[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
A balanced assessment of the Government's financial condition requires
several alternative perspectives. This chapter presents a framework for
such analysis.
The usual business accounting techniques do not work well for the
Government. A full evaluation of the Government's financial condition
must consider a broader range of information than would usually be shown
on a business balance sheet, and no one of the tables in this chapter
should be treated as if it were ``the balance sheet'' of the Federal
Government. Rather, this chapter taken as a whole provides an overview
of the Government's financial resources--the current and future claims
on them, and what the taxpayer gets 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 on a balance
sheet, taking into account the Government's unique task and
circumstances.
Because of the differences between Government and business, and
because there are serious limitations in the available data, this
chapter's findings should be interpreted with considerable caution. The
conclusions are tentative and subject to future revision.
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 items that are actually owned by the Government; but the
Government can also rely on taxes and other means to meet
future obligations. The liabilities in the table are limited
to the binding commitments resulting from prior Government
actions; but 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 1999 Budget. The
information is summarized in Table 2-2. 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 1996.
The third part of the presentation features information on
broader economic and social conditions which the Government
affects in some degree by its actions. 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 can capture all the ramifications of Federal
actions, so a set of indicators is needed to encompass the
full range of Government activities and interests. Table 2-5
is intended to illustrate what might be learned from a more
complete set of indicators.
Relationship with FASAB Objectives
The framework presented here meets the stewardship objective \1\ for
Federal financial reporting recommended by the Federal Accounting
Standards Advisory Board and adopted for use by the Federal Government
in September 1993.
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\1\ Objectives of Federal Financial Reporting, Statement of Federal
Financial Accounting Concepts Number 1, September 2, 1993. The other
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
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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
assets. No business could operate that way. Why can't the Government
run like a business?
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 almost 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 such that it
would be difficult or impossible to charge prices for
them--let alone prices that would cover expenses. The
Government undertakes these activities not to improve
its balance sheet, but to benefit the Nation--its people
and businesses--to foster 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 source of the
deterioration of the Federal Government's balance sheet
since the 1980s has been a decline in the price of gold,
which has reduced the value of the Government's gold
holdings. But that price decline--and the resulting
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 direct return from
these investments; but the Nation and its people are
made richer. A business's motives for investment are
quite different; business invests to earn a profit for
itself, not others.
Because the Federal Government's objectives are
different, its balance sheet behaves differently, and
should be interpreted 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 most comparable to the liabilities of a
business corporation exceed the estimated value of the
assets the Federal Government actually owns. However,
the Government has access to other resources through its
sovereign powers, which include taxation, seignorage and
other means. 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.
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QUESTIONS AND ANSWERS ABOUT THE GOVERNMENT'S ``BALANCE SHEET''--
Continued
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However, the Federal Government's balance sheet was
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 useful information.
In recent years, 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 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 for fiscal year 1997 following these
standards is scheduled to be issued later this year.
This chapter addresses the ``stewardship objective''--
assessing the interrelated financial condition of the
Federal Government and of the Nation. 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.'' There is no ``bottom line'' for the
Government comparable to the net worth of a business
corporation. Some analysts may find the 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. In the past, the Government has
unilaterally decreased as well as increased benefits,
and the Social Security Advisory Council has recently
suggested further reforms that would change benefits, if
enacted by Congress. When the amount in question can be
changed unilaterally, it is not ordinarily considered a
liability.
There are a number of other Federal programs that are
quite similar in their promises to social security,
including Medicare and veterans benefits, to name only
two. These programs are not usually considered to be
liabilities. Treating social security differently from
these programs would be hard to justify. There is no
bright line dividing social security from Government's
other income maintenance programs.
A similar problem arises on the tax side. If social
security benefits were to be treated as liabilities,
logic would suggest that the earmarked social security
payroll tax receipts that finance those benefits ought
to be considered assets. However, no other tax receipts
are counted as assets, and drawing a line between social
security taxes and other taxes would be 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, but can this be a
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 will leave the country much better prepared to
address these problems.
Once the budget comes into balance, it will be possible
to preserve that balance 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 scenarios.
6. 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 $114
billion in 1997. This was considerably larger than the
1997 Federal deficit, but that does not necessarily mean
that the 1997 deficit was ``too small.''
First of all, the Government consumes capital each year
in the process of providing goods and services to the
public. The rationale for using Federal borrowing to
finance investment applies only to net investment, after
depreciation is subtracted, because only net investment
augments the assets available to offset the increase in
debt resulting from the borrowing. As discussed in
Chapter 6 of this volume, net investment in physical
capital owned by the Federal Government is estimated to
have been negative in 1997 and to be negative again in
1998 and 1999. Thus, even more deficit reduction would
be required by this proposed criterion than is 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 or the conduct of research
and development. A private business would never borrow
to spend on assets that would be owned by someone else.
