[Analytical Perspectives]
[Economic and Accounting Analyses]
[2. Stewardship: Toward a Federal Balance Sheet]
[From the U.S. Government Printing Office, www.gpo.gov]
Introduction
This chapter presents a framework for describing the financial
condition of the Federal Government and its performance as a steward of
publicly owned assets. Although parts of the presentation are similar in
appearance to a business balance sheet, they are not the same. The
Government's sovereign powers have no counterparts in the business
world, and its resources and responsibilities are broader than the
assets and liabilities found on a typical balance sheet. For this
reason, it is not possible to judge how well the Government is
discharging its stewardship obligations simply from an examination of
its formal assets and liabilities. A review of how national welfare and
security are faring in light of Government policy is also needed.
Because of the differences between Government and business, and the
serious limitations that exist in the available data, the material
presented below must be interpreted cautiously. The conclusions are
necessarily tentative and subject to future revision as the estimating
methods are improved and better data become available.
The presentation consists of three parts:
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Table 2-1. GOVERNMENT ASSETS AND LIABILITIES*
(As of the end of the fiscal year, in billions of 1995 dollars)
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1960 1965 1970 1975 1980 1985 1990 1993 1994 1995
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ASSETS
Financial assets:
Gold and Foreign Exchange............... 98 69 58 130 322 154 194 171 171 183
Other Monetary Assets................... 37 53 32 15 38 24 31 39 31 34
Mortgages and Other Loans............... 122 156 202 202 278 341 276 230 218 193
Less Expected Loan Losses............. -1 -2 -4 -9 -16 -16 -18 -24 -26 -22
Other Financial Assets.................. 58 77 64 64 84 108 166 202 190 188
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Subtotal.............................. 314 353 351 403 706 611 648 618 584 576
Physical Assets:
Fixed Reproducible Capital:
Defense............................... 826 842 839 683 586 694 771 782 780 744
Nondefense............................ 146 175 189 216 248 249 254 251 256 255
Inventories............................. 252 218 203 181 220 252 219 179 170 168
Nonreproducible Capital:
Land.................................. 87 121 151 234 296 318 315 241 237 235
Mineral Rights........................ 314 291 241 334 607 683 457 388 360 335
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Subtotal............................ 1,626 1,646 1,622 1,647 1,958 2,197 2,016 1,841 1,803 1,737
=============================================================================================================
Total assets...................... 1,940 2,000 1,972 2,050 2,664 2,808 2,664 2,459 2,387 2,313
LIABILITIES
Financial liabilities:
Currency and Bank Reserves.............. 220 241 267 272 273 290 348 396 422 437
Debt held by the Public................. 954 941 800 787 1,019 1,809 2,483 3,072 3,158 3,219
Miscellaneous........................... 28 29 31 33 44 55 82 59 60 61
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Subtotal.............................. 1,202 1,211 1,097 1,092 1,336 2,153 2,913 3,527 3,640 3,717
Insurance Liabilities:
Deposit Insurance....................... 0 0 0 0 2 9 67 13 8 4
Pension Benefit Guarantee Corp.......... 0 0 0 41 30 41 40 63 31 19
Loan Guarantees......................... 0 0 2 6 12 10 14 28 30 27
Other Insurance......................... 30 27 21 19 26 16 19 18 17 16
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Subtotal.............................. 30 27 23 67 69 76 140 122 86 66
Federal Pension Liabilities............... 734 930 1,104 1,256 1,707 1,693 1,625 1,563 1,541 1,513
=============================================================================================================
Total liabilities................... 1,966 2,168 2,225 2,414 3,112 3,922 4,678 5,212 5,267 5,296
Balance............................. -26 -169 -252 -364 -448 -1,114 -2,014 -2,753 -2,880 -2,983
Per capita (in 1995 dollars)...... -146 -867 -1,231 -1,686 -1,961 -4,658 -8,034 -10,635 -11,018 -11,312
Ratio to GDP (in percent)......... -1.1 -5.4 -6.9 -8.7 -9.0 -19.1 -30.4 -39.5 -39.9 -40.7
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*This table shows assets and liabilites for the Government as a whole, including the Federal Reserve System. Therefore, it does not break out separately
the assets held in Government accounts, such as social security, that are the obligation of specific Government agencies. Estimates for 1995 are
extrapolated in some cases.
THE FEDERAL GOVERNMENT'S ASSETS AND LIABILITIES
Table 2-1 summarizes what the Government owes as a result of its past
operations, along with the value of what it owns, for a number of years
beginning in 1960. The values of assets and liabilities are measured in
terms of constant 1995 dollars. For all of this period, Government
liabilities have exceeded the value of assets, but until the early 1980s
the disparity was relatively small, and for many years it deteriorated
only gradually.
In the late 1970s, a speculative run-up in the prices of oil, gold,
and other real assets temporarily boosted Federal asset values, but
since then they have declined.\2\ Currently, the total real value of
Federal assets is estimated to be about 20 percent greater than it was
in 1960. Meanwhile, Federal liabilities have increased by almost 170
percent in real terms. The sharp decline in the Federal net asset
position that began in the 1980s was principally due to the large
Federal budget deficits that began at that time along with the drop in
asset values. Currently, the net excess of liabilities over assets is
about $3 trillion or over $11,000 per capita.
\2\This temporary improvement highlights the importance of the other
tables in this presentation. What is good for the Federal Government as
an asset holder is not necessarily favorable to the economy. The decline
in inflation in the early 1980s reversed the speculative runup in gold
and other commodity prices. This reduced the balance of Federal net
assets, but it was good for the economy.
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Assets
The assets in Table 2-1 reflect a comprehensive list of the financial
and physical resources owned by the Federal Government. The list
corresponds to items that
[[Page 19]]
would appear on a typical balance sheet, but
it does not constitute an exhaustive catalogue of Federal resources. For
example, the Government's most important financial resource, its ability
to tax, is not reflected.
Financial Assets: At the end of 1995, the Federal Government's
holdings of financial assets amounted to about $570 billion. Government-
held mortgages and other loans (measured in constant dollars) reached a
peak in the mid-1980s. Since then, Federal loans have declined. The
holdings of mortgages, in particular, have declined sharply over the
last three years as the holdings acquired from failed Savings and Loan
institutions have been liquidated.
The face value of mortgages and other loans overstates their economic
value because of future losses and the interest subsidy on these loans.
These estimated losses are subtracted from the face value of outstanding
loans to obtain a better estimate of their economic worth.
Over time, variations in the price of gold have accounted for major
swings in this category. Since 1980, gold prices have fallen, and the
real value of U.S. gold and foreign exchange holdings have dropped by
over 40 percent. Last year, for the first time in several years, these
assets rose in value.
