1990.

The publication states first "the cost of a student loan is recorded in the federal budget during the year the loan is disbursed, taking into account the amount of the loan, expected payments to the government over the life of the loan and other cash flows." Items like the probability of default and the recovery rate are accounted for in this part of the equation.

Next, a discount rate is subtracted. A discount rate allows a calculation of gain or loss in today's dollars by taking into account market risk and the idea that money available now is worth more than the same amount of money available in the future.

[Find out the perks, pitfalls of simplifying student loan repayment.]

In the current calculation, the discount rate is simply the interest rate on U.S. Treasury securities. That is, it is the cost to the government of obtaining the funds through Treasury borrowing.

Since Treasury bills are one of the world's safest investments, using them as a discount rate doesn't take risk into account – that's been done in the first step – but does account for the lower value of money obtained later.

It's easy to see why federal student loans are projected to make a lot of money using this calculation: subtracting the low current interest rate for Treasury bills from fixed student loan interest rates of 6.8 to 7.9 percent – assuming the 3.4 percent rate on subsidized loans does double July 1 – results in a net gain for the government. In fact, under this accounting method, the budget office calculates that the government will net about $184 billion from 2013 to 2023.

However, some analysts think that this accounting is flawed because it does not sufficiently reflect risk, including, for example, the risk of default. They argue for a "fair-value" approach that would use a market-based discount rate.

In other words, the discount rate would not be based on the government's cost of borrowing but on the higher interest rate the private sector pays, which reflects a much higher degree of market risk.

Using the higher discount rate in the fair-value approach leads to far different results. The CBO projects the federal direct loan program would cost the federal government $95 billion between 2013 and 2023 instead of earning $184 billion.

That's a whopping difference – and implies far different student loan policies. So which calculation, and which policies, should be chosen?

[See how the Student Loan Fairness Act could benefit borrowers.]

Ultimately, the Student Loan Ranger feels that the current accounting method – which has worked well for decades – is the correct one for a few reasons, many of which are articulated in a report by the Center for American Progress.

Corporations and individuals are, and should be, risk averse because the consequences of unanticipated risks can be devastating to them. They should also, for similar reasons, want to ensure they make a profit. The fair-value approach adds value in that context.

But the federal government should be risk neutral and is not aiming to make a profit. The fair-value approach would drive up the budgetary cost of the student loan program in order to account for eventualities that are unlikely to occur.

This would be of little value because unlike a private entity, the federal government – with its far greater resources and ability to print money – is well-equipped to handle those eventualities. And the downside of increasing the budgetary cost of the student loan program is considerable, because it will mean there is less money available for other valuable programs such as Pell Grants.

Instead, it should focus on budgeting accurately and ensuring its money is spent wisely. A move to fair-value accounting would burden student loan borrowers with unnecessarily high interest rates for the foreseeable future.

Isaac Bowers is a senior program manager in the Communications and Outreach unit, responsible for Equal Justice Works's educational debt relief initiatives. An expert on educational debt relief, Bowers conducts monthly webinars for a wide range of audiences; advises employers, law schools, and professional organizations; and works with Congress and the Department of Education on federal legislation and regulations. Prior to joining Equal Justice Works, he was a fellow at Shute, Mihaly & Weinberger LLP in San Francisco. He received his J.D. from New York University School of Law.

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Bridging the Gap? Government Subsidized Lending and Access to Capital

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Oxford Journals Contact Us My Basket My Account Review of Corporate Finance Studies About This Journal Contact This Journal Subscriptions View Current Issue (Volume 2 Issue 1 March 2013) Archive Search Oxford Journals EconomicsSocial Sciences Review of Corporate Finance Studies Volume 2 Issue 1 Pp. 98-128. Bridging the Gap? Government Subsidized Lending and Access to Capital Kristle Romero Cortés

Federal Reserve Bank of Cleveland Josh Lerner

Harvard University Send correspondence to Kristle Cortés, Federal Reserve Bank of Cleveland, 1455 East 6th St., Cleveland, OH 44114, USA. E-mail: kristle.cortes{at}researchfed.org. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Cleveland or the Federal Reserve System. All errors and admissions are our own. Abstract The consequences of providing public funds to financial institutions remain controversial. We examine the Community Development Financial Institution (CDFI) Fund’s impact on credit union activity, using hitherto little studied U.S. Treasury data. The CDFI Fund grants increase lending at credit unions by 3%. For every dollar awarded, 45 additional cents are loaned out to borrowers in the first year, and up to an additional $1.60 is loaned out within three years. Delinquent loan rates also increase slightly. Our panel results are supported by a broadband regression discontinuity analysis. Politics does not seem to play a role in allocating funding. (JEL G28)

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