However, such spending is a principal function of
Government. Chapter 6 shows that when these investments
are also included, net investment is estimated to be
positive in 1999, but by only a moderate amount.
There is another hitch in the logic of borrowing to
invest. Businesses expect investments to earn a profit
from which to 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, whether or not it owns
them. 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.
Considerations other than the size of Federal investment
need to be weighed in choosing the appropriate level of
the surplus or deficit.
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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. The
standard budget presentation, however, with its focus on annual outlays,
receipts, and the deficit, does not provide all the information needed
for a full analysis of the Government's financial and investment
decisions. Information about Federal assets and liabilities, and budget
projections beyond the usual forecast horizon are needed for such
analysis. We must also examine the effects on society and the economy of
Government policies to evaluate how well the Federal Government is
performing. A business may ultimately be judged by the bottom line in
its balance sheet, but for the National Government, the ultimate test is
how its actions affect the country. The data needed to judge its
performance go beyond a simple measure of net assets. 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.
From the standpoint of the Federal Government's ``bottom line,'' these
investments might appear to be unnecessary or even wasteful; but they
make a real contribution to the economy and to people's lives. A
framework for evaluating Federal finances needs to take Federal
investments into account, even when the return they earn accrues to
someone other than the Federal Government.
A good starting point to evaluate the Government's finances is to
examine its assets and liabilities. An illustrative tabulation of net
assets is presented below in Table 2-1, 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. Table 2-1 clearly shows that this is not correct. The Federal
Government's assets are less than its debts; the sharp increase in
deficits in the 1980s caused Government debts to increase far more than
Government assets.
But that is not the end of the story. The Federal Government has
resources that go beyond the assets that normally appear on a
conventional balance sheet--including the Government's sovereign powers
to tax, regulate commerce, and set monetary policy. However, these
powers call for special treatment in financial analysis. The best way to
incorporate them 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
sovereign powers are expected to generate cash flows in the future.
On the other side of the ledger are the Government's binding
obligations--such as Treasury debt, and the present discounted value of
Federal obligations to pay pension benefits to Government retirees and
current employees when they retire. These obligations have counterparts
in the business world, and would be expected to appear on a business
balance sheet. Accrued obligations for government insurance policies and
the estimated present value of failed loan guarantees and deposit
insurance claims are also analogous to private liabilities, and are
included with the other Government liabilities. Taken together, these
formal obligations are only a subset of the Government's financial
responsibilities.
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. Many such changes
occurred in last year's Balanced Budget Agreement. Allowing for such
changes, however, it is likely that many of these programs will remain
Federal obligations in some form for the foreseeable future. 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. Information
on that point requires performance measures for government programs
supplemented by appropriate information about conditions in the U.S.
economy and society. Some such data are currently available, but far
more 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. All of them taken together function as a Federal 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.
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 provides the base for Government revenues.
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. This column ends with a set of
indicators highlighting areas where Government activity might
require adjustment.
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[[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 1997 dollars. For most of this period, Government
liabilities have exceeded the value of assets, but until the early 1980s
the disparity was relatively small, and it was 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 the value of Federal holdings,
but since then those prices have declined. \2\ Currently, the total real
value of Federal assets is estimated to be only about 14 percent greater
than it was in 1960. Meanwhile, Federal liabilities have increased by
170 percent in real terms. The sharp decline in the Federal net asset
position 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 $3.3 trillion, or $12,000 per capita.
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\2\ This temporary improvement highlights the importance of the other
tables in this presentation. What is good for the Federal Government as
an asset holder is not necessarily favorable to the economy. The decline
in inflation in the early 1980s reversed the speculative runup in gold
and other commodity prices. This reduced the balance of Federal net
assets, but it was good for the economy and the nation as a whole.