Reproducible Capital: The Federal Government is a major investor in
physical capital. Government-owned stocks of fixed capital amounted to
about $1.0 trillion in 1995. About three-quarters of this capital took
the form of defense equipment or structures. From 1960 to 1981, the net
stock of defense capital fell as a share of GDP, but between 1982 and
1991, the ratio generally held steady. Since 1991, the reduction in
defense purchases following the end of the Cold War has caused a decline
in the ratio of these stocks to GDP of about 1\1/2\ percentage point.
Non-reproducible Capital: The Government owns significant amounts of
land and mineral deposits. There are no official estimates of the market
value of these holdings. Researchers in the private sector have
estimated what they are worth, and these estimates are extrapolated in
Table 2-1. Private land values are about 20 percent lower than they were
at the end of the 1980s, although they have risen somewhat since 1993.
It is assumed here that Federal land has shared in this decline. Oil
prices have fluctuated but are lower now than they were five years ago.
These shifts are likely to have pulled down the value of Federal mineral
deposits.
Total Assets: The total real value of Government assets has declined
about 15 percent over the last 10 years, principally because of declines
in the real prices of gold, land, and minerals. At the end of 1995, the
Government's holdings of all assets were worth about $2.3 trillion.
Liabilities
The liabilities listed in Table 2-1 are analogous to those of a
business corporation. They include public debt, Federal trade credit,
and Federal pension obligations owed to its workers. Other potential
claims on Federal resources are not reflected.
Financial Liabilities: These amounted to about $3.7 trillion at the
end of 1995. The largest component was Federal debt held by the public,
amounting to over $3.2 trillion. This measure of Federal debt is net of
the holdings of the Federal Reserve System. Those holdings exceeded $380
billion in 1995. Although independent in its policy deliberations, the
Federal Reserve is part of the Federal Government, and for that reason
its assets and liabilities are included here in the Federal totals. In
addition to debt held by the public, the Government's financial
liabilities include $440 billion in currency and bank reserves, which
are mainly obligations of the Federal Reserve System, and about $60
billion in miscellaneous liabilities.
Guarantees and Insurance Liabilities: The Federal Government has
contingent liabilities arising from loan guarantees and insurance
programs. When the Government offers insurance, the initial outlays may
be small or, if a fee is charged, they may even be negative, but the
risk of future outlays associated with such commitments can be huge. In
the past, the cost of such risks was not recognized until after a loss
was realized. In the last few years, however, techniques have been
developed which permit estimates to be made of the accruing costs
arising from these commitments. The estimates are reported in Table 2-1.
The resolution of the many failures in the Savings and Loan and banking
industries have helped to reduce the losses in this category by about
half since 1990.
Federal Pension Liabilities: The Federal Government owes pension
benefits to its retired workers and to current employees who will
eventually retire. The amount of these liabilities is large. As of 1995,
the discounted present value of the benefits is estimated to have been
around $1.5 trillion.\3\
\3\These pension liabilities are expressed as the actuarial present
value of benefits accrued-to-date based on past and projected salaries.
The cost of retiree health benefits is not included. The 1995 liability
is extrapolated from recent trends.
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The Balance of Net Liabilities
The balance between Federal liabilities and Federal assets has
deteriorated over the past 15 years at a rapid rate. In 1980, the
negative balance was less than 11 percent of GDP. Currently, it is
estimated to be over 40 percent. The budget deficit has declined since
1992, however, and this has slowed the rate of decline in the net asset
position. If the Administration's budget proposals were to be enacted,
it is likely that the rate of decline in the net asset position would be
halted and even reversed.
[[Page 20]]
THE BALANCE OF RESOURCES AND RESPONSIBILITIES
The data summarized in Table 2-1 are useful in showing the
consequences of past Government policies, but Government's continuing
commitments to provide public services are not reflected there, nor can
the Government's broader resources be displayed in a table limited only
to the assets that it owns. A better way to examine the balance between
future Government obligations and resources is by projecting the overall
budget. The budget offers the most comprehensive measure of the
Government's financial burdens and its resources. By projecting total
receipts and outlays, it is possible to examine whether there will be
sufficient resources to support all of the Government's ongoing
obligations.
The Federal Government's responsibilities extend well beyond the five-
year window (or the expanded seven-year window) that has been the focus
of recent budget analysis and debate. There is no time limit on
Government's constitutional responsibilities, and programs like social
security are clearly expected to continue indefinitely.
This part of the presentation shows some alternative long-run
projections of the Federal budget that extend through the year 2050.
Forecasting the economy and the budget over such a long period is highly
uncertain. Future budget outcomes depend on a host of unknowns--
constantly changing economic conditions, unforeseen international
developments, unexpected demographic shifts, the unpredictable forces of
technological advance, and unknown future political preferences. Those
uncertainties increase the further projections are pushed into the
future. Even so, long-run budget projections are needed to assess the
full implications of current action or inaction.
It is evident even now that there will be mounting challenges to the
budget after the turn of the century. The huge baby-boom generation born
in the years after World War II is aging and will begin to retire in
little more than a decade. By 2008, the first baby-boomers will become
eligible for social security. In the years that follow there will be
serious strains on the budget because of increased expenditures for both
social security and Medicare. Long-range projections can offer a sense
of the seriousness of these strains and what may be needed to withstand
them.
The Long-Range Outlook for the Budget.--Since the Administration took
office there have been major changes in the long-run budget outlook. In
January 1993, the deficit was clearly on an unsustainable trajectory.
Had current policies continued unchanged the deficit would have steadily
mounted not only in dollar terms, but relative to the size of the
economy.\4\ The Omnibus Budget Reconciliation Act of 1993 (OBRA) changed
that. Not only did it produce a decline in the near-term deficit, but it
also brought down the long-term budget deficit as well. The policies in
OBRA were sufficient to maintain the deficit as a stable share of GDP
into the next century. This was a marked improvement over the long-term
outlook that the Administration inherited.
\4\Over very long periods when the rate of inflation is positive,
comparisons of dollar values are meaningless. Even the low rate of
inflation assumed in this budget will reduce the value of a 1995 dollar
by over 60 percent by 2030, and by almost 80 percent by the year 2050.
For long-run comparisons, it is much more useful to examine the ratio of
the deficit and other budget categories to the overall size of the
economy as measured by GDP.
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Despite this improvement, the long-run picture for the budget has
remained threatening. A GAO study released in 1992 concluded that, ``the
economic and political reality is that the nation cannot continue on the
current path'' of increasing long-run deficits. More recently, the 1994
report of the Bipartisan Commission on Entitlement and Tax Reform found
that there exists a ``long-term imbalance between the Government's
entitlement promises and the funds it will have available to pay for
them.'' On a narrower front, the annual trustees' reports for both the
social security and Medicare trust funds project a long-run actuarial
deficiency for these programs, and have for some time.
Economic and Demographic Projections.--Long-run budget projections
must be based on a long-run demographic and economic forecast.
