[Analytical Perspectives]
[Economic and Accounting Analyses]
[2. Stewardship: Toward a Federal Balance Sheet]
[From the U.S. Government Publishing Office, www.gpo.gov]


[[Page 15]]

 
             2. STEWARDSHIP: TOWARD A FEDERAL BALANCE SHEET

                               Introduction

  The Government's financial condition can be examined from several 
alternative perspectives, and a balanced assessment requires various 
approaches. This chapter presents an organizing framework for such 
analysis. The Government is not a business, and it cannot be evaluated 
simply by applying the usual business accounting techniques. A full 
evaluation of its finances must consider a broader range of information 
than is contained in a conventional balance sheet, and none of the 
tables in this chapter should be treated as if it were ``the balance 
sheet'' of the Federal Government. Considered as a whole, however, the 
chapter with all of its tables provides an overview of the Government's 
financial resources, the current and future claims on them, and some 
information about what the taxpayer is getting in exchange for this 
commitment of resources. In this way, the presentation that follows 
offers the kind of information that a financial analyst would expect to 
find in a business balance sheet.
  Because of major differences between Government and business, and the 
serious limitations of the available data, this chapter's findings 
should be interpreted with considerable caution. The conclusions are 
tentative and subject to future revision as the estimating methods are 
improved and better data become available.
  The presentation consists of three parts:
     The first part reports on what the Federal Government owns 
          and what it owes. Table 2-1 summarizes this information. The 
          assets and liabilities in this table are a useful starting 
          point for a financial analysis of the Federal Government, but 
          they are only a partial reflection of the full range of 
          Government resources and responsibilities. The assets include 
          only the items that are actually owned by the Government; 
          through taxation the Government can rely on a much wider range 
          of resources to meet future obligations. The liabilities in 
          the table are binding Government commitments resulting from 
          prior actions; the Government's financial responsibilities are 
          considerably broader than this.
     The second part presents possible future paths for the 
          Federal budget extending well into the next century, including 
          an extension of the proposals in the 1998 Budget. The 
          information is summarized in Table 2-2 and in the set of 
          charts presented along with it. This is the appropriate 
          context in which to examine the balance between future Federal 
          resources and responsibilities; and the analysis in this part 
          offers the clearest indication of the long-run financial 
          burdens that the Government faces and the resources that will 
          be available to meet them. Some future claims on the 
          Government receive special emphasis because of their 
          importance to individuals' retirement plans. Table 2-3 
          summarizes the condition of the social security and Medicare 
          trust funds and how that condition has changed since 1995.
     The third part of the presentation features information on 
          broader economic and social conditions that are affected by 
          Government activity. Table 2-4 is a summary of national wealth 
          highlighting the different categories of Federal investment 
          that have contributed to wealth. Table 2-5 is a sample of 
          economic and social indicators. No single statistic, not even 
          GDP, can capture the full ramifications of Federal actions; a 
          comprehensive set of indicators, such as the one presented 
          here, is needed to encompass the full range of Government 
          activities and interests.

                   Relationship with FASAB Objectives

  The framework presented here meets one of the four objectives \1\ of 
Federal financial reporting recommended by the Federal Accounting 
Standards Advisory Board and adopted for use by the Federal Government 
in September 1993. This Stewardship Objective says:
---------------------------------------------------------------------------
  \1\ Objectives of Federal Financial Reporting, Statement of Federal 
Financial Accounting Concepts Number 1, September 2, 1993. The other 
three Objectives relate to budgetary integrity, operating performance, 
and systems and controls.

           Federal financial reporting should assist report users in 
     assessing the impact on the country of the Government's operations 
          and investments for the period and how, as a result, the 
    Government's and the Nation's financial conditions have changed and 
    may change in the future. Federal financial reporting should provide 
---------------------------------------------------------------------------
               information that helps the reader to determine:

         3a. Whether the Government's financial position improved or 
                        deteriorated over the period.

       3b. Whether future budgetary resources will likely be sufficient 
    to sustain public services and to meet obligations as they come due.

      3c. Whether Government operations have contributed to the Nation's 
                       current and future well-being.

  The experimental presentation here explores one possible approach for 
meeting this objective at the Government-wide level.

[[Page 16]]

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     QUESTIONS AND ANSWERS ABOUT THE GOVERNMENT'S ``BALANCE SHEET''     
                                                                        
                                                                        
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1.  According to Table 2-1, the Government's liabilities exceed its     
                                                                        
               Because the Federal Government is not a business. It has 
                fundamentally different objectives, and so must operate 
                in different ways.                                      
                                                                        
               The primary goal of every business is to earn a profit.  
                But in our free market system, the Federal Government   
                leaves virtually all activities at which a profit could 
                be earned to the private sector. In fact, the vast bulk 
                of the Federal Government's operations are of a nature  
                such that it would be difficult or impossible to charge 
                prices at all--let alone prices that would cover        
                expenses. The Government undertakes these activities not
                to improve its balance sheet, but for the balance sheet 
                of the Nation--that is, its people and its businesses-- 
                including not only monetary but also nonmonetary values.
                No business would--or should--sacrifice its own balance 
                sheet to bolster that of the rest of the country.       
                                                                        
               To illustrate, one of the Federal Government's most      
                valuable assets is its holdings of gold. The price of   
                gold generally fluctuates counter to the state of the   
                economy--if inflation is rapid and out of control, the  
                price of gold rises; but when inflation slows and       
                steadies, the price of gold falls. One important source 
                of the deterioration of the Federal Government's balance
                sheet since the 1980s has been the decline in the price 
                of gold, which reduced the value of the Government's    
                gold holdings. But that price decline--and hence a      
                deterioration of the Government's balance sheet--was a  
                direct consequence of Federal policies to reduce        
                inflation, for the benefit of the people and businesses 
                of the United States. No business would undertake such a
                policy of worsening its own balance sheet.              
                                                                        
               Similarly, the Federal Government invests in education   
                and research. The Government earns no return from these 
                investments; but the Nation and its people are made     
                richer. A business, in contrast, undertakes investments 
                that earn a profit for itself, not others.              
                                                                        
               Because the Federal Government's objectives are          
                different, its balance sheet will behave differently.   
                                                                        
2.  But doesn't Table 2-1 say that the Government is insolvent?         
                                                                        
               No. Just as the Federal Government's responsibilities are
                of a different nature than those of a private business, 
                so are its resources. Its solvency must be evaluated in 
                different terms.                                        
                                                                        
               What the table shows is that those Federal obligations   
                that are comparable to the liabilities that a business  
                corporation would show on its balance sheet exceed the  
                estimated value of the assets the Federal Government    
                actually owns. However, the Government has access to    
                other resources--such as through its sovereign powers of
                taxation and money creation. These powers give the      
                Government the ability to meet its present obligations  
                and those it will incur through future operations.      
                                                                        
               The financial markets clearly recognize this reality. The
                Federal Government's implicit credit rating is the best 
                in the United States; lenders are willing to lend it    
                money at interest rates substantially below those       
                charged to private borrowers. This would not be true if 
                the Government were really insolvent. In countries where
                governments totter on the brink of true insolvency,     
                lenders are either unwilling to lend them money, or do  
                so only in return for a substantial interest premium.   
                                                                        
               However, the Federal Government's balance sheet was      
                clearly worsened by the budget policies of the 1980s. If
                the President's policy proposals in this budget are     
                accepted, the excess of the Government's liabilities    
                over its assets could well shrink over the foreseeable  
                future.                                                 

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    QUESTIONS AND ANSWERS ABOUT THE GOVERNMENT'S ``BALANCE SHEET''--    
                                Continued                               
                                                                        
                                                                        
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3.  The Government does not comply with the accounting requirements     
 imposed on private businesses. Why can't the government keep a proper  
 set of books?                                                          
                                                                        