Table 2-1 GOVERNMENT ASSETS AND LIABILITIES *
(As of the end of the fiscal year, in billions of 1997 dollars)
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1960 1965 1970 1975 1980 1985 1990 1991 1992 1993 1994 1995 1996 1997
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ASSETS
Financial Assets:
Gold and Foreign Exchange................................... 103 72 61 136 336 161 202 181 178 178 178 184 168 142
Other Monetary Assets....................................... 39 55 33 15 39 25 32 23 41 41 32 32 44 44
Mortgages and Other Loans................................... 127 163 211 211 290 356 289 293 270 240 228 201 176 160
less Expected Loan Losses................................... -1 -3 -4 -9 -17 -17 -19 -21 -23 -25 -27 -23 -22 -34
Other Financial Assets...................................... 61 81 65 66 82 106 159 190 222 201 188 185 185 182
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Subtotal.................................................. 329 370 365 419 731 631 663 666 688 636 599 579 551 494
Physical Assets:
Fixed Reproducible Capital:
Defense................................................... 931 911 886 723 627 788 817 831 828 815 803 777 754 732
Nondefense................................................ 138 212 249 273 296 319 337 340 342 343 346 351 349 357
Inventories................................................. 264 228 212 188 230 263 229 208 202 186 177 158 140 127
Nonreproducible Capital:
Land...................................................... 91 126 157 243 309 332 328 299 267 251 247 245 243 244
Mineral Rights............................................ 329 304 250 348 632 712 476 451 426 404 374 350 395 413
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Subtotal................................................ 1,752 1,781 1,755 1,776 2,094 2,414 2,187 2,128 2,064 2,000 1,947 1,880 1,882 1,872
=================================================================================================================================
Total Assets.......................................... 2,081 2,151 2,119 2,195 2,825 3,046 2,851 2,794 2,752 2,636 2,546 2,459 2,433 2,366
LIABILITIES
Financial Liabilities:
Currency and Bank Reserves.................................. 230 253 279 284 285 302 360 365 383 413 439 446 454 474
Debt held by the Public..................................... 999 985 836 822 1,063 1,886 2,589 2,792 3,049 3,200 3,286 3,371 3,410 3,358
Miscellaneous............................................... 26 28 30 43 67 93 139 127 119 118 116 120 123 144
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Subtotal.................................................. 1,254 1,266 1,145 1,148 1,415 2,281 3,088 3,284 3,551 3,731 3,840 3,937 3,988 3,976
Insurance Liabilities:
Deposit Insurance........................................... ...... ...... ....... ....... 2 9 69 76 39 13 9 5 2 1
Pension Benefit Guarantee Corp.............................. ...... ...... ....... 43 31 43 42 46 51 66 32 20 54 30
Loan Guarantees............................................. ...... ...... 2 6 12 10 15 24 27 30 32 28 32 38
Other Insurance............................................. 31 28 22 20 27 17 19 19 19 18 17 17 16 16
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Subtotal.................................................. 31 29 24 70 72 79 146 165 135 127 90 69 104 85
Federal Pension Liabilities................................... 794 1,006 1,193 1,355 1,781 1,766 1,694 1,682 1,693 1,628 1,603 1,614 1,566 1,568
Total Liabilities......................................... 2,079 2,300 2,362 2,573 3,268 4,126 4,927 5,132 5,380 5,486 5,532 5,620 5,658 5,629
Balance................................................... 2 -149 -243 -378 -443 -1,080 -2,077 -2,338 -2,628 -2,851 -2,986 -3,161 -3,226 -3,263
Per Capita (in 1997 dollars)............................ 12 -765 -1,184 -1,751 -1,938 -4,517 -8,286 -9,228 -10,259 -11,012 -11,426 -11,982 -12,117 -12,150
Ratio to GDP (in percent)............................... 0.1 -4.6 -6.3 -8.7 -8.5 -17.8 -30.1 -33.9 -37.0 -39.2 -39.7 -41.3 -40.9 -39.8
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* This table shows assets and liabilites for the Government as a whole, including the Federal Reserve System. Therefore, it does not break out separately the assets held in Government
accounts, such as social security, that are the obligation of specific Government agencies. Estimates for FY 1997 are extrapolated in some cases.
[[Page 22]]
Assets
The assets in Table 2-1 reflect a comprehensive list of the financial
and physical resources owned by the Federal Government. The list
corresponds to items that would appear on a typical balance sheet.
Financial Assets: According to the Federal Reserve Board's Flow-of-
Funds accounts, the Federal Government's holdings of financial assets
amounted to about $500 billion at the end of FY 1997. Government-held
mortgages and other loans (measured in constant dollars) reached a peak
in the mid-1980s. Since then, the value of Federal loans has 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 over $30 billion as of 1997.
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 58 percent.
Reproducible Capital: The Federal Government is a major investor in
physical capital. Government-owned stocks of fixed capital amounted to
over $1.0 trillion in 1997 (OMB estimate). About two-thirds 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 fell sharply in the early 1990s, although
they have risen somewhat since 1993. It is assumed here that federal
land shared in the decline and the subsequent recovery. Oil prices have
fluctuated but are about the same now as they were in 1990.
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 value of gold, land, and minerals. Even so, the Government's
holdings are vast. At the end of 1997, the value of Government assets is
estimated to have been about $2.4 trillion.
Liabilities
Table 2-1 includes only those liabilities that would appear on a
business balance sheet. These include various forms of Federal debt,
Federal pension obligations to its workers, and an imputed liability for
Federal insurance and loan guarantee programs.
Financial Liabilities: Financial liabilities amounted to about $4.0
trillion at the end of 1997. The largest
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component was Federal debt held by the public, amounting to around $3.4
trillion. This measure of Federal debt is net of the holdings of the
Federal Reserve System (about $400 billion at the end of FY 1997).