Otherwise, it is impossible to estimate either future resources or the
potential claims on them. The forecast used here is an extension of the
Administration's economic projections described in the first chapter of
this volume. Inflation, unemployment and interest rates are assumed to
hold stable at their values in the year 2006. The real rate of economic
growth is determined by the expected growth of the labor force and labor
productivity. Productivity is assumed to continue rising at the same
rate as in the Administration's medium-term projections, approximately
1.2 percent per year.\5\
\5\This projection is stated in terms of the new chain-weighted
measures for GDP introduced by the Bureau of Economic Analysis in
January. On the unrevised basis, the projected growth rate is about one-
half percentage point higher.
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Population growth is expected to slow over the next several decades.
This is consistent with recent trends in the birth rate and an expected
decline in the proportion of women in their childbearing years. The
slowdown is expected to lower the rate of population growth from over 1
percent per year to about half that rate by the year 2020.\6\ Labor
force participation is also expected to decline as the population ages.
Together these trends imply a slowdown in real economic growth beginning
around the year 2005. The rate of real GDP growth slows to less than 1.5
percent per year after 2020 because of these trends.
\6\The population growth assumptions in these projections are based on
the intermediate assumptions in the 1995 social security trustees'
report for the period after 2006.
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The Deficit Outlook.--Chart 2-2 shows three alternative deficit
projections: a projection based on the policies in place prior to
enactment of OBRA, the current outlook before incorporating the
President's proposals to balance the budget, and a projection that shows
the long-run outlook assuming those proposals are adopted.
[[Page 21]]
The chart clearly illustrates the dramatic improvement
in the deficit that has
already been achieved and shows that more is possible, not only in the
short run but also in the long run. If the budget were balanced by 2002,
the task of achieving fiscal stability when the demographic bulge hits
after 2005 would be substantially reduced.
Along the pre-OBRA baseline, the deficit reaches over 40 percent of
GDP by the year 2030. OBRA reduced the deficit by extending the caps on
discretionary outlays; reforming Medicare; changing the rules for other
entitlement programs; and raising tax rates on upper-income taxpayers,
among other measures. A strengthening of the economic outlook also
improved the deficit projection following the enactment of OBRA. In the
current context, it is notable that OBRA lowered the deficit in the long
term as well as in the short term. This would require that the
discretionary savings achieved in 1994-1998 be preserved by holding the
level of real discretionary spending constant thereafter. A return to
the prior spending trajectory would partially undo these savings.
Similarly, the savings in Medicare and other entitlements would need to
be preserved.
Despite the improvement in the outlook after the passage of OBRA,
serious long-run problems remain. Beginning around the year 2010 and
continuing throughout the next several decades, the deficit would rise,
eventually reaching unsustainable levels. The initial increase is caused
by the expected retirement of the baby-boom generation that puts new
strains on social security and Medicare. By 2030, the deficit reaches 12
percent of GDP, and by 2050, it is 26 percent. Table 2-2 shows
alternative long-range budget projections for the major spending
categories. The table shows that the entitlement programs are the major
driving force behind the rise in the deficit in the long run.
Table 2-2. ALTERNATIVE BUDGET PROJECTIONS
(Percent of GDP)
----------------------------------------------------------------------------------------------------------------
1995 2000 2005 2010 2020 2030 2040 2050
----------------------------------------------------------------------------------------------------------------
Current outlook without a balanced budget:
Receipts...................................... 19.3 19.3 19.2 19.2 19.2 19.4 19.4 19.5
Outlays....................................... 21.7 21.3 21.2 21.8 25.0 30.9 37.4 45.3
Discretionary............................... 7.8 6.5 5.8 5.3 4.5 4.0 3.4 3.0
Mandatory................................... 10.6 11.7 12.4 13.4 16.4 19.7 21.5 22.5
Social security........................... 4.8 4.7 4.7 4.8 6.0 7.1 7.6 8.0
Medicare and Medicaid..................... 3.5 4.3 5.2 6.2 8.3 10.7 12.3 13.0
Net interest................................ 3.3 3.1 3.0 3.1 4.1 7.3 12.5 19.8
Deficit....................................... -2.3 -1.9 -2.0 -2.6 -5.8 -11.6 -18.0 -25.8
Federal debt held by public................... 51.4 50.8 49.5 50.5 68.4 121.0 207.8 327.0
Presidential policy (balanced budget):
Receipts...................................... 19.3 19.4 19.4 19.3 19.4 19.5 19.5 19.6
Outlays....................................... 21.7 19.7 18.7 18.1 18.5 20.0 20.5 20.6
Discretionary.............................. 7.8 6.0 5.4 4.9 4.2 3.7 3.2 2.8
Mandatory.................................. 10.6 11.1 11.4 12.0 14.0 16.1 16.8 17.1
Social security.......................... 4.8 4.7 4.7 4.8 6.0 7.1 7.6 8.0
Medicare and Medicaid.................... 3.5 3.9 4.3 4.9 6.0 7.2 7.7 7.7
Net interest............................... 3.3 2.6 1.9 1.2 0.3 0.2 0.4 0.7
Deficit....................................... -2.3 -0.3 0.7 1.2 0.9 -0.5 -0.9 -1.0
Federal debt held by public................... 51.4 47.0 35.6 24.1 6.5 3.7 9.5 14.2
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Social security benefits, driven by the retirement of the baby-boom
generation, rise from around 5 percent of GDP in 2000 to over 7 percent
in 2030. The rise in Federal health care is even greater. Without the
President's policies, Medicare and Medicaid together would reach 4
percent of GDP in 2000 and then continue to rise to 11 percent by the
year 2030. As entitlement spending rises, if no corrective action is
taken, the deficit grows rapidly. Initially, the programmatic spending
is responsible for the increase, but as time passes a vicious spiral
takes hold in which more
[[Page 22]]
borrowing leads to higher Federal interest
payments on the growing debt, which is financed in turn by yet more
borrowing. The spiral is unstable in that if it continued unchecked it
would eventually drive the debt and the deficit to infinity. Long before
that point, a financial crisis would surely be triggered that would
force some type of action on the Federal Government--action that was
certain to be drastic and painful.
The long-run deficit outlook would be much improved if the President's
budget proposals were enacted. Balancing the budget would set it on a
solid footing for several decades. There is no justification in these
projections for the concern sometimes expressed that a balanced budget
would be a transitory phenomenon, to be followed quickly by a return of
large and growing deficits. Under the Administration's economic and
demographic assumptions that would not happen. The additional savings
projected for the entitlements and the further reduction in
discretionary spending leave the budget in a much improved position
compared with the outlook in the absence of these changes. The lower
level of Federal debt and interest that result from a balanced budget
also help to maintain a budget surplus in these projections in the
period beyond 2006.
