The Cost of Risk to the Government and Its Implications for Federal Budgeting

In this paper we revisit the question of the cost of risk to the federal government and its implications, both conceptual and practical, for federal budgeting. We emphasize the budgetary rationale for including the cost of risk, which is related to, but distinct from, the economic rationale for treating risk as a cost to the government. We survey the evidence on the cost of risk for several federal loan and insurance programs, and find that the cost of risk is significant. We conclude that when feasible, considerations of consistency and transparency favor using market values in budgeting.