                  Because the Government is not a business, and its     
                   primary goal is not to earn profits and to enhance   
                   its own wealth, accounting standards designed to     
                   illuminate how much a business earns and how much    
                   equity it has would be misleading, and would not     
                   provide the most useful information. The appreciation
                   of the need for separate Federal Government          
                   accounting standards is comparatively recent. But now
                   the Federal Accounting Standards Advisory Board has  
                   developed, and the Federal Government has adopted, an
                   accounting framework that reflects the Government's  
                   functions and answers the questions about the        
                   responsibilities for which it should be accountable. 
                   This framework addresses the Government's budgetary  
                   integrity, operating performance, stewardship, and   
                   systems and controls. The Board has also developed,  
                   and the Government has adopted, a full set of        
                   accounting standards. Federal agencies are issuing   
                   audited financial reports that follow these          
                   standards; a Government-wide consolidated financial  
                   report following these standards will be issued for  
                   FY 1997.                                             
                                                                        
                  This chapter viewed in its entirety addresses the     
                   ``stewardship objective''--assessing the interrelated
                   financial condition of the Federal Government and of 
                   the Nation for which the Government is responsible.  
                   The data in this chapter are intended to develop a   
                   fuller understanding of the trade-offs and           
                   connections between making the Federal Government    
                   ``better off'' and making the Nation ``better off.'' 
                                                                        
                  However, there is no single number or ``bottom line'' 
                   for the Government comparable to the net worth of a  
                   business corporation. Some analysts find this absence
                   of a bottom line to be frustrating. But pretending   
                   that there is such a number--when there clearly is   
                   not--does not advance the understanding of Government
                   finances.                                            
                                                                        
4.  Why isn't social security shown as a liability in Table 2.1?        
                                                                        
                  Social security benefits are a political and moral    
                   responsibility of the Federal Government, but they   
                   are not a liability. The Government has unilaterally 
                   both increased and decreased benefits in the past;   
                   the Social Security Advisory Council has recently    
                   suggested further reforms, involving additional      
                   changes in benefits. When the amount in question can 
                   be changed in such a fashion, it would not ordinarily
                   be considered a liability.                           
                                                                        
                  There are a large number of other Federal programs    
                   that are similar in many ways to social security,    
                   such as Medicare, veterans benefits, and student     
                   loans, to name only three. These programs are not    
                   counted as liabilities in the balance sheet. Treating
                   social security benefits differently from these other
                   programs would be hard to justify.                   
                                                                        
                  Furthermore, if social security benefits were to be   
                   treated as liabilities, then logic would suggest that
                   the earmarked social security payroll tax receipts   
                   that finance those benefits should be assets.        
                   However, no other future tax receipts are counted as 
                   assets in the formal sense; and thus again, drawing a
                   line between social security taxes and other taxes   
                   would appear questionable.                           

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    QUESTIONS AND ANSWERS ABOUT THE GOVERNMENT'S ``BALANCE SHEET''--    
                                Continued                               
                                                                        
                                                                        
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5.  It is all very well to balance the budget in 2002, but can this be a
 permanent solution? When the baby-boom generation retires beginning in 
 2008, won't the deficit return larger and meaner than ever before?     
                                                                        
                  The aging of the U.S. population, which will become   
                   dramatically evident when the baby-boomers retire,   
                   poses serious long-term problems for the Federal     
                   budget and its major entitlement programs. However,  
                   balancing the budget over the next few years would   
                   leave the country much better prepared to address    
                   these problems.                                      
                                                                        
                  If the reforms in this budget are enacted, not only   
                   would the budget come into balance, but that balance 
                   would be preserved for some time to come (under an   
                   extension of the economic and technical assumptions  
                   used for this budget). Far from being an exercise in 
                   futility, balancing the budget now is one of the key 
                   steps towards keeping it in balance when the baby-   
                   boomers retire. The second part of this chapter and  
                   the charts that accompany it show how the budget is  
                   likely to fare under various possible alternative    
                   assumptions. Absent the budget policy proposals the  
                   deficit is likely to begin growing sharply early in  
                   the next century.                                    
                                                                        
6.  Does Federal investment exceed the deficit? Would it be sensible to 
 permit a deficit so long as it was no larger than the amount spent on  
 Federal investments?                                                   
                                                                        
                  Gross Federal investment in physical capital was $103 
                   billion in 1996. This was about equal to the Federal 
                   deficit in that year. However, this does not mean    
                   that a deficit of this amount was appropriate.       
                                                                        
                  First of all, the Government consumes capital each    
                   year in the process of providing goods and services  
                   to the public. The rationale that investment can     
                   justify borrowing should apply only to net           
                   investment, after depreciation is subtracted, because
                   only net investment augments the assets available to 
                   offset the higher liability. For the Federal         
                   Government, as discussed in Chapter 6 of this volume,
                   net investment in physical capital owned by the      
                   Federal Government is estimated to be negative in    
                   1998. Thus, more deficit reduction would be required 
                   by this proposed criterion than would be required to 
                   balance the present budget.                          
                                                                        
                  The Federal Government also funds substantial amounts 
                   of physical capital that it does not own, such as    
                   highways and research facilities, and it funds       
                   investment in intangible ``capital'' such as         
                   education and training, or the conduct of research   
                   and development. A private business would never      
                   borrow to spend on assets that would be owned by     
                   other people. However, such spending is a principal  
                   function of Government. Chapter 6 shows that by this 
                   definition net investment is estimated to be positive
                   in 1998, but by only a small amount.                 
                                                                        
                  There is another hitch in the logic of borrowing to   
                   invest. Businesses expect investments to earn a      
                   profit from which they repay the financing costs. In 
                   contrast, the Federal Government does not generally  
                   expect to receive a direct payoff (in the form of    
                   higher tax receipts) from its investments. In this   
                   sense, Government investments are no different from  
                   other Government expenditures, and the fact that they
                   provide services over a longer period is no          
                   justification for excluding them when calculating the
                   deficit.                                             
                                                                        
                  Finally, the Federal Government has responsibilities  
                   for supporting the overall financial and economic    
                   well-being of the Nation. In this broader context, it
                   might want to manage its fiscal policy so as to      
                   augment private saving and investment by paying for  
                   its own investments from current revenues, instead of
                   borrowing in the credit market and crowding out      
                   private investment. In other words, there are        
                   considerations other than the amount of Federal      
                   investment that should govern the appropriate level  
                   of the deficit.                                      

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[[Page 19]]