Even with the improvements caused by a balanced budget, a very long-
run deficit problem would remain as a result of the expected strains on
social security and the health programs in the period following the
retirement of the baby-boom generation. Balancing the budget would
enable the Government to run a surplus over the following decades
without further major policy initiatives. Eventually, the surplus would
dissipate to be followed by a reappearance of the unified budget
deficit.\7\ By the year 2050, however, the deficit would still be lower,
as a percentage of GDP, than it was in 1992. To prevent the reemergence
of a deficit, policies would have to be changed to reform social
security and check the growth of Medicare and Medicaid.
\7\These projections assume that any surplus is used to reduce the
debt. This depends on political choices in future years.
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Alternative Scenarios.--Budget projections are uncertain, and long-run
projections are especially so. Therefore, it is essential to study how
such projections can vary under reasonable variations in assumptions. A
number of such alternative scenarios have been developed for these
projections. Each alternative focuses on one of the key uncertainties in
the outlook. Generally, the scenarios highlight negative possibilities
rather than positive ones to show the risks in the outlook.
1. Discretionary Spending. The projections assume that discretionary
spending is held constant in real terms once budget balance is reached.
This is a strong assumption in a long-run context, although it is the
usual assumption when current services projections are made, and
currently discretionary spending is only half as large as a percent of
GDP as it was 30 years ago. What makes it questionable is the fact that
with real economic growth occurring and population rising, the public
demand for Government services--more national parks, better
transportation, additional Federal support for scientific research--
might be expected to increase as well. It also assumes that the Nation's
real defense needs will not vary from the proposed levels at the end of
the current budget period. Alternative assumptions that allow for these
programs to grow with population or overall economic activity are shown
in Chart 2-3. These alternative assumptions worsen the deficit outlook.
2. Health Spending: The most volatile element of recent budgets has
been Federal health spending. Expenditures for Medicare and Medicaid
have grown faster than other entitlements, and even after the reforms
[[Page 23]]
in the President's budget, which go a long way toward
reining in their growth, they continue to rise more
rapidly. In the long-run projections,
the growth of real per capita spending for Medicare, following the
Medicare trustees' assumptions, is assumed to slow down gradually. Per
capita Medicaid spending is constrained by the proposed cap on per
capita spending. The beneficiary populations vary with the demographic
assumptions. The alternative scenario shows what would happen instead if
faster trends in spending for these programs resumed after 2006. Chart
2-4 shows the resulting deficit outlook from such assumptions.
3. Productivity: The slowdown in productivity growth in the U.S.
economy that began in 1973 is responsible for much of the weaker
performance of U.S. income growth since that time. Indeed, over the long
run, productivity gains are the principal source of higher incomes, so
slower growth of productivity necessarily means a slower rise in living
standards. Productivity can be affected by changes in the budget
deficit, but many other factors influence it as well. Educational
achievement, R&D, energy prices, regulation, changes in business
organization, and competition all affect productivity. The alternative
scenarios illustrate what would happen to the budget deficit in the long
run if productivity growth were higher or lower. A higher rate of growth
would make the task of preserving a balanced budget much easier; a lower
growth rate would have the opposite effect. Chart 2-5 shows how the
deficit varies with changes of one-half percentage point of average
productivity growth.
4. Population: In the long-run, demographics dominate the projections.
Changes in population growth feed into real economic growth through the
effect on labor supply and employment. Changes in demographics also
affect spending under the entitlement programs. Much of the long-run
problem that remains even with a balanced budget is due to expected
demographic shifts. Chart 2-6 illustrates how important these are by
showing what would happen to the deficit under the alternative
demographic assumptions used by the social security trustees in their
most recent report.
Conclusion.--OBRA improved the long-run deficit outlook dramatically,
but even so the deficit is still projected to increase beginning around
the year 2010, and to rise to unacceptable levels by mid-century. The
President's current budget proposals would not only balance the budget,
but go some distance toward resolving the long-run deficit problem as
well. The long-run budget problem is not the result of irresponsible
discretionary spending, and while it is necessary to control
discretionary spending, and while it is necessary to
[[Page 24]]
[[Page 25]]
control discretionary spending, doing this alone will not
be enough to solve the long-run problem.
Actuarial Balance in the Social Security and Medicare Trust Funds.--
Because of the critical role of the social security and Medicare
programs to the long-range budget outlook, it is worthwhile to examine
the status of these programs more closely. Table 2-3 shows the changes
in the 75-year actuarial balances of the social security and Medicare
Trust Funds since 1994. There was only a small change in the
consolidated balance for the OASDI Trust Funds which combines the
separate funds set up for retirement and disability insurance.
Legislation to shift resources from the retirement fund to the
disability fund prevented the latter from becoming insolvent. The
combined OASDI fund is not projected to become depleted until 2030. In
1995, the trustees for the Hospital Insurance Trust Fund projected that
under intermediate assumptions, the HI trust fund would be insolvent in
2002, one year later than projected in 1994. More recent data has shown,
however, that outlays exceeded income in 1995, sooner than was expected.
In addition, baseline spending for HI has slightly increased from Mid-
Session Review baseline estimates, primarily to reflect anticipated
growth in home health spending. The trustees are expected to revise the
projected exhaustion date for HI later this Spring in their 1996 Report.
Because the trustees' analysis considers a wide range of factors,
including additional experience in the current fiscal year, new analyses
of the factors affecting HI benefit growth during fiscal years 1990-95,
updated projections of HI payroll tax income and current interest rate
expectations, it is not possible to accurately predict the exhaustion
date until the Report is completed. Furthermore, the trustees' estimates
do not take account of possible legislative changes, such as those
proposed in this budget, that would postpone the date at which the fund
is depleted.
[[Page 26]]
TABLE 2-3. CHANGE IN 75-YEAR ACTUARIAL BALANCE FOR OASDI AND HI TRUST FUNDS (INTERMEDIATE ASSUMPTIONS)
(As a percent of taxable payroll)
----------------------------------------------------------------------------------------------------------------
OASI DI OASDI HI
----------------------------------------------------------------------------------------------------------------
Actuarial balance in 1994 report........................................ -1.46 -0.66 -2.13 -4.14
Changes in balance due to changes in:
Valuation period...................................................... -0.06 -0.01 -0.07 -0.10
Economic and demographic assumptions.................................. 0.13 0.01 0.14 0.01
Disability assumptions................................................ 0.00 -0.05 -0.05 0.00
Legislation........................................................... -0.40 0.40 0.00 0.00
Methods............................................................... -0.06 -0.01 -0.07 0.00
Hospital costs........................................................ 0.00 0.00 0.00 0.64
Other................................................................. 0.00 0.00 0.00 0.07
---------------------------------------
Total changes....................................................... -0.40 0.35 -0.05 0.62
Actuarial balance in 1995 report........................................ -1.87 -0.31 -2.17 -3.52
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NATIONAL WEALTH AND WELFARE
Unlike a private corporation, the Federal Government routinely invests
in ways that do not add directly to its own assets. For example, Federal
grants are frequently used to fund capital projects by State or local
Governments for highways and other purposes. Such investments are
valuable to the public which pays for them with taxes, but they are not
owned by the Federal Government.
