Pied Piper Finance?

Assume a government wants to do a big infrastructure project – resurfacing a major highway and repairing bridges along the route. This is not a toll road and that will not change. The government finds a contractor who will do the work. However, the government does not want to pay all the cost upfront. Therefore the government’s overseer of the project – call him “pied piper” -- finds a private investor (PI), who will borrow a large part, say 85%, of the money to cover the construction cost. PI will put up the remaining 15%. The pied piper promises to pay PI enough over several years so that PI can pay back the loan, plus some more. How much more might depend on meeting deadlines and how much actual construction costs turn out to be compared to the amount budgeted. If construction is done in less time and/or costs come under budget, PI will receive more from the government. If construction is done in more time than expected and/or there are cost overruns, PI will receive less from the government. In other words, incentives are attached to PI’s 15% equity stake.

Since the government doesn’t borrow – PI does that – the project will not increase the government’s debt or any deficit it has initially, under current cash-based public accounting practice. However, it probably will over time when the payments to PI come due, whenever the government does not have enough cash on hand at the time to make said payments.

This is off-budget treatment by the government. It is what the federal government does already regarding Social Security and Medicare. It is obligated to make payments to beneficiaries of these programs well into the future in excess of incoming revenue. But there is no corresponding debt for the excess of future outgo over future FICA tax revenues on a federal government balance sheet. The federal government doesn’t even publish a balance sheet. The only item that the government prominently presents that is a balance sheet component is the national debt. Cash deficits for the programs become debt as they materialize.

Is the scenario described above what Mr. Trump has in mind when this webpage says his infrastructure plan will be deficit-neutral? (This document by two Trump advisers had more detail.) Of course, it will be deficit-neutral early on when PI puts up the money, borrowing 85% of it. But when the government payments to PI commence, I will bet that it won’t remain deficit-neutral. The government will likely issue more Treasury debt to offset shortfalls, and that debt will be added to the national debt, which is now about $20 trillion. Depending on how the pied piper’s deal with PI is structured, those payments may not start coming due, and some may not be due anyway, until after Trump no longer occupies the oval office. Then they won’t be “his debts”; they will be the next president’s … and ours.

Or maybe much of the $1 trillion infrastructure plan would be pushed onto state and local governments. They already pay for a lot of infrastructure and get earmarked revenues to do so, e.g. fuel taxes for roads and bridges. Whatever is so pushed would be off-budget for the federal government. It might even be done selectively with strings attached. The state or local government is told it must contribute some of the money, e.g. raising it by issuing bonds. If they don’t, then they get no federal money.