            What Can Be Learned from a Balance Sheet Approach

  The budget is an essential tool for allocating resources within the 
Federal Government and between the public and private sectors, but the 
standard budget presentation, with its focus on annual outlays, 
receipts, and the deficit over a five- or six-year period does not 
provide all the information that would be needed for a full analysis of 
the Government's financial and investment decisions. In addition, 
information about Federal assets and liabilities can be helpful. Long-
run budget projections that extend the usual forecast horizon are also 
important. Finally, it is important to examine the effects on society 
and the economy of Government policies in order to evaluate how well the 
Federal Government is performing. A business may ultimately be judged by 
the bottom line in its income statement or balance sheet, but for the 
National Government, the ultimate test is how its actions affect the 
entire country. The data needed to judge its performance go beyond a 
simple measure of the net assets of the Government alone; indeed, given 
the Federal Government's much broader responsibilities, looking at its 
net assets alone can be misleading (see the ``Questions and Answers'' in 
the accompanying box).
  Consider, for example, Federal investments in education or 
infrastructure which generate returns that flow mainly to households, 
private businesses or other levels of government rather than back to the 
Federal Treasury. Considered in terms of the Federal Government's own 
``bottom line,'' these investments are a negative, but they make a real 
contribution to the Nation as a whole, the economy, and the people. A 
framework for evaluating Federal finances needs to take the return on 
such investments into account, even when the return accrues to someone 
other than the Federal Government.
  A good place to start an evaluation of the Government's finances is 
with a measurement of its assets and liabilities, although this is only 
a starting point. Such a tabulation is presented below based on data 
from a variety of public and private sources. It has sometimes been 
suggested that the Federal Government's assets, if fully accounted for, 
would exceed its debts, and that a positive balance in such a 
calculation would mitigate the risks of large Government budget 
deficits. Table 2-1 clearly shows that this is not correct. The Federal 
Government's assets are substantially less than its debts mainly because 
of the steep increase in deficits that occurred in the 1980s.
  But that is not the end of the story. The Federal Government has 
resources that go beyond the conventional assets that normally appear on 
a balance sheet. These include the Government's sovereign powers to tax, 
regulate commerce, and set monetary policy. These powers call for 
special treatment in evaluating the Government's financial position. The 
Government's sovereign powers give it access to resources that no 
private individual or business possesses, but these powers would not be 
considered assets in any normal sense of the word, nor would they be 
counted on a conventional balance sheet. Yet they need to be considered 
in a comprehensive review of the Government's financial condition. The 
best way to do this is to make a long-run projection of the Federal 
budget. The budget provides a comprehensive measure of the Government's 
annual cash flows, and projecting it forward shows how the Government's 
powers are expected to generate cash flows in the future.
  On the other side of the ledger are the Government's formal debt 
obligations, such as Treasury bills or notes, along with the present 
discounted value of its obligations to pay pension benefits to Federal 
retirees. Both types of obligations have obvious counterparts in the 
business world that would appear on a business balance sheet. Accrued 
obligations for government insurance policies and the estimated present 
value of future failed loan guarantees and deposit insurance claims 
should also be added to Government liabilities. These formal liabilities 
are only a subset of the Government's financial responsibilities. In 
addition, there are obligations which have no analogues in business 
accounting, and which would not be included on a conventional balance 
sheet.
  For example, the Government has established a broad range of programs 
that dispense cash and other benefits to individual recipients. The 
Government is not constitutionally obligated to continue payments under 
these programs; the benefits can be modified or even ended at any time, 
subject to the decisions of the elected representatives in Congress. 
Last year's welfare reform legislation is only the most recent example 
of such a change. Allowing for such changes, however, it is likely that 
many of these programs will remain Federal obligations in some form for 
the foreseeable future. The present value of the benefits that will be 
paid out through these programs therefore, can be measured as a claim on 
future Government resources. Again, the best way to see how future 
responsibilities line up with future resources is to project the Federal 
budget forward far enough in time to capture the long-run effects of 
current and past decisions. Projections of this sort are presented 
below.
  The budget, even when projected far into the future, does not show 
whether the public is receiving value for its tax dollars. That question 
requires performance measures for government programs supplemented by 
appropriate information about conditions in the U.S. economy and 
society. Some of these data are currently available but much more would 
need to be developed to obtain a full picture. Examples of what might be 
done are also shown below.
  The presentation that follows consists of a series of tables and 
charts. No one of these is a ``Government balance sheet,'' but all of 
them together can serve many of the functions of a balance sheet. The 
schematic diagram, Chart 2-1, shows how they fit together. The tables 
and charts should be viewed as an ensemble, the main elements of which 
can be grouped together in two broad categories--assets/resources and 
liabilities/responsibilities.

[[Page 20]]


     Reading down the left-hand side of the diagram shows the 
          range of Federal resources, including assets the Government 
          owns, tax receipts it can expect to collect, and national 
          wealth that underpins the Government's revenue raising 
          capacity.
     Reading down the right-hand side reveals the full range of 
          Federal obligations and responsibilities, beginning with 
          Government's acknowledged liabilities based on past actions, 
          such as the debt held by the public, and going on to include 
          future budget outlays.

          

[[Page 21]]

          
         PART I--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 FY 1996 dollars. For nearly all of this period, 
Government liabilities have exceeded the value of assets, but until the 
early 1980s the disparity was relatively small, and it was only growing 
slowly (see Chart 2-2).
  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. 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. That reduced the 
balance of Federal net assets, but it was good for the economy.
  The total real value of Federal assets is estimated to be about 18 
percent greater than it was in 1960. Meanwhile, Federal liabilities have 
increased by almost 180 percent in real terms. The sharp decline in the 
Federal net asset position in the 1980s was principally due to large 
Federal budget deficits along with a drop in asset values. Currently, 
the net excess of liabilities over assets is about $3 trillion or 
$12,000 per capita.

                                                     Table 2-1  GOVERNMENT ASSETS AND LIABILITIES *                                                     
                                             (As of the end of the fiscal year, in billions of 1996 dollars)                                            
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                               1960       1965       1970       1975       1980       1985       1990       1994       1995       1996  
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                        
ASSETS                                                                                                                                                  
                                                                                                                                                        
Financial Assets:                                                                                                                                       
  Gold and Foreign Exchange...............        100         71         59        133        328        157        198        174        181        165
  Other Monetary Assets...................         77        112         68         43         82         52         68         69         70         87
  Mortgages and Other Loans...............        124        159        206        206        284        348        282        224        196        171
    less Expected Loan Losses.............         -1         -3         -4         -9        -16        -16        -18        -26        -22        -22
  Other Financial Assets..................         59         79         65         66         86        110        170        195        195        200
                                           -------------------------------------------------------------------------------------------------------------
    Subtotal..............................        360        419        393        439        763        651        700        635        619        600
Physical Assets:                                                                                                                                        
  Fixed Reproducible Capital:                                                                                                                           
    Defense...............................        843        841        845        655        541        674        768        786        761        739
    Nondefense............................        149        174        189        196        210        226        244        252        258        261
  Inventories.............................        257        222        207        184        225        257        224        174        172        168
  Nonreproducible Capital:                                                                                                                              
    Land..................................         89        123        153        238        302        325        321        242        240        239
    Mineral Rights........................        321        297        245        340        618        696        465        367        342        376
                                           -------------------------------------------------------------------------------------------------------------
      Subtotal............................      1,659      1,658      1,639      1,613      1,896      2,178      2,022      1,820      1,773      1,783
                                           =============================================================================================================
        Total assets......................      2,018      2,077      2,032      2,052      2,659      2,829      2,722      2,455      2,392      2,383
                                                                                                                                                        
LIABILITIES                                                                                                                                             
                                                                                                                                                        
Financial Liabilities:                                                                                                                                  
  Currency and Bank Reserves..............        224        246        272        277        279        295        352        430        437        446
  Debt held by the Public.................        973        961        815        802      1,039      1,845      2,532      3,219      3,302      3,347
  Miscellaneous...........................         25         27         28         41         59         84        126        112        117        120
                                           -------------------------------------------------------------------------------------------------------------
    Subtotal..............................      1,222      1,234      1,115      1,120      1,377      2,224      3,010      3,761      3,856      3,913
Insurance Liabilities:                                                                                                                                  
  Deposit Insurance.......................  .........  .........  .........  .........          2          9         68          8          5          2
  Pension Benefit Guarantee Corp..........  .........  .........  .........         42         30         42         41         31         19         13
  Loan Guarantees.........................  .........  .........          2          6         12         10         15         31         28         31
  Other Insurance.........................         30         27         22         20         26         16         19         17         16         16
                                           -------------------------------------------------------------------------------------------------------------
    Subtotal..............................         30         28         24         68         71         77        142         88         68         62
Federal Pension Liabilities...............        749        949      1,125      1,280      1,740      1,726      1,656      1,570      1,581      1,598
      Total liabilities...................      2,001      2,211      2,264      2,468      3,187      4,028      4,809      5,420      5,505      5,572
      Balance.............................         17       -134       -232       -416       -528     -1,199     -2,086     -2,965     -3,113     -3,189
        Per Capita (in 1996 dollars)......         95       -689     -1,130     -1,926     -2,313     -5,013     -8,324    -11,344    -11,805    -11,985
        Ratio to GDP (in percent).........        0.7       -4.2       -6.2       -9.8      -10.4      -20.2      -30.9      -40.2      -41.6      -41.6
                                                                                                                                                        