TABLE 2-4. NATIONAL WEALTH
(As of the end of the fiscal year, in trillions of 1995 dollars)
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1960 1965 1970 1975 1980 1985 1990 1993 1994 1995
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ASSETS
Publicly owned physical assets:
Structures and Equipment................ 2.0 2.3 2.8 3.4 3.7 3.7 3.9 4.0 4.0 4.1
Federally owned or financed........... 1.1 1.2 1.3 1.3 1.4 1.5 1.6 1.6 1.6 1.6
Federally owned..................... 1.0 1.0 1.0 0.9 0.8 0.9 1.0 1.0 1.0 1.0
Grants to State & Local............. 0.1 0.2 0.2 0.4 0.5 0.5 0.6 0.6 0.6 0.6
Funded by State and local Governments. 0.9 1.1 1.5 2.1 2.4 2.2 2.3 2.4 2.4 2.5
Other Federal assets.................... 0.7 0.7 0.6 0.9 1.4 1.4 1.1 0.9 0.9 0.9
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Subtotal......................... 2.7 3.0 3.5 4.3 5.2 5.1 5.0 4.9 4.9 4.9
Privately Owned Physical Assets:
Reproducible Assets..................... 5.4 6.2 7.9 10.2 13.0 13.6 15.0 15.3 15.8 16.2
Residential Structures................ 1.9 2.2 2.7 3.6 4.9 4.9 5.4 5.7 5.9 6.1
Nonresidential Plant and equipment.... 1.9 2.3 3.0 4.0 5.0 5.6 6.0 6.0 6.1 6.3
Inventories........................... 0.7 0.7 0.9 1.1 1.3 1.2 1.3 1.2 1.2 1.3
Consumer Durables..................... 0.9 1.0 1.3 1.5 1.7 1.9 2.3 2.4 2.5 2.6
Land.................................... 1.9 2.3 2.6 3.4 5.1 5.9 5.9 4.5 4.5 4.4
-------------------------------------------------------------------------------------------------------------
Subtotal.......................... 7.3 8.5 10.5 13.6 18.1 19.4 20.9 19.8 20.3 20.7
Education Capital:
Federally Financed...................... 0.1 0.1 0.2 0.3 0.4 0.5 0.7 0.8 0.8 0.8
Financed from Other Sources............. 6.1 7.9 10.6 12.3 15.0 18.1 22.8 25.0 25.9 26.7
-------------------------------------------------------------------------------------------------------------
Subtotal.......................... 6.1 8.0 10.8 12.6 15.4 18.6 23.5 25.8 26.7 27.5
Research and Development Capital:
Federally Financed R&D.................. 0.2 0.3 0.5 0.5 0.6 0.7 0.8 0.8 0.8 0.9
R&D Financed from Other Sources......... 0.1 0.2 0.3 0.4 0.4 0.6 0.8 0.9 1.0 1.0
-------------------------------------------------------------------------------------------------------------
Subtotal.......................... 0.3 0.5 0.7 0.9 1.0 1.3 1.6 1.8 1.8 1.9
=============================================================================================================
Total assets.................... 16.5 20.1 25.5 31.3 39.7 44.4 51.0 52.3 53.7 55.0
LIABILITIES:
Net Claims of Foreigners on U.S......... (0.2) (0.2) (0.2) (0.2) (0.5) (0.2) 0.3 0.6 0.7 0.9
Balance......................... 16.7 20.3 25.7 31.5 40.2 44.6 50.7 51.7 52.9 54.1
Per capita (thousands of 1995 dollars).... 92.2 104.4 125.5 145.8 176.1 186.5 202.1 199.7 202.6 205.1
ADDENDA:
Total Federally funded capital.......... 2.1 2.3 2.6 3.0 3.8 4.1 4.2 4.1 4.1 4.1
Percent of national wealth.............. 12.3 11.3 10.2 9.5 9.4 9.1 8.2 8.0 7.8 7.6
--------------------------------------------------------------------------------------------------------------------------------------------------------
The Federal Government also invests in education and research and
development (R&D). These outlays contribute to future productivity and
are in that sense analogous to investments in physical capital. Indeed,
economists have computed stocks of human and knowledge capital to
reflect the accumulation of such investments. Nonetheless, these capital
stocks are not owned by the Federal Government, nor would they appear on
a business balance sheet.
Table 2-4 presents a national balance sheet. It includes estimates of
total national wealth classified in three categories: physical assets,
education capital, and R&D capital. The Federal Government has made
contributions to each of these categories, and these contributions are
also shown in the table. Data in this table are especially uncertain
because of the assumptions needed to prepare the estimates. Overall, the
Federal contribution to the current level of national wealth is about
7\1/2\ percent, which is down from around 8 percent at the end of the
1980s, and from over 12 percent in 1960.
Physical Assets
These include stocks of plant and equipment, office buildings,
residential structures, land, and Government's physical assets such as
military hardware, office buildings, and highways. Automobiles and
consumer appliances are also included in this category. The total amount
of such capital is vast, amounting to around $26 trillion in 1995; by
comparison, GDP was about $7 trillion.
The Federal Government's contribution to this stock of capital
includes its own physical assets plus $0.6 trillion in accumulated
grants to State and local governments for capital projects. The Federal
Government has financed about one-quarter of the physical capital held
by other levels of Government.
Education Capital
Economists have developed the concept of human capital to reflect the
notion that individuals and society invest in people as well as in
physical assets. Investment in education is a good example of how human
capital is accumulated.
For this table, an estimate has been made of the stock of capital
represented by the Nation's investment in education. The estimate is
based on the cost of replacing the years of schooling embodied in the
U.S. population aged 16 and over. The idea is to measure how much it
would cost to reeducate the U.S. workforce at today's prices.
This is a crude measure, but it can provide a rough order of
magnitude. According to this measure, the stock of education capital
amounted to $28 trillion in 1995, of which about 3 percent was financed
by the Federal Government. The total exceeds the Nation's stock of
physical capital. The main investors in education capital have been
State and local Governments, parents, and the students themselves who
forgo earning opportunities in order to acquire education.
Even broader concepts of human capital have been considered. Not all
useful training occurs in school, or formal training programs at work.
Much informal and yet invaluable learning occurs within families or on
the job. Labor compensation amounts to about two-thirds of national
income. Therefore, it is conceivable that the total value of human
capital might be as large as three times the estimated value of physical
capital. Thus, it can be seen that the estimates offered here are in a
sense conservative, because they reflect only the costs of acquiring
formal education.