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 $474 billion in
currency and bank reserves, which are mainly obligations of the Federal
Reserve System, and $144 billion in miscellaneous liabilities.
Guarantees and Insurance Liabilities: The Federal Government has
contingent liabilities arising from loan guarantees and insurance
programs. When the Government guarantees a loan or offers insurance,
initial outlays may be small or, if a fee is charged, they may even be
negative; but the risk of future outlays associated with such
commitments can be very large. In the past, the cost of such risks was
not recognized until after a loss was realized. In Table 2-1 rough
estimates are shown for the accrued liability resulting from such
obligations. Of these, about half were for Federal loan guarantees,
while the Pension Benefit Guarantee Corporation and other Federal
insurance programs accounted for most of the rest. The resolution of the
many failures in the Savings and Loan and banking industries has helped
to reduce the losses in this category by about half since 1990.
Federal Pension Liabilities: The Federal Government owes pension
benefits to its retired workers and to current employees who will
eventually retire. The amount of these liabilities is large. As of 1997,
the discounted present value of the benefits is estimated to have been
around $1.6 trillion. \3\
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\3\ These pension liabilities are expressed as the actuarial present
value of benefits accrued-to-date based on past and projected salaries.
The cost of retiree health benefits is not included. The 1997 liability
is extrapolated from recent trends.
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The Balance of Net Liabilities
Because of its sovereign powers, the Government need not maintain a
positive balance of net assets, and the rapid buildup in liabilities
since 1980 has not damaged Federal creditworthiness. However, from 1980
to 1992, the balance between Federal liabilities and Federal assets did
deteriorate at a very rapid rate. In 1980, the negative balance was less
than 10 percent of GDP; by 1992 it was 37 percent of GDP. Between then
and now, there has been little further increase. Last year, the net
balance as a percentage of GDP fell for the second straight year; and it
ended the year at under 40 percent of GDP. As the budget reaches
balance, the ratio of net liabilities to GDP will continue to decline.
PART II--THE BALANCE OF RESOURCES AND RESPONSIBILITIES
As noted in the preceding section, a business-type accounting of
assets and liabilities misses the role of the Government's unique
sovereign powers, including taxation, seignorage, and regulation.
Therefore, the best way to examine the balance between future Government
obligations and resources is by projecting the budget. The budget offers
the most comprehensive measure of the Government's financial burdens and
its resources. By projecting total receipts and outlays, it is possible
to examine whether there will be sufficient resources to support all of
the Government's ongoing obligations.
This part of the presentation describes long-run projections of the
Federal budget extending beyond the normal budget horizon. 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 evolving 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 action
or inaction, and to sound warnings about future problems that could be
avoided by timely action. The Federal Government's responsibilities
extend well beyond the next decade. There is no time limit on
Government's constitutional responsibilities, and programs like social
security are clearly intended to continue indefinitely.
It is evident even now that there will be mounting challenges to the
budget after the turn of the century. By 2008, the first of the huge
baby-boom generation born after World War II will become eligible for
early retirement under 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 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 inevitably coming in the ratio of retirees to
workers. The budgetary pressure from these trends is temporarily in
abeyance. In the 1990s, the large baby-boom cohort has been moving into
its prime earning years, while the retirement of the much smaller cohort
born during the Great Depression has been holding down the rate of
growth in the retired population. The suppressed budgetary pressures are
likely to burst forth when the baby-boomers begin to retire. However,
even after the baby-boomers have passed from the scene later in the
century, a higher ratio of retirees to workers is expected to persist
because of the underlying declines in fertility and mortality, with
concomitant
[[Page 24]]
problems for the retirement programs. These same problems are gripping
other developed nations, even those that never experienced a baby-boom;
in fact, those nations that did not have baby-booms are facing their
demographic pressures already.
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. \4\ The deficit would have exceeded
10 percent of GDP by 2010--a level unprecedented for peacetime--and
continued sharply upward, driving the debt to unsustainable levels.
---------------------------------------------------------------------------
\4\ 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 1997 dollar
by over 50 percent by 2030, and by 70 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 expected size of the economy
as measured by GDP.
---------------------------------------------------------------------------
The Omnibus Budget Reconciliation Act of 1993 (OBRA 1993) changed
that. Not only did it reduce the near-term deficit, but, aided by the
strong economy that it helped to create, it also reduced the long-term
deficit. Prior to enactment of last year's Balanced Budget Agreement,
the deficit was expected to remain at around 1.5 percent of GDP through
2010. But still, a longer-term budget problem remained. After 2010, the
deficit was projected to begin an unsustainable rise that would reach 20
percent of GDP shortly after 2050 if uncorrected.