--------------------------------------------------------------------------------------------------------------------------------------------------------
* 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 other Government agencies Estimates for FY 1995 are       
  extrapolated in some cases Negative numbers are in parentheses.                                                                                       
                                                                                                                                                        
                                                                                                                                                        



Assets:

  The assets in Table 2-1 reflect the most comprehensive possible list 
of the financial and physical resources 

[[Page 22]]



owned by the Federal Government. The list corresponds to items that would appear on a typical balance sheet, but it does not constitute an exhaustive catalogue of Federal resources. In particular, the Government's most important financial resource, its ability to tax, is not reflected.
  Financial Assets: According to the Federal Reserve Board's Flow-of-
Funds accounts, the Federal Government's holdings of financial assets 
amounted to about $600 billion at the end of 1996. 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 five 
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 
worth. OMB estimates that the discounted present value of future losses 
and interest subsidy on these loans is about $22 billion as of 1996. 
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 the end of Fiscal Year 1980, gold prices 
have fallen and the real value of U.S. gold and foreign exchange 
holdings has dropped by about 50 percent. Much of this decline occurred 
before 1990; since then the decline has continued but at a slower pace.
  Reproducible Capital: The Federal Government is a major investor in 
physical capital. Government-owned stocks of fixed capital amounted to 
$1.0 trillion in 1996 (OMB estimate). About three-quarters of this 
capital took the form of defense equipment or structures.
  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. 
The past year's increase in oil prices, however, has pulled up the value 
of Federal mineral deposits.
  Total Assets: The total real value of Government assets is lower now 
than at the end of the 1980s, principally because of declines in the 
real prices of gold, land, and minerals. Even so, the Government's 
holdings are vast. At the end of 1996, the value of Government assets is 
estimated to have been about $2.4 trillion.

[[Page 23]]

Liabilities:

  Only liabilities analogous to those of a business corporation are 
shown in Table 2-1. These include the various forms of Federal debt, 
Federal pension obligations to its workers, and an imputed liability for 
Federal insurance and loan guarantee programs. Other potential claims on 
Federal financial resources are not reflected.
  Financial Liabilities: The Government's financial liabilities amounted 
to about $3.9 trillion at the end of 1996. The largest component was 
Federal debt held by the public, amounting to over $3.3 trillion. This 
measure of Federal debt is net of the holdings of the Federal Reserve 
System, about $390 billion in 1996. (Although independent in its policy 
deliberations, the Federal Reserve is part of the Federal Government, 
and 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 approximately $450 billion in currency and bank 
reserves, which are mainly obligations of the Federal Reserve System, 
and about $120 billion in miscellaneous liabilities.
  Guarantees and Insurance Liabilities: The Federal Government has 
contingent liabilities arising from loan guarantee and insurance 
programs. When the Government guarantees a loan or offers insurance, 
initial cash flows 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 much larger. In the past, the accruing cost of such 
risks was not recognized until after a loss was realized. Table 2-1 
includes an estimate of the discounted present value of future costs 
traceable to risks assumed through the end of last year.
  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 1996, 
the discounted present value of the benefits is estimated to have been 
around $1.6 trillion. \2\
---------------------------------------------------------------------------
  \2\  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 because estimates 
are unavailable. The 1996 liability is extrapolated from recent trends.
---------------------------------------------------------------------------

The Balance of Net Liabilities

  Because its sovereign powers give it access to other resources, the 
Government need not maintain a positive balance of net assets, and the 
rapid in buildup in liabilities since 1980 has not damaged the Federal 
creditworthiness. However, from 1980 to 1992, the balance between 
Federal liabilities and Federal assets did deteriorate at a rapid rate. 
In 1980, the negative balance was 10 percent of GDP. By 1992 it was 37 
percent of GDP. Since then it has increased only half as fast. However, 
because the net liability did deteriorate, albeit slowly, it has reached 
about 42 percent of GDP.
  The Government is able to finance its borrowing, and often does so at 
quite moderate interest rates, but ever continuing increases in the 
scale of its net liabilities would be worrisome. Fortunately, the upward 
trend is being reversed. Since 1992, the budget deficit has declined by 
about two thirds, and the rate of increase in Federal debt has slowed 
appreciably. If the budget were balanced, as the Administration 
proposes, the rate of decline in the net asset position would be 
reversed, and even before the budget reached surplus, the ratio of net 
liabilities to GDP would begin to decline.

          PART II--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 that is 
limited 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 
responsibilities.
  This part of the presentation shows some alternative long-run 
projections of the Federal budget that extend into the middle of the 
next century. 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 ahead 
projections are pushed. Even so, long-run budget projections are needed 
to assess the full implications of current policy choices, and to sound 
warnings about future problems that could be avoided by timely action.
  The Federal Government's responsibilities extend well beyond the five- 
or six-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.
  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 around 
the year 2005. 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 help indicate 

[[Page 24]]

how serious these strains might become and what is needed to withstand them.
  The retirement of the baby-boomers dictates the timing of the problem, 
but the underlying cause is deeper. The growth of the U.S. population 
has been slowing down, and because of that, and because people are 
living longer, a change is coming in the ratio of retirees to workers. 
That change will speed up dramatically when the baby-boomers begin to 
retire, but even after they have passed from the scene later in the 
century, the higher ratio of dependent elderly will persist. There is in 
short a long-run problem facing the Nation's retirement programs that 
will continue as long as Americans continue to live longer in retirement 
and have fewer offspring. The same problem is gripping other developed 
nations, even those that never experienced a baby boom--and, in fact, 
for some of those nations the problem has already arrived.

  The Long-Range Outlook for the Budget.--Since this Administration 
first 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 the policies then in place continued unchanged, the 
deficit would have steadily mounted, not only in dollar terms, but 
relative to the size of the economy. \3\ The Omnibus Budget 
Reconciliation Act of 1993 (OBRA 1993) changed that. Not only did it 
reduce the near-term deficit, but it also brought down the long-term 
budget deficit. Subsequent budget action pulled down the deficit even 
more. It is now expected that current budget policies would be 
sufficient to maintain the deficit as a relatively stable share of GDP 
for many years to come (see Chart 2-3).
---------------------------------------------------------------------------
  \3\ Over 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 1996 dollar 
by 60 percent by 2030, and by more than 75 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. 



  Despite this improvement, however, the long-run outlook for the budget 
remains problematic. Without further action, substantial increases in 
Federal debt and the deficit are likely when the baby-boom generation 
retires. For example, the 1994 report of the Bipartisan Commission on 
Entitlement and Tax Reform found that there is a ``long-term imbalance 
between the government's entitlement promises and the funds it will have 
available to pay for them.'' Last year, the Congressional Budget Office 
in The Economic and Budget Outlook: Fiscal Years 1997-2006 observed in 
reference to the budgetary threat posed by the retirement of the baby-
boomers, ``Those fiscal demands could produce unsustainably high levels 
of federal debt unless additional actions are taken to control federal 
spending.'' On a narrower front, the annual Trustees' reports for both 
the social security and Medicare trust funds have for some time 
projected a long-run actuarial deficiency for these programs.