[[Page 27]]
Research and Development Capital
Research and Development can also be thought of as an investment,
because R&D represents a current expenditure for which there is a
prospect of future returns. After adjusting for depreciation, the flow
of R&D investment can be added up to provide an estimate of the current
R&D stock.\8\ That stock is estimated to have been about $1.9 trillion
in 1995. Although this is a large amount of research, it is a relatively
small portion of total National wealth. About half of this stock was
funded by the Federal Government.
\8\R&D depreciates in the sense that the economic value of applied
research and development tends to decline with the passage of time which
leads to movement in the technological frontier.
---------------------------------------------------------------------------
Liabilities
When considering the debts of the Nation as a whole, the debts that
Americans owe to one another cancel out. This does not mean they are
unimportant. The buildup in debt largely owed to other Americans was
partly responsible for the sluggishness of the recovery from the 1990-
1991 recession in its early stages. Indeed, the debt explosion in the
1980s may have helped to bring on the recession in the first place.
However, these debts do not belong on the national balance sheet. If
they were included, there would have to be offsetting entries. Only the
net debt that is owed to foreigners belongs on the national balance
sheet. America's foreign debt has been increasing rapidly in recent
years, as a consequence of the U.S. trade deficit, but the size of this
debt is small compared with the total stock of assets. It amounted to
about 1\1/2\ percent of the total in 1995.
Most of the Federal debt held by the public is owned by Americans, so
it does not appear in Table 2-4. Only that portion of the Federal debt
held by foreigners is included. Even so, it is of interest to compare
the imbalance between Federal assets and liabilities with national
wealth. The Government will have to service the debt or repay it, and
its ability to do so without disrupting the economy will depend in part
on the wealth of the private sector. Currently, the Federal net asset
[[Page 27]]
imbalance, as estimated in Table 2-1, amounts to about 5\1/2\ percent of
total U.S. wealth as shown in Table 2-4.
Trends in National Wealth
The net stock of wealth in the United States at the end of 1995 was
about $55 trillion. Since 1980 it has increased in real terms at an
annual rate of 2.2 percent per year--about half the 4.5 percent rate it
averaged from 1960 to 1980. (All comparisons are in terms of constant
1995 dollars.) Public capital formation slowed down markedly between the
two periods. The real value of the net stock of publicly owned physical
capital was actually lower in 1995 than in 1980--$4.9 trillion versus
$5.1 trillion in the earlier year. Since 1980, Federal grants to State
and local governments for capital projects have grown less rapidly,
while capital funded directly by State and local governments has grown
at an average rate of only 0.1 percent per year.
Private capital formation in physical assets has also grown more
slowly since 1980. The net stock of nonresidential plant and equipment
grew 1.6 percent per year from 1980 to 1995 compared with 4.9 percent in
the 1960s and 1970s, and the stock of business inventories actually
declined. Overall, the stock of privately owned physical capital grew at
an average rate of just 0.9 percent per year between 1980 and 1995.
The accumulation of education capital, as measured here, also slowed
down in the 1980s, but not nearly as much. It grew at an average rate of
4.7 percent per year in the 1960s and 1970s, about the same as the
average rate of growth in private physical capital during the same
period. Since 1980, education capital has grown at a 4.4 percent annual
rate. This reflects the extra resources devoted to schooling in this
period, and the fact that such resources were rising in relative value.
R&D stocks have grown at about the same rate as education capital since
1980.
Other Federal Influences on Economic Growth
Many Federal policies have contributed to the slowdown in capital
formation shown here. Federal investment policies obviously were
important, but the Federal Government also contributes to wealth in ways
that cannot be easily captured in a formal presentation. Monetary and
fiscal policies affect the rate and direction of capital formation.
Regulatory and tax policies affect how capital is invested, as do the
Federal Government's credit assistance policies.
One important channel of influence is the Federal budget deficit,
which determines the size of the Federal Government's borrowing
requirements. Smaller deficits in the 1980s would have resulted in a
smaller gap between Federal liabilities and assets than is shown in
Table 2-1. It is also likely that, had the $3 trillion in added Federal
debt since 1980 been avoided, a significant share of these funds would
have gone into private investment. National wealth might have been 2 to
4 percent larger in 1995 had fiscal policy avoided the buildup in the
debt.
Social Indicators
There are certain broad responsibilities that are unique to the
Federal Government. Especially important are the Government's role in
fostering healthy economic conditions, promoting health and social
welfare, and protecting the environment. Table 2-5 offers a rough cut of
information that can be useful in assessing how well the Federal
Government has been doing in promoting these general objectives.
The indicators shown here are only a limited subset drawn from the
vast array of data available on conditions in the United States. In
choosing indicators for this table, priority was given to measures that
were consistently available over an extended period. Such indicators
make it easier to draw valid comparisons and evaluate trends. In some
cases, however, this meant choosing indicators with significant
limitations.
Table 2-5. ECONOMIC AND SOCIAL INDICATORS
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
General categories Specific measures 1960 1965 1970 1975 1980 1985 1990 1991 1992 1993 1994\1\ 1995
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Economic:
Living Standards..... Real GDP per person (1992 dollars)....................... 12,512 14,792 16,521 17,896 20,252 22,345 24,559 24,058 24,447 24,728 25,335 25,591
Average annual percent change............................ 0.4 3.4 2.2 1.6 2.5 2.0 1.9 -2.0 1.6 1.2 2.5 1.0
Median family income (1994 dollars):
All families........................................... 25,866 30,147 35,407 36,177 37,857 38,200 40,087 39,105 38,632 37,905 38,782 NA
Married couple families................................ 27,030 31,482 37,735 39,204 41,671 42,835 45,237 44,607 44,249 44,106 44,959 NA
Female householder, no husband present................. 13,660 15,305 18,276 18,048 18,742 18,814 19,199 18,163 17,984 17,890 18,236 NA
Income share of middle three quintiles (%)............... 54.0 53.9 53.6 53.5 53.4 52.0 51.2 51.4 51.0 43.9 49.0 NA
Poverty rate (%)\2\...................................... 22.2 17.3 12.6 12.3 13.0 14.0 13.5 14.2 14.8 15.1 14.5 NA
Economic security inflation and unemployment:
Civilian unemployment (%).............................. 5.5 4.5 4.9 8.5 7.1 7.2 5.5 6.7 7.4 6.8 6.1 5.6
CPI-U (year over year % change)........................ 2.0 1.3 4.3 6.8 8.9 5.5 4.0 4.2 3.0 3.0 2.6 2.8
Employment prospects. Increase in total payroll employment (millions, Dec. to -0.5 2.9 -0.5 0.4 0.2 2.5 0.3 -0.9 1.2 2.8 3.5 1.7
Dec.).