The Balanced Budget Agreement, enacted last year by the President and
the Congress, took the next major step. The Agreement is now expected to
eliminate the deficit in 1999, and the policies proposed in this Budget
would, if continued in the long run, preserve a balanced budget for many
years. Deficits will reemerge in the long run, though they would be
relatively small as a percentage of the economy until well into the next
century. Ultimately, as described in greater detail below, even these
small deficits, pushed by demographic factors, could create compounding
deficit pressures in the very long run.
This greatly improved long-run deficit outlook contrasts with the
generally prevailing opinion among budget experts--at least prior to the
enactment of last year's Balanced Budget Agreement--that the long-run
outlook for the deficit is bleak. 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.'' The
Congressional Budget Office has observed: ``If the budgetary pressure
from both demography and health care spending is not relieved by
reducing the growth of expenditures or increasing taxes, deficits will
mount and seriously erode future economic growth.'' \5\ On a narrower
front, the annual trustees' reports for both the social security and
Medicare trust funds have for some time projected long-run actuarial
deficiencies.
---------------------------------------------------------------------------
\5\ Long-Term Budgetary Pressures and Policy Options, March 1997.
---------------------------------------------------------------------------
One sign that the consensus may be shifting as a result of recent
policy actions is provided by the most recent of a series of reports
from the General Accounting Office on the long-run budget outlook. \6\
The GAO observes that, ``Major progress has been made on deficit
reduction . . . While our 1995 simulations showed deficits exceeding 20
percent of GDP by 2024 . . ., our updated model results show that this
point would not be reached until nearly 2050.'' GAO continues to find
that unsustainable deficits will emerge in the long run absent major
entitlement reforms, but the date at which the deficit starts to rise is
postponed significantly as a result of recent actions. That is similar
to the analysis reported here, although the timing of the upswing in the
deficit comes sooner in the GAO report.
---------------------------------------------------------------------------
\6\ Analysis of Long-Term Fiscal Outlook, October 1997.
---------------------------------------------------------------------------
Economic and Demographic Projections.--Long-run budget projections
require a long-run demographic and economic forecast--even though any
such forecast is highly uncertain and likely to be at least partly
wrong. 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, 2008--2.3 percent per year for the
CPI, 5.4 percent for the unemployment rate, and 5.7 percent
for the yield on 10-year Treasury notes.
Productivity growth is assumed to continue at the same rate
as it averages in the Administration's projections,
approximately 1.3 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 over 1
percent per year to about half that rate by the year 2020.
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 projects 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 productivity growth. Because labor
force growth is expected to slow and productivity growth is
assumed to be constant, real GDP growth declines after 2008
from around 2.4 percent to 1.4 percent per year.
[[Page 25]]
Although this result is perfectly logical given population
trends, it would result in a very low sustained rate of real
economic growth by U.S. historical standards.
The economic projections described above 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. A more responsive (or dynamic) set of assumptions would serve
mainly to strengthen the same conclusions reached by the current
approach. In their investigations of the long-run outlook, both CBO and
GAO have explored such feedback effects and found that they accelerate
the destabilizing effects of sustained budget deficits.
The Deficit Outlook.--Chart 2-3 shows five alternative deficit
projections: one based on the policies in place prior to enactment of
OBRA 1993; another incorporating all of the subsequent changes in budget
policy prior to passage of last year's Balanced Budget Agreement; and
three alternative scenarios of the current policy projection. The chart
clearly illustrates the dramatic improvement in the deficit that has
already been achieved. If the budget is balanced in 1999 as is now
expected, it will substantially ease the task of maintaining fiscal
stability when the retirement bulge hits after 2008.
Table 2-2 shows long-range projections for the major categories of
spending under current policy assumptions. The table shows that the
entitlement programs are expected to absorb an increasing share of
budget resources.
Under current policy, social security benefits, driven by
the retirement of the baby-boom generation, rise from 4.5
percent of GDP in 2000 to 6.3 percent in 2030 and to 6.5
percent by 2050.
Medicare rises from 2.4 percent of GDP in 2000 to 4.6
percent in 2030 and 5.0 percent by 2050.
Federal Medicaid spending goes up from 1.3 percent of GDP
in 2000 to 3.2 percent in 2030 and 5.3 percent in 2050.
Partially offsetting these increases in entitlement
programs, discretionary spending falls as a share of GDP, from
6.3 percent in 2000 to 3.7 percent in 2030 and 2.8 percent in
2050, as real economic growth outpaces the growth in these
programs (assumed to equal inflation).