[[Page 25]]

  Economic and Demographic Projections.--Long-run budget projections 
must be based on a long-run demographic and economic forecast, even 
though such forecasts are highly uncertain and sure to be at least 
partly wrong. Otherwise, it is impossible to form any judgment about 
future resources or the potential claims on them. The forecast used here 
extends the Administration's medium-term economic projections described 
in the first chapter of this volume augmented by the long-run 
demographic projections from the most recent social security Trustees' 
Report.
     Inflation, unemployment and interest rates are assumed to 
          hold stable at their values in the last year of the 
          Administration projections, 2007.
     Productivity growth is assumed to continue at a constant 
          rate equal to its average rate in the Administration's 
          projections, approximately 1.1 percent per year.
     In line with the most recent projections of the social 
          security Trustees, 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 about 
          1 percent per year to half that rate by the year 2030.
     Labor force participation is also expected to decline as 
          the population ages and the proportion of retirees in the 
          population increases. Over the next decade, however, the 
          Administration is projecting a higher rate of labor force 
          participation than in the latest Trustees' Report. That 
          difference is preserved in the long-run projections below.
     The real rate of economic growth is determined by the 
          expected growth of the labor force (assuming a stable 
          unemployment rate) plus labor productivity growth. Because 
          labor force growth is expected to slow, even though 
          productivity growth is assumed to be constant, real GDP growth 
          declines during the period after 2007 from around 2\1/4\ 
          percent to less than 1\1/2\ percent per year.
  The assumptions just described are consistent with the 
Administration's policy of balancing the budget. For the long-run 
projections without a balanced budget, the assumptions are revised 
slightly to reflect higher interest rates and other changes that would 
occur if the President's proposals were not adopted. Aside from this 
revision for the baseline projections, the economic projections are set 
by assumption and do not automatically change in response to changes in 
the budget outlook. This is unrealistic, but it simplifies comparisons 
of alternative policies. It also tends to underestimate the budgetary 
effects of policies that fail to stabilize the deficit and the Federal 
debt. Such policies are likely to lower saving, raise interest rates, 
and reduce economic growth, creating a feedback effect that drives the 
budget deficit higher and raises the level of debt further. Thus, a more 
responsive (or dynamic) set of assumptions would serve mainly to 
strengthen the conclusions based on the current approach.

  The Deficit Outlook.-- Chart 2-3 shows three alternative deficit 
projections: a projection based on the policies in place prior to 
enactment of OBRA 1993; the current baseline projections which 
incorporate the effects of OBRA 1993 along with subsequent changes in 
budget policy; and a projection that shows what would happen to the 
long-run deficit if the proposals in the current budget were adopted. 
The chart clearly illustrates the dramatic improvement in the deficit 
that has already been achieved. Despite the improvement in the outlook, 
serious long-run problems remain to be addressed. Without further 
changes, the deficit is expected to begin rising again relative to the 
size of the economy. If unchecked, the growth in the deficit would 
eventually push the debt to unsustainable levels. However, if the budget 
were balanced early in the next century, as the President proposes, the 
task of maintaining fiscal stability when the demographic bulge hits 
could be substantially reduced.

                                   Table 2-2.  ALTERNATIVE BUDGET PROJECTIONS                                   
                                                (Percent of GDP)                                                
----------------------------------------------------------------------------------------------------------------
                                                   1995    2000    2005    2010    2020    2030    2040    2050 
----------------------------------------------------------------------------------------------------------------
Current outlook without a balanced budget:                                                                      
  Receipts......................................    18.9    19.0    18.9    18.9    19.0    19.2    19.4    19.5
  Outlays.......................................    21.1    20.7    20.2    20.3    23.1    27.6    31.5    35.9
    Discretionary...............................     7.6     6.5     5.9     5.4     4.7     4.2     3.7     3.3
    Mandatory...................................    10.3    11.3    11.8    12.6    15.7    18.6    19.9    20.7
      Social security...........................     4.6     4.6     4.6     4.7     5.6     6.4     6.5     6.5
      Medicare and Medicaid.....................     3.4     4.1     4.8     5.7     8.1    10.5    11.9    12.8
    Net interest................................     3.2     2.9     2.5     2.3     2.8     4.8     8.0    12.0
  Surplus or deficit (-)........................    -2.3    -1.6    -1.2    -1.4    -4.1    -8.4   -12.2   -16.5
                                                                                                                
  Primary surplus or deficit (-)................     0.9     1.2     1.2     0.9    -1.3    -3.6    -4.2    -4.5
  Federal debt held by the public...............    50.1    48.3    44.9    42.2    52.7    91.9   152.1   227.4
                                                                                                                
Presidential policy (balanced budget):                                                                          
  Receipts......................................    18.9    19.1    19.0    18.9    19.0    19.2    19.3    19.4
  Outlays.......................................    21.1    20.1    18.6    18.1    19.1    21.1    22.1    22.9
    Discretionary...............................     7.6     6.2     5.4     4.8     4.2     3.7     3.3     2.9
    Mandatory...................................    10.3    11.1    11.3    11.8    14.1    16.3    17.1    17.5
      Social security...........................     4.6     4.6     4.6     4.7     5.6     6.4     6.5     6.5
      Medicare and Medicaid.....................     3.4     3.8     4.3     4.9     6.6     8.2     9.1     9.6
    Net interest................................     3.2     2.7     2.0     1.4     0.8     1.0     1.7     2.5
  Surplus or deficit (-)........................    -2.3    -1.0     0.4     0.8    -0.1    -1.9    -2.8    -3.5
                                                                                                                
  Primary surplus or deficit (-)................     0.9     1.8     2.3     2.2     0.7    -0.9    -1.1    -1.0
  Federal debt held by the public...............    50.1    47.2    37.7    27.5    15.8    21.4    36.0    51.3
----------------------------------------------------------------------------------------------------------------

  Table 2-2 shows long-range projections for the major categories of 
spending under current baseline assumptions and with the policy changes 
proposed in this year's budget. The table shows that the entitlement 
programs are the major driving force behind the rise in the deficit in 
the long run. Social security benefits, driven by the retirement of the 
baby-boom generation, rise from 4.6 percent of GDP in 2000 to 6.4 
percent in 2030. The rise in Federal health care is even greater. 
Together Medicare and Medicaid reach 4.1 percent of GDP in 2000 along 
the current baseline, and then continue to rise to over 10 percent by 
the year 2030.
  As this occurs, the deficit begins to soar. Initially, the 
programmatic spending drives the increase, but then a vicious spiral 
takes hold in which more borrowing leads to higher Federal interest 
payments on the growing debt which are financed in turn by yet more 
borrowing. The spiral is unstable in that if it continued unchecked it 
would lead to an unbounded increase in the debt and the deficit. At some 
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.
  Because interest on the debt is the uncontrollable consequence of past 
spending decisions, it is useful to focus on the primary surplus or 
deficit, which is the balance between revenues and non-interest outlays. 
This measure is shown in Table 2-2 along with the total, or unified 
surplus or deficit. The large and rapidly growing deficit in the unified 
budget is the product of a smaller and slower growing primary deficit. 
If the imbalance in the primary budget could be controlled over time, 
the larger imbalance in the unified budget would automatically be 
resolved. The unsustainable spiral of increasing deficits and debt can 
be avoided by maintaining a small primary surplus. This is possible even 
with a modest deficit in the unified budget. How-

[[Page 26]]