Managerial or professional jobs (% of civilian NA NA NA NA 22.2 24.1 26.0 26.5 26.5 27.1 27.5 28.3
employment).
Wealth creation...... Net national saving rate (% of NNP)...................... 11.4 13.3 9.3 6.8 7.3 6.2 4.2 4.1 2.7 2.8 3.9 4.7
Innovation........... Patents issued to U.S. residents (thous.)................ 42.0 53.6 50.1 51.4 40.8 43.4 53.0 57.8 58.7 61.1 64.2 64.4
Multifactor productivity (average percent change)........ 1.1 3.2 1.1 1.3 0.7 0.6 0.3 -1.0 1.4 0.5 0.8 NA
Social:
Families............. Children living with a single parent (% of all children). 9.2 10.2 12.9 16.4 18.6 20.2 21.6 22.4 22.8 23.3 23.1 NA
Safe communities..... Violent crime rate (per 100,000 population)\3\........... 160 199 364 482 597 557 732 758 758 746 716 NA
Murder rate (per 100,000 population).................... 5.1 5.1 7.8 9.6 10.2 7.9 9.4 9.8 9.3 9.5 9.0 NA
Juvenile crime (murders per 100,000 persons age 14-17).. NA NA NA NA 8.2 7.1 15.8 17.3 17.5 18.6 NA NA
Health and illness... Infant mortality (per 1,000 live births)................. 26.0 24.7 20.0 16.1 12.6 10.6 9.2 8.9 8.5 8.4 7.9 NA
Low birthweight (<2,500 gms) babies (%)................. 7.7 8.3 7.9 7.4 6.8 6.8 7.0 7.1 7.1 7.2 NA NA
Life expectancy at birth (years)........................ 69.7 70.2 70.8 72.6 73.7 74.7 75.4 75.5 75.8 75.5 75.7 NA
Cigarette smokers (% population 18 and oover)........... NA 42.4 39.5 36.4 33.2 30.1 25.5 25.6 26.5 25.0 NA NA
Bed disability days (average days per person)........... 6.0 6.2 6.1 6.6 7.0 6.1 6.2 6.5 6.3 6.7 NA NA
National health expenditures (% of GDP).................. 5.2 5.8 7.2 8.1 9.0 10.4 12.1 12.8 13.1 13.5 NA NA
Learning............. High school graduates (% of population 25 and older)..... 44.6 49.0 55.2 62.5 68.6 73.9 77.6 78.4 79.4 80.2 80.9 NA
College graduates (% of population 25 and older)........ 8.4 9.4 11.0 13.9 17.0 19.4 21.3 21.4 21.4 21.9 22.2 NA
National assessment of educational progress\4\...........
Mathematics........................................... NA NA NA 304 298 302 305 NA 307 NA NA NA
Science............................................... NA NA 305 296 283 288 290 NA 294 NA NA NA
Participation........ Voting for President (% eligible population)............. 62.8 NA NA NA 52.6 NA NA NA 55.2 NA NA NA
Voting for Congress (% of eligible population).......... 58.5 NA 43.5 NA 47.4 NA 33.1 NA 50.8 NA 36.0 NA
Individual charitable giving per capita (1994 dollars)... 199 238 286 304 331 349 427 423 422 419 NA NA
Environment:
Air quality.......... Population living in counties with ozone levels exceeding
the standard (millions)................................. NA NA NA NA NA 76 63 70 43 51 50 NA
Water quality........ Population served by secondary treatment or better NA NA NA NA NA 134 155 157 159 162 164 166
(millions).
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\Data are preliminary for infant mortality and life expectancy.
\2\The poverty rate does not reflect noncash government transfers such as Medicaid or food stamps.
\3\Not all crimes are reported, and the fraction that go unreported may have varied over time.
\4\Dates shown in table for the national educational assessments are approximate.
The individual measures in this table are influenced in varying
degrees by many Government policies and programs, as well as by external
factors beyond the Government's control. They are not outcome
indicators, because they do not measure the direct results of Government
activities, but they do provide a quantitative measure of the progress
or lack of progress in reaching some of the ultimate values that
Government policy is intended to promote.
Such a table can serve two functions. First, it highlights areas where
the Federal Government might need to modify its current practices or
consider new approaches. Where there are clear signs of deteriorating
conditions, corrective action might be appropriate. Second, the table
provides a context for evaluating other data on Government activities.
For example, Government actions that weaken its own financial position
may be appropriate when they promote a broader social objective.
An example of this occurs during economic recessions when reductions
in tax collections lead to increased Government borrowing that adds to
Federal liabilities. This deterioration in the Federal balance sheet
provides an automatic stabilizer for the private sector. State
Government, local government and private budgets are strengthened by
allowing the Federal budget to run a deficit. More stringent Federal
budgetary controls could be used to hold down Federal borrowing during
such periods, but only at the risk of aggravating the downturn.
The Government cannot avoid making such trade-offs because of its size
and the broad-ranging effects of its actions. Monitoring these effects
and incorporating them in the Government's policy making is a major
challenge.
An Interactive Analytical Framework
No single framework can encompass all of the factors that affect the
financial condition of the Federal Government. Nor can any framework
serve as a substitute for actual analysis. Nevertheless, the framework
presented above offers a useful way to examine the financial aspects of
Federal policies. Increased Federal
[[Page 28]]
support for investment, the reduction in Federal absorption
of saving through deficit reduction, and
other Administration policies to enhance economic growth are expected to
promote national wealth and improve the future financial condition of
the Federal Government. As that occurs, the efforts will be clearly
revealed in these tables.
TECHNICAL NOTE: SOURCES OF DATA AND METHOD OF ESTIMATING
Federally Owned Assets and Liabilities
Assets
Financial Assets: The source of data is the Federal Reserve Board's
Flow-of-Funds Accounts. Two adjustments were made to these data. First,
U.S. Government holdings of financial assets were consolidated with the
holdings of the monetary authority, i.e., the Federal Reserve System.
Second, the gold stock, which is valued in the Flow-of-Funds at a
constant historical price, is revalued using the market value for gold.
Physical Assets
Fixed Reproducible Capital: Estimates were developed from the OMB
historical database for physical capital outlays. The database extends
back to 1940 and was supplemented by data from other selected sources
for 1915-1939. The source data are in current dollars. To estimate
investment flows in constant dollars, it is necessary to deflate the
nominal investment series. This was done using BEA price deflators for
Federal purchases of durables and structures. These price deflators are
available going back as far as 1940. For earlier years, deflators were
based on Census Bureau historical statistics for constant price public
capital
[[Page 30]]
formation. The capital stock series were adjusted for
depreciation on a straight-line basis, assuming useful lives of 46 years
for water and power projects; 40 years for other direct Federal
construction; and 16 years for major nondefense equipment and for
defense procurement.