Long-range projections such as these are subject to enormous
uncertainy. Detailed analysis of the sensitivity of the results to key
assumptions follows later, but Chart 2-3 highlights two of the key risks
to the outlook. A projection of the conventional current-services budget
shows small surpluses through 2054. However, the budget moves sharply to
deficit thereafter as the fundamental demographic forces reassert
themselves, and by 2070 the deficit exceeds the worst figures of the
[[Page 26]]
Table 2-2. LONG-RUN BUDGET PROJECTIONS OF 1999 BUDGET POLICY
(Percent of GDP)
----------------------------------------------------------------------------------------------------------------
1995 2000 2005 2010 2020 2030 2040 2050 2060 2070
----------------------------------------------------------------------------------------------------------------
Current services:
Receipts...................... 18.8 19.8 19.7 19.8 20.0 20.1 20.2 20.3 20.2 20.2
Outlays....................... 21.1 19.7 18.5 17.5 17.7 18.5 18.8 19.6 21.7 25.5
Discretionary............... 7.6 6.3 5.5 4.9 4.2 3.7 3.2 2.8 2.5 2.2
Mandatory................... 10.3 10.8 11.1 11.6 13.9 16.1 17.2 18.4 20.2 22.3
Social security........... 4.6 4.5 4.5 4.7 5.6 6.3 6.4 6.5 6.7 6.8
Medicare.................. 2.2 2.4 2.5 2.8 3.7 4.6 5.0 5.0 5.1 5.3
Medicaid.................. 1.2 1.3 1.5 1.8 2.5 3.2 4.0 5.3 6.8 8.7
Other..................... 2.3 2.6 2.6 2.3 2.1 2.0 1.8 1.6 1.6 1.5
Net interest................ 3.2 2.6 1.8 1.0 -0.5 -1.3 -1.5 -1.6 -1.0 1.0
Surplus or deficit (-)........ -2.3 0.1 1.2 2.3 2.3 1.6 1.4 0.7 -1.4 -5.2
Federal debt held by the
public....................... 50.1 42.1 30.3 15.8 -9.2 -22.0 -26.8 -27.6 -15.6 18.9
Primary surplus or deficit (-) 0.9 2.7 3.0 3.3 1.8 0.3 -0.2 -0.9 -2.4 -4.3
Continued rapid Medicare growth:
Receipts...................... 18.8 19.8 19.7 19.8 20.0 20.1 20.2 20.3 20.2 20.2
Outlays....................... 21.1 19.7 18.5 17.5 17.9 19.7 21.4 24.8 31.0 40.5
Discretionary............... 7.6 6.3 5.5 4.9 4.2 3.7 3.2 2.8 2.5 2.2
Mandatory................... 10.3 10.8 11.1 11.6 14.1 16.9 18.6 20.9 23.9 27.4
Social security........... 4.6 4.5 4.5 4.7 5.6 6.3 6.4 6.5 6.7 6.8
Medicare.................. 2.2 2.4 2.5 2.8 3.9 5.4 6.4 7.5 8.9 10.4
Medicaid.................. 1.2 1.3 1.5 1.8 2.5 3.2 4.0 5.3 6.8 8.7
Other..................... 2.3 2.6 2.6 2.3 2.1 2.0 1.8 1.7 1.5 1.5
Net interest................ 3.2 2.6 1.8 1.0 -0.4 -0.9 -0.4 1.1 4.5 10.9
Surplus or deficit (-)........ -2.3 0.1 1.2 2.3 2.1 0.4 -1.2 -4.5 -10.7 -20.2
Federal debt held by the
public....................... 50.1 42.1 30.3 15.8 -8.5 -15.5 -6.4 20.6 81.9 193.8
Primary surplus or deficit (-) 0.9 2.7 3.0 3.3 1.6 -0.5 -1.6 -3.4 -6.2 -9.3
Discretionary grows with
population:
Receipts...................... 18.8 19.8 19.7 19.8 20.0 20.1 20.2 20.3 20.2 20.2
Outlays....................... 21.1 19.7 18.5 17.6 18.1 19.5 20.3 21.7 24.5 29.3
Discretionary............... 7.6 6.3 5.5 4.9 4.5 4.2 3.7 3.4 3.0 2.7
Mandatory................... 10.3 10.8 11.1 11.6 13.9 16.1 17.2 18.4 20.2 22.3
Social security........... 4.6 4.5 4.5 4.7 5.6 6.3 6.4 6.5 6.7 6.8
Medicare.................. 2.2 2.4 2.5 2.8 3.7 4.6 5.0 5.0 5.1 5.3
Medicaid.................. 1.2 1.3 1.5 1.8 2.5 3.2 4.0 5.3 6.8 8.7
Other..................... 2.3 2.6 2.6 2.4 2.2 2.0 1.7 1.6 1.6 1.5
Net interest................ 3.2 2.6 1.8 1.0 -0.3 -0.8 -0.6 -0.1 1.3 4.2
Surplus or deficit (-)........ -2.3 0.1 1.2 2.2 1.8 0.6 -0.1 -1.4 -4.3 -9.0
Federal debt held by the
public....................... 50.1 42.1 30.3 15.9 -6.7 -13.9 -10.7 -0.8 24.7 76.2
Primary surplus or deficit (-) 0.9 2.7 3.0 3.2 1.5 -0.2 -0.7 -1.5 -2.9 -4.8
----------------------------------------------------------------------------------------------------------------
1980s, at over five percent of GDP. Furthermore, if discretionary
spending were to keep pace with population growth as well as inflation--
as might be required for the delivery of government services to that
growing population, or because of threats to national security--the
budget would continue in surplus through only 2032, and the deficit
would reach nine percent of GDP by 2070. Finally, if the slowdown in
Medicare costs currently projected for the early years of the next
century by the Health Care Financing Administration (HCFA) were not to
materialize, budget surpluses would disappear after 2038, and the
deficit would grow to over 20 percent of GDP by 2070.