ever, the spiral is inevitable with a permanent primary deficit, even a small one. \4\
---------------------------------------------------------------------------
  \4\ The exact relationship between fiscal sustainability and the 
primary surplus or deficit depends on the relationship among the initial 
ratio of debt to GDP, interest rates, and GDP growth. The higher the 
initial debt ratio or interest rates, or the lower GDP growth, the 
larger the primary surplus necessary to avoid the unsustainable debt 
spiral.
---------------------------------------------------------------------------
  The long-run deficit outlook would be much improved if current budget 
proposals were enacted. Eliminating the deficit by 2002 would leave the 
budget in surplus for nearly two decades thereafter. While deficits 
would eventually reappear, they would be substantially lower than if the 
budget were not balanced now. In this sense, the current policy 
proposals would do much to place the budget on a sounder footing to 
address the coming fiscal pressures created by the retirement of the 
baby-boom generation.
  The key to these projections is the set of economic assumptions which 
has already been discussed plus technical assumptions about Medicare, 
Medicaid and discretionary spending.
     The Medicare savings proposed in the budget are assumed to 
          lower Medicare spending permanently relative to the current 
          baseline. After 2007, the policy projections assume that 
          Medicare resumes the same rate of growth as in the baseline 
          projections, but starting from a much lower level that 
          reflects the impact of the Administration's proposed savings. 
          The baseline rate of growth after 2007 is taken from the 
          latest reports of the Medicare Trustees, who assume a marked 
          slowdown in growth in the long term.
     The projections assume that the Administration's proposed 
          cap for per capita Medicaid payments is maintained 
          indefinitely. Medicaid would continue to be an entitlement, 
          and enrollment in the program would be determined by general 
          eligibility requirements, but increases in the Federal 
          payments on a per person basis would be capped by a formula.
     By convention, the current services estimates of 
          discretionary spending are assumed to rise with the rate of 
          inflation. This assumption, or any other used for 
          discretionary spending, is inherently arbitrary, because 
          discretionary spending is determined annually through the 
          legislative process, and there is no legally binding formula 
          to dictate the pattern of future spending. The assumption that 
          the real value of Federal services is unchanging \5\ implies 
          over long periods of time that the size of the Federal 
          establishment shrinks relative to the size of the economy.
---------------------------------------------------------------------------
  \5\ This is an approximation. The real value of the services in terms 
of purchasing power would be unchanged, but the quantity of services 
would depend on the productivity of Federal workers. A significant 
portion of discretionary spending consists of Federal payroll costs. In 
a period of moderately rising real wages, as assumed in the budget and 
in the Trustees' report, these costs would rise somewhat faster than 
inflation on a per employee basis. Under these circumstances, holding 
Federal discretionary spending constant over several decades would imply 
a significant decrease in the Federal work force and, unless offset by 
productivity gains, in the volume of Federal services.
---------------------------------------------------------------------------
  Other assumptions are possible, and one reason why other analysts have 
come to varying conclusions is because of differences with one or more 
of these assumptions. For example, some assume that discretionary 
spending will hold to a constant share of GDP in the long run, even 
though that is not the current services assumption used by OMB and CBO. 
Under this alternative assumption, discretionary spending would seem 
neutral with respect to spending as a share of GDP. In contrast, when 
discretionary spending is held constant in real terms, as normally 
assumed by OMB, discretionary spending shrinks as a share of GDP, and 
consequently serves to offset some of the rise in entitlement spending 
as a share of GDP that occurs for demographic reasons.

[[Page 27]]

  The Medicaid cap is also a key assumption. Limiting Federal Medicaid 
spending as a share of GDP would reduce the pressure on the budget by 
several percentage points of GDP, compared with a long-run projection in 
which Medicaid continues at its historical rate of growth.
  Various alternative economic and technical assumptions are discussed 
below:

  Alternative Scenarios.--Each alternative focuses on one of the key 
uncertainties in the outlook. Generally, the scenarios highlight 
negative possibilities rather than positive ones to show where the 
dangers are in the outlook.
  1. Discretionary Spending: The projections assume that discretionary 
spending is held constant in real terms once budget balance is reached. 
With real economic growth and rising population, the public demand for 
Government services--more national parks, better transportation, 
additional Federal support for scientific research--might increase as 
well. The assumption also implies that the Nation's defense needs will 
not vary from the levels projected at the turn of the century. 
Alternative assumptions that allow for these programs to grow with 
population or overall economic activity are shown in Chart 2-4. These 
alternative assumptions worsen the deficit outlook.



  2. Health Spending: Expenditures for Medicare and Medicaid have grown 
much faster than other entitlements, and even after the reforms in the 
President's budget, they continue to rise at a rapid rate. The 
alternative assumptions show what would happen if spending for these 
programs speeds up or slows down after the budget is balanced. The 
budget is extremely sensitive to these assumptions, as can be seen in 
Chart 2-5.
  3. Productivity:  The slowdown in productivity growth in the U.S. 
economy that began in 1973 is responsible for the slow rise in U.S. real 
incomes since that time. Productivity can be altered by changes in the 
budget deficit which affect national saving, but many other factors 
influence it as well. The alternative scenarios illustrate what would 
happen to the budget deficit if productivity growth were higher or 
lower. A higher rate of growth would make the task of preserving a 
balanced budget dramatically easier; a lower growth rate would have the 
opposite effect. Chart 2-6 shows how the deficit varies with changes of 
one-half percentage point of average productivity growth.







  4. Population: Much of the long-run problem is due to expected 
demographic shifts. Chart 2-6 illustrates how important these are by 
showing what happens to the deficit under the alternative demographic 
assumptions used by the social security Trustees in their most recent 
report. The projection of Presidential policy relies on the Trustees' 
intermediate assumptions.

  Conclusion.--OBRA 1993 and subsequent policy actions have improved the 
long-run deficit outlook, but the deficit is still projected to increase 
if further budget

[[Page 29]]

offsets are not made. The President's budget proposals 
would not only balance the budget by 2002, but go some distance toward 
resolving the long-run deficit problem as well.
  Actuarial Balance in the Social Security and Medicare Trust Funds.--
The Trustees for the social security and Hospital Insurance trust funds 
issue annual reports that include projections of income and outgo for 
these funds over a 75-year period. These projections are based on 
different methods and assumptions than the budget projections presented 
above, but they deliver a similar message: the retirement of the baby 
boom generation, coupled with high rates of health care cost growth, are 
expected to place large pressures on social security and Medicare, 
resulting in spending increases that outstrip the resources of the trust 
funds under current law.
  The Trustees' reports highlight the 75-year actuarial balance of the 
trust funds as a summary measure of their financial status. This 
indicator measures the change in payroll taxes or program benefits, 
expressed as a percent of taxable payroll, that would be needed to leave 
the fund with a small positive balance at the end of 75 years.
  Table 2-3 shows the changes in the 75-year actuarial balances of the 
social security and Hospital Insurance trust funds since 1995. There was 
only a small change in the consolidated balance for the combined OASDI 
fund, which aggregates the separate funds set up for retirement and 
disability insurance. There was a noticeable deterioration in the 
Hospital Insurance fund for the Medicare program. In 1996, the Trustees 
for the Hospital Insurance Trust Fund projected that under their 
intermediate assumptions, the HI Trust Fund would be insolvent in 2002, 
one year earlier than projected in 1995. The Trustees are expected to 
revise the projected exhaustion date for HI later this spring in their 
1997 Report. A significant change in the insolvency date is not 
expected. However, because the Trustees' analysis considers a wide range 
of uncertain developments, including additional experience in the 
current fiscal year, new analyses of factors affecting HI benefit growth 
during fiscal years 1991-1996, updated projections of HI payroll tax 
income, and possible revisions to interest rate expectations, it is not 
possible to predict the new exhaustion date prior to the Report's 
completion exactly. Furthermore, the Trustees' estimates do not take 
account of the legislative changes in Medicare proposed in this budget 
that wuuld postpone the date at which the trust fund is expected to be 
depleted. While the HI fund is projected to be depleted within a few 
years in the intermediate actuarial projections, the combined OASDI fund 
would not be depleted for more than three decades.
  The 75-year actuarial balance is widely reported, but it does not 
provide information about trends within the 75-year period. The social 
security trust fund, for example, is currently running large annual 
surpluses. Until 2012, the Trustees project that the current payroll tax

[[Page 30]]


will be sufficient to cover program benefits. Afterwards, the program 
must draw down trust fund assets to finance benefits, until the fund is 
exhausted in 2029. If the payroll tax were raised today by the 2.2 
percentage points necessary to eliminate the 75-year imbalance, the 
higher trust fund income would only cover outlays in the program until 
2021, according to the Trustees' intermediate projections. Beyond that 
point, trust fund assets would once again have to be drawn down to 
finance benefits. At the end of 75 years, the fund would have only 
enough assets to finance the following year's benefits, and would face 
exhaustion shortly thereafter.