Fixed Nonreproducible Capital: Historical estimates for 1960-1985 were
based on estimates in Michael J. Boskin, Marc S. Robinson, and Alan M.
Huber, ``Government Saving, Capital Formation and Wealth in the United
States, 1947-1985,'' published in The Measurement of Saving, Investment,
and Wealth, edited by Robert E. Lipsey and Helen Stone Tice (The
University of Chicago Press, 1989).
Estimates were updated using changes in the value of private land from
the Flow-of-Funds Balance Sheets and in the Producer Price Index for
Crude Energy Materials. The Bureau of Economic Analysis is in the
process of preparing satellite accounts to accompany the National Income
and Product Accounts that will report on changes in mineral deposits for
the Nation as a whole, but this work is not yet completed.
Liabilities
Financial Liabilities: The principal source of data is the Federal
Reserve's Flow-of-Funds Accounts.
Contingent Liabilities: Sources of data are the OMB Deposit Insurance
Model and the OMB Pension Guarantee Model. Historical data on contingent
liabilities for deposit insurance were also drawn from the Congressional
Budget Office's study, The Economic Effects of the Savings and Loan
Crisis, issued January 1992.
Pension Liabilities: For 1979-1994, the estimates are the actuarial
accrued liabilities as reported in the annual reports for the Civil
Service Retirement System, the Federal Employees Retirement System, and
the Military Retirement System (adjusted for inflation). Estimates for
the years before 1979 are not actuarial; they are extrapolations. The
estimate for 1994 is a projection.
Long-Run Budget Projections
The long-run budget projections are based on long-run demographic and
economic projections. A model of the Federal budget developed at OMB
computes the budgetary implications of this forecast.
Demographic and Economic Projections: For the years 1996-2006 the
assumptions are identical to those used in the budget. As always, these
budget assumptions reflect the President's policy proposals, in this
case that the budget be balanced. The long-run projections extend these
budget assumptions by holding inflation, interest rates, and
unemployment constant at the levels assumed in the budget for 2006.
Population growth and labor force participation are extended using the
intermediate assumptions from the 1995 social security trustees' report
and Bureau of Labor Statistics projections. The projected rate of growth
for real GDP is built up from the labor force assumptions and an assumed
rate of productivity growth. The assumed rate of productivity growth is
held constant at the average rate of growth implied by the budget's
economic assumptions. The economic forecast used to project the budget
in the absence of the President's balanced budget proposals is altered
to reflect the higher interest rates and lower profits that would be
expected to prevail under these circumstances.
Budget Projections: For the years 1996-2006, the projections follow
the budget. After 2006, receipts are projected using simple rules of
thumb linking income taxes, payroll taxes, excise taxes, and other
receipts to projected tax bases derived from the economic forecast.
Outlays are computed in different ways. Discretionary spending grows at
the rate of inflation. Social security, Medicare, and Federal pension
outlays are projected using the most recent actuarial forecasts
available at the time the budget was prepared (April 1995 for social
security). These projections are repriced using Administration inflation
assumptions. Other entitlement programs are projected based on rules of
thumb linking program spending to elements of the economic and
demographic forecast such as the poverty rate.
National Balance Sheet Data
Publicly Owned Physical Assets: Basic sources of data for the
federally owned or financed stocks of capital are the investment flows
computed by OMB from the budget database. Federal grants for State and
local Government capital were added together with adjustments for
inflation and depreciation in the same way as described above for direct
Federal investment. Data for total State and local Government capital
come from the capital stock data prepared by the BEA.
Privately Owned Physical Assets: Data are from the Flow-of-Funds
national balance sheet. Preliminary estimates for 1995 were prepared
based on net investment from the National Income and Product Accounts.
Education Capital: The stock of education capital is computed by
valuing the cost of replacing the total years of education embodied in
the U.S. population 16 years of age and older at the current cost of
providing schooling. The estimated cost includes both direct
expenditures in the private and public sectors and an estimate of
students' forgone earnings, i.e., it reflects the opportunity cost of
education.
For this presentation, Federal investment in education capital is a
portion of the Federal outlays included in the conduct of education and
training. This portion includes direct Federal outlays and grants for
elementary, secondary, and vocational education and for higher
education. The data exclude Federal outlays for physical capital at
educational institutions and for research and development conducted at
colleges and universities because these outlays are classified elsewhere
as investment in physical capital and investment in R&D capital. The
data also exclude outlays under the GI Bill; outlays for graduate and
post-graduate education spending in HHS, Defense and Agriculture; and
most outlays for vocational training.
Data on investment in education financed from other sources come from
educational institution reports on
[[Page 31]]
the sources of their funds, published
in U.S. Department of Education, Digest of Education Statistics.
Education capital is assumed not to depreciate, but to be retired when a
person dies. An education capital stock computed using this method with
different source data can be found in Walter McMahon, ``Relative Returns
To Human and Physical Capital in the U.S. and Efficient Investment
Strategies,'' Economics of Education Review, Vol. 10, No. 4, 1991. The
method is described in detail in Walter McMahon, Investment in Higher
Education, 1974.
Research and Development Capital: The stock of R&D capital financed by
the Federal Government was developed from a database that measures the
conduct of R&D. The data exclude Federal outlays for physical capital
used in R&D because such outlays are classified elsewhere as investment
in federally financed physical capital. Nominal outlays were deflated
using the GDP deflator to convert them to constant dollar values.
Federally funded capital stock estimates were prepared using the
perpetual inventory method in which annual investment flows are
cumulated to arrive at a capital stock. This stock was adjusted for
depreciation by assuming an annual rate of depreciation of 10 percent on
the outstanding balance for applied research and development. Basic
research is assumed not to depreciate. The 1993 Budget contains
additional details on the estimates of the total federally financed R&D
stock, as well as its national defense and nondefense components (see
Budget for Fiscal Year 1993, January 1992, Part Three, pages 39-40).
A similar method was used to estimate the stock of R&D capital
financed from sources other than the Federal Government. The component
financed by universities, colleges, and other nonprofit organizations is
based on data from the National Science Foundation, Surveys of Science
Resources. The industry-financed R&D stock component is from that source
and from the U.S. Department of Labor, The Impact of Research and
Development on Productivity Growth, Bulletin 2331, September 1989.
Experimental estimates of R&D capital stocks have recently been
prepared by BEA. The results are described in ``A Satellite Account for
Research and Development,'' Survey of Current Business, November 1994.
These BEA estimates are lower than those presented here primarily
because BEA assumes that the stock of basic research depreciates, while
the estimates in Table 2-4 assume that basic research does not
depreciate. BEA also assumes a slightly higher rate of depreciation for
applied research and development, 11 percent, compared with the 10
percent rate used here.
Social Indicators
The main sources for the data in this table are the Government
statistical agencies. Generally, the data are publicly available in the
President's annual Economic Report and the Statistical Abstract of the
United States.