The long-run deficit outlook is much improved because of the actions
taken by this Administration in cooperation with the Congress.
Eliminating the budget deficit is expected to set the budget on a solid
footing for many years to come. If these projections are correct, a
balanced budget would not be transitory. Assuming a continuation of the
Administration's economic and technical assumptions, the budget remains
in balance for several decades. However, the underlying problems are not
fully eliminated. Table 2-2 shows that a primary, or non-interest,
deficit reappears around 2035 even under the current-services case.
Although the underlying imbalance is small, it is sufficient to begin a
slow but irreversibly increasing spiral. The recurrence of the primary
deficit means that eventually the pressure of rising entitlement claims
will drive the unified deficit and Federal debt sharply higher relative
to GDP. \7\
---------------------------------------------------------------------------
\7\ The primary or non-interest surplus is the difference between all
outlays, excluding interest, and total receipts. It can be positive even
when the total budget is in deficit. A relatively small primary surplus
can stabilize the budget even when the total budget is in deficit, and
similarly, even a small primary deficit can destabilize a budget. The
mathematics are inexorable.
---------------------------------------------------------------------------
The keys to these projections are the economic assumptions, which have
already been discussed, plus technical assumptions about Medicare and
discretionary spending. The main reason why other analysts have reached
different conclusions about the deficit is because of differences with
these or other assumptions. The basic results shown here are highly
sensitive to
[[Page 27]]
changes in these underlying assumptions. While Table 2-2 projects a
budget that remains under control for several decades before underlying
problems reemerge, small variations in assumptions can produce
considerably more pessimistic--or even more optimistic--outcomes.
Various alternative economic and technical assumptions are discussed
below. Each alternative focuses on one of the key uncertainties in the
outlook. Generally, the scenarios highlight negative possibilities
rather than positive ones to explore all of the major risks in the
outlook.
1. Discretionary Spending: By convention, the current-services
estimates of discretionary spending rise with the rate of inflation.
This assumption, or any other, is essentially arbitrary, because
discretionary spending is always determined annually through the
legislative process, and no formula can dictate future spending in the
absence of legislation. This assumption implies that the real value of
Federal services is unchanging over time, which has the implication that
the size of the Federal establishment would shrink relative to the size
of the economy. \8\ It also presupposes that the Nation's defense needs
will not vary from their current projected levels. The relative decline
in discretionary spending frees 4.1 percent of GDP for use in other ways
in these projections.
---------------------------------------------------------------------------
\8\ This is not precisely accurate. The real cost of providing the
services would be unchanged, but the quantity of Federal services might
or might not decline, depending on productivity. A significant portion
of discretionary spending is Federal payroll costs. In a period of
moderately rising real wages as assumed in the budget assumptions and in
the Trustees' report, these costs would rise somewhat faster than
inflation unless the number of employees were scaled back, which might
or might not be offset by productivity gains.
---------------------------------------------------------------------------
Some budget analysts have assumed alternatively that discretionary
spending would hold constant as a share of GDP in the long run; this
requires it to increase in real terms whenever there is real economic
growth. That is a more generous assumption for Government spending than
the current services assumption used by OMB or CBO. It might be argued
that with rising population and growth in real per capita incomes, the
public demand for Government services--more national parks, better
transportation, additional Federal support for scientific research--will
increase as well. Provision of public person-to-person services might
imply that spending should grow with population as well as prices. And
if Government salaries keep in step with those in the private sector by
rising slightly faster than overall inflation, then total spending
growing only as fast as inflation implies a shrinking Federal work
force. However, such demands might be met within constant real dollar
spending through increased productivity in the Federal sector, such as
has allowed the recent reduction of the Federal workforce by more than
316,000. Spending for provision of ``public goods'' that naturally apply
to the entire population--such as national defense or information (like
the Weather Service)--need not increase just because the economy and the
population grow. Furthermore, an assumption of a constant discretionary
spending share of GDP would be in sharp contrast with recent experience;
since its peak in 1968, the discretionary spending share of GDP has been
cut virtually in half (from 13.6 percent to 6.9 percent in 1997).