                                     

     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 1995 Report........................................     -1.87     -0.31     -2.17     -3.52
Changes in balance due to changes in:                                                                           
  Valuation period......................................................     -0.07     -0.01     -0.08     -0.10
  Economic and demographic assumptions..................................     -0.06  ........     -0.07     -0.10
  Disability Assumptions................................................  ........     -0.03     -0.03  ........
  Legislation...........................................................      0.01      0.02      0.03  ........
  Methods...............................................................      0.14  ........      0.14  ........
  Hospital Costs........................................................  ........  ........  ........     -0.54
  Other.................................................................  ........  ........  ........     -0.26
                                                                         ---------------------------------------
    Total Changes.......................................................      0.01     -0.03     -0.02     -1.00
Actuarial balance in 1996 Report........................................     -1.85     -0.34     -2.19     -4.52
----------------------------------------------------------------------------------------------------------------

                                     

                  PART III--NATIONAL WEALTH AND WELFARE

  Unlike a private corporation, the Federal Government routinely invests 
in ways that do not add directly to its 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 and would not be reported on a 
conventional balance sheet.
  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 an investment 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 
usually appear on a balance sheet.
  Table 2-4 presents a national balance sheet. It includes estimates of 
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, 
and detailed assumptions are needed to prepare the estimates. 
Furthermore, the principal source of data on physical capital, the 
Bureau of Economic Analysis, is in the process of making significant 
revisions to the underlying series. As a result, the estimates for 1995-
1996 are quite tentative, and the data shown for earlier years are 
likely to be revised as well. In broad terms, however, the picture shown 
in Table 2-4 is not likely to be overturned.
  Federal investments are responsible for about 7\1/2\ percent of total 
national wealth. This is a small fraction, but it represents a large 
volume of investment, $4.3 trillion. The Federal contribution is down 
from around 8 percent at the end of the 1980s, and from over 12 percent 
in 1960. Much of this reflects the shrinking size of the defense capital 
stocks, which have gone down from 12 percent of GDP to 10 percent in the 
last few years. Chart 2-7 illustrates the relative contributions of 
different categories of wealth to the national total.

                                                               Table 2-4  NATIONAL WEALTH                                                               
                                            (As of the end of the fiscal year, in trillions of 1996 dollars)                                            
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                               1960       1965       1970       1975       1980       1985       1990       1994       1995       1996  
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                        
ASSETS                                                                                                                                                  
                                                                                                                                                        
Publicly Owned Physical Assets:                                                                                                                         
  Structures and Equipment................       2.0        2.4        2.9        3.4        3.7        3.7        3.9        4.1        4.2        4.2 
    Federally Owned or Financed...........       1.1        1.2        1.3        1.2        1.2        1.4        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 Governments.       0.1        0.2        0.3        0.4        0.5        0.5        0.6        0.6        0.6        0.6 
    Funded by State & Local Governments...       0.9        1.2        1.6        2.2        2.5        2.3        2.3        2.5        2.6        2.6 
  Other Federal Assets....................       0.8        0.7        0.7        0.9        1.5        1.4        1.1        0.9        0.9        0.9 
                                           -------------------------------------------------------------------------------------------------------------
        Subtotal..........................       2.8        3.0        3.5        4.3        5.2        5.1        5.1        5.0        5.0        5.1 
Privately Owned Physical Assets:                                                                                                                        
   Reproducible Assets....................       5.5        6.4        8.0       10.4       13.2       13.9       15.3       16.1       16.6       17.1 
    Residential Structures................       2.0        2.3        2.8        3.7        4.9        5.0        5.5        6.0        6.2        6.4 
     Nonresidential Plant & Equipment.....       2.0        2.3        3.0        4.1        5.1        5.7        6.1        6.3        6.4        6.6 
    Inventories...........................       0.7        0.8        0.9        1.1        1.4        1.3        1.3        1.3        1.3        1.3 
     Consumer Durables....................       0.9        1.0        1.3        1.5        1.8        1.9        2.4        2.6        2.7        2.7 
  Land....................................       2.0        2.3        2.7        3.5        5.2        6.0        6.0        4.5        4.5        4.5 
                                           -------------------------------------------------------------------------------------------------------------
        Subtotal..........................       7.5        8.7       10.7       13.8       18.5       19.8       21.3       20.7       21.1       21.6 
Education Capital:                                                                                                                                      
  Federally Financed......................       0.1        0.1        0.2        0.3        0.4        0.6        0.7        0.8        0.9        0.9 
  Financed from Other Sources.............       6.2        8.1       10.8       12.5       15.3       18.4       23.4       26.3       27.3       28.2 
                                           -------------------------------------------------------------------------------------------------------------
        Subtotal..........................       6.3        8.2       11.0       12.9       15.7       19.0       24.1       27.2       28.1       29.1 
Research and Development Capital:                                                                                                                       
  Federally Financed R&D..................       0.2        0.3        0.5        0.5        0.6        0.6        0.8        0.8        0.9        0.9 
  R&D Financed from Other Sources.........       0.1        0.2        0.3        0.4        0.4        0.6        0.8        1.0        1.0        1.1 
                                           -------------------------------------------------------------------------------------------------------------
        Subtotal..........................       0.3        0.5        0.7        0.9        1.0        1.3        1.6        1.8        1.9        1.9 
                                           =============================================================================================================
          Total Assets....................      16.8       20.4       25.9       31.8       40.4       45.2       52.1       54.7       56.2       57.7 
                                                                                                                                                        
LIABILITIES                                                                                                                                             
                                                                                                                                                        
  Net Claims of Foreigners on U.S.........      (0.2)      (0.2)      (0.2)      (0.2)      (0.5)      (0.2)       0.3        0.7        0.9        1.1 
          Balance.........................      17.0       20.7       26.2       32.0       40.9       45.4       51.8       53.9       55.3       56.7 
Per Capita (thousands, 1996 dollars)......      94.0      106.4      127.7      148.3      179.0      189.8      206.5      206.3      209.6      213.0 
                                                                                                                                                        
ADDENDA:                                                                                                                                                
                                                                                                                                                        
  Total Federally Funded Capital..........       2.1        2.3        2.6        3.0        3.7        4.1        4.2        4.2        4.2        4.3 
  Percent of National Wealth..............      12.3       11.2       10.1        9.3        9.0        8.9        8.1        7.8        7.6        7.5 
--------------------------------------------------------------------------------------------------------------------------------------------------------

Physical Assets

  Physical assets in Table 2-4 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 
$27 trillion in 1996; by comparison, GDP was only about $7\1/2\ 
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.

[[Page 31]]


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.
  Table 2-4 shows an estimate of the stock of capital formed 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. The replacement value of education (as 
opposed to its original costs) is more meaningful economically, and is 
comparable to the measures of physical capital presented earlier.
  Although this is a relatively crude measure, it does provide a rough 
order of magnitude of the current value of the investment in education. 
According to this measure, the stock of education capital amounted to 
$29 trillion in 1996 of which about 3 percent was financed by the 
Federal Government. It exceeds the total value of the Nation's stock of 
physical capital. The main investors in education capital have been 
State and local governments, parents, and students themselves who forego 
earning opportunities to acquire education.
  There are even broader concepts of human capital. Not all useful 
training occurs in a schoolroom or in formal training programs at work. 
Much informal learning occurs within families or on the job, but 
measuring its value is very difficult. Labor compensation amounts to 
about two thirds of national income. Therefore, it is conceivable that 
the total value of human capital might be two to three times as large as 
the estimated value of physical capital. The estimates offered here are 
in a sense conservative, because they reflect only the costs of 
acquiring formal education and training.

Research and Development Capital

  Research and development can also be thought of as an investment, 
because R&D represents a current expenditure that is made in the 
expectation of earning a future return. After adjusting for 
depreciation, the flow of R&D investment can be added up to provide 

[[Page 32]]


an estimate of the current R&D stock. \6\ That stock is estimated to have 
been about $1.9 trillion in 1996. 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.
---------------------------------------------------------------------------
  \6\ 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 how much the United States owes as a Nation, the 
debts that Americans owe to one another cancel out. They do not belong 
in Table 2-4; but they are important. An unwise buildup in debt, most of 
which was owed to other Americans, was partly responsible for the 
sluggishness of the recovery from the 1990-1991 recession in its early 
stages. The only debt that appears in Table 2-4 is the debt that 
Americans owe to foreign investors. America's foreign debt has been 
increasing rapidly in recent years, because of the continuing imbalance 
in the U.S. current account; but even so the size of this debt is small 
compared with the total stock of U.S. assets. It amounted to slightly 
less than 2 percent of total U.S. wealth in 1996.
  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 reflected. However, comparing the Federal 
Government's net liabilities with total national wealth gives another 
indication of the relative magnitude of the imbalance in the 
Government's accounts. Currently, the Federal net asset imbalance, as 
estimated in Table 2-1, amounts to less than 6 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 1996 was 
about $57 trillion. Since 1980 it has increased in real terms at an 
annual rate of 2.0 percent per year--less than half the 4.5 percent rate 
it averaged from 1960 to 1980. 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 1996 than in 
1980--$5.1 trillion versus $5.2 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 0.4 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 1996, 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 1.0 percent per year between 1980 and 1996. 
Economists might discuss whether slower growth in net private business 
investment is caused by a shift toward investment in more efficient but 
shorter-lived computers, and whether the decline in inventories really 
reflects a more efficient use of them.
  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 3.9 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 that occurred after 1980. 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 more than $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 1996 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.

                                                                                               Table 2-5.  ECONOMIC AND SOCIAL INDICATORS                                                                                               
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
           General categories                                         Specific measures                                1960     1965     1970     1975     1980     1985     1990     1991     1992     1993     1994     1995     1996 
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
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   24,738   25,352   25,630   25,998
                                          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      1.1      1.4
                                          Median income (1994 dollars):                                                                                                                                                                 
                                            All households.........................................................   26,598   31,001   36,410   37,202   38,930   39,283   41,223   40,214   39,727   38,980   39,881   40,611       NA
                                            Married couple families................................................   27,796   32,375   38,805   40,315   42,852   44,049   46,519   45,871   45,503   45,356   46,223   47,062       NA
                                            Female householder, no husband present.................................   14,047   15,738   18,793   18,559   19,272   19,346   19,742   18,677   18,493   18,397   18,753   19,691       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     49.1       NA
                                          Poverty rate (%) \1\.....................................................     22.2     17.3     12.6     12.3     13.0     14.0     13.5     14.2     14.8     15.1     14.5     13.8       NA
  Economic security.....................  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      5.4
                                            CPI-U (year over year % change)........................................      1.7      1.6      5.7      9.1     13.5      3.6      5.4      4.2      3.0      3.0      2.6      2.8      3.0
   Employment prospects.................  Increase in total payroll employment (millions)..........................     -0.5      2.9     -0.5      0.4      0.2      2.5      0.3     -0.8      1.1      2.8      3.8      2.2      2.6
                                           Managerial or professional jobs (% of civilian employment)..............       NA       NA       NA       NA       NA     24.1     25.8     26.3     26.2     26.8     27.5     28.3     28.8
   Wealth creation......................  Net national saving rate (% of NNP)......................................     10.1     12.0      8.3      6.0      6.4      5.4      3.7      3.6      2.4      2.5      3.4      4.5      5.4
   Innovation...........................  Patents issued to U.S. residents (thous.)................................     42.0     53.6     50.1     51.4     40.8     43.3     52.8     57.7     58.7     61.1     64.2     64.5       NA
                                          Multifactor productivity (average annual percent change).................      1.1      3.2      1.1      1.3      0.7      0.6      0.3     -1.0      1.5      0.5      0.7       NA       NA
Social:                                                                                                                                                                                                                                 
   Families.............................  Children living with a single parent (% of all children).................      9.2     10.2     11.6     16.4     18.6     20.2     21.6     22.4     22.8     23.3     23.1     24.0       NA
   Safe communities.....................  Violent crime rate (per 100,000 population) \2\..........................      160      199      364      482      597      557      732      758      758      747      714      685      650
                                           Murder rate (per 100,000 population)....................................        5        5        8       10       10        8        9       10        9       10        9        8        8
                                           Juvenile crime (murders per 100,000 persons age 14-17)..................       NA       NA       NA       NA        9        7       16       18       17       19       19       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      7.6       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      7.3       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       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       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      6.2       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     81.7       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     23.0       NA
                                          National assessment of educational progress \3\..........................                                                                                                                     
                                             Mathematics...........................................................       NA       NA       NA      304      298      302      305       NA      307       NA      306       NA       NA
                                             Science...............................................................       NA       NA      305      296      283      288      290       NA      296       NA      294       NA       NA
   Participation........................  Voting for President (% eligible population).............................     62.8       NA       NA       NA     52.6       NA       NA       NA     55.2       NA       NA       NA       49
                                           Voting for Congress (% of eligible population)..........................     58.5       NA     43.5       NA     47.4       NA     33.1       NA     50.8       NA     36.0       NA       NA
                                          Individual charitable giving per capita (1996 dollars)...................      205      246      295      313      341      359      438      438      429      426      427       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       71       NA
   Water quality........................  Population served by secondary treatment or better (millions)............       NA       NA       NA       NA       NA      134      155      157      159      162      164      166      168
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The poverty rate does not reflect noncash government transfers such as Medicaid or food stamps.                                                                                                                                     
\2\ Not all crimes are reported, and the fraction that go unreported may have varied over time.                                                                                                                                         
\3\ Data shown for the National Education assessment are preliminary.                                                                                                                                                                   

  The indicators shown here are only a limited subset drawn from the 
vast array of available data 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.
  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 

[[Page 33]]

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.
  For example, during economic recessions, reductions in tax collections 
lead to increased government borrowing that adds to Federal liabilities. 
This decline in Federal net assets, however, provides an automatic 
stabilizer for the private sector. State and local governments and 
private budgets are strengthened by allowing the Federal budget to go 
deeper into 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 and weakening the other sectors.
  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 one useful way to examine the financial aspects 
of Federal policies. Increased Federal 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 and the Nation as a whole. As that occurs, the 
efforts will be clearly revealed in these tables.

[[Page 34]]

        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 this 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 data base for physical capital outlays. The data base 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 price deflators for 
Federal purchases of durables and structures from the National Income 
and Product Accounts. These price deflators are available going back as 
far as 1930. For earlier years, deflators were based on historical 
statistics for constant price public capital 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 1979-1995, 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 1996 is a projection.

                       Long-Run Budget Projections

  The long-run budget projections are based on long-run demographic and 
economic projections. A spread-sheet model of the Federal budget 
developed at OMB computes the budgetary implications of this forecast.
  Demographic and Economic Projections: For the years 1997-2007, 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 constant inflation, interest rates, and 
unemployment at the levels assumed in the final year of the budget. 
Population growth and labor force participation are extended using the 
intermediate assumptions from the 1996 social security Trustees' report. 
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 
assumptions used for the current services projections subtract the 
``fiscal dividend'' from interest rates, profits, and dividends.
  Budget Projections: For the budget period, the projections follow the 
budget. Beyond the budget horizon, 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 
pensions are projected using the most recent actuarial forecasts 
available at the time the budget was prepared (June 1996 for social 
security). These projections are repriced using Administration inflation 
and wage growth 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 
described in Chapter 6 of this volume. 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 unrevised capital stock data prepared by the Bureau of 
Economic Analysis.

[[Page 35]]


  Privately Owned Physical Assets: Data are from the Flow-of-Funds 
national balance sheet. Estimates for 1995-1996 were based on investment 
data 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' foregone 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 the sources of their funds, published 
in U.S. Department of Education, Digest of Education Statistics. Nominal 
expenditures were deflated by the implicit price deflator for GDP to 
convert them to constant dollar values. 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 data base 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. Chapter 6 of this volume contains 
additional details on the estimates of the total federally financed R&D 
stock, as well as its national defense and nondefense components.
  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 2-3 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.