Thus, there are arguments on both sides; for purposes of analysis, the
projections in Table 2-2 show both the standard current services
assumptions, with discretionary spending increasing in step with
inflation, and an alternative assumption that allows discretionary
spending to increase for population growth in addition to general
inflation. Chart 2-4 adds a third assumption, under which discretionary
spending grows still more rapidly, to maintain a constant percentage of
GDP (which is the assumption used by GAO, and is reported as an
alternative by CBO).
2. Health Spending: Some of the most volatile elements in recent
budgets have been Federal health spending for Medicare and Medicaid.
Expenditures for these programs have grown much faster than those of
other entitlements, including social security. After the last year of
the standard budget estimates in 2008, real per capita growth rates for
Medicare benefits in the current services case are based on the
projections in the latest report of the Medicare Trustees, which slow
down markedly after 2015. Thus, while spending for Medicare (and
Medicaid) is assumed to continue to grow more rapidly than the overall
economy, real spending on a per capita basis is expected to stabilize at
lower than the historical rates of increase. Also, for Medicare, the
savings in the Balanced Budget Agreement are assumed to lower the level
of spending permanently relative to earlier baselines; that is, the
Trustees' prior growth estimates take off from the new lower base.
However, when the Trustees made their projections last summer, they did
not include the spending restraint in Medicare now anticipated over the
next few years as a result of the Balanced Budget Agreement. Had they
done so, it is conceivable that they would also have included a catch-up
after 2002 that would have raised the long-run average growth rate
assumed here. For that reason, the assumptions used in the current-
services case could prove to be optimistic.
Chart 2-5 shows the current-services case, and the case (shown in
Chart 2-3) under which Medicare cost growth continues without slowing
after the end of the 10-year budget window in 2008. It also shows a
still more pessimistic scenario, under which both Medicare and Medicaid
per capita growth rates accelerate by one percentage point per year, and
a more optimistic scenario, under which Medicare and Medicaid per capita
growth rates slow to the rate of growth of GDP per capita.
3. Productivity: Productivity growth in the U.S. economy slowed down
after 1973. The slowdown is responsible for the slower rise in U.S. real
incomes since that time. Productivity growth is affected by changes in
the budget deficit which influence national saving, but many other
factors influence it as well. The deficit in turn is affected by changes
in productivity growth, which affect the size of the economy and hence
future receipts. Two alternative scenarios illustrate what would happen
to the budget deficit if productivity
[[Page 28]]
[[Page 29]]
growth were either higher or lower than assumed. A higher rate of growth
would make the task of preserving a balanced budget much easier; lower
productivity growth 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: In the long run, changing demographic patterns dictate
the behavior of the projections. Changes in population growth feed into
real economic growth through the effect on labor supply and employment.
Changing demographics also affect entitlement spending, contributing to
the surge of spending expected for social security and Medicare. The key
assumptions underlying the demographic projections are fertility,
mortality and immigration.
The main reason for the expected slowdown in population
growth is the expected continuation of a low fertility rate.
Since 1990, the number of births per woman in the United
States has averaged between 2.0 and 2.1. This is slightly
below the replacement rate needed to maintain a constant
population. The fertility rate was even lower in the 1970s and
1980s. The demographic projections assume that fertility will
average around 1.9 births per woman in the future. Fertility
is hard to predict. Both the baby boom in the 1950s and the
baby bust in the 1970s came as surprise to demographers. A
return to the higher fertility rates of the past is possible,
but so is another drop in fertility. Although the fertility
rate has never fallen below 1.7 in U.S. history, such low
rates have been observed recently in some European countries.
Chart 2-7 shows the effects of alternative fertility
assumptions on the deficit; higher fertility would contribute
eventually to a larger labor force, and hence increase incomes
and revenues, and reduce the deficit.
The aging of the U.S. population is due to both lower
fertility, which reduces the number of children per adult, and
lengthening lifespans. Since 1970, the average lifespan for
U.S. women has increased from 74.9 years to 79.3 years, and it
is projected to rise to 82.9 years by 2050. Men do not live as
long as women on average, but their lifespan has also
increased from 67.1 years in 1970 to 72.6 years in 1995, and
it is expected to reach 77.5 years by 2050. Longer lifespans
mean that more people will live to receive social security and
Medicare benefits, and will receive them for a longer time. If
the U.S. population were to experience no further improvements
in mortality, the shorter lifespans would help to lower the
deficit. Conversely, if the population lives even longer than
now expected, the outlook for the deficit would worsen. This
is illustrated in Chart 2-8.
The final demographic factor influencing long-run
projections is the rate of immigration. The United
[[Page 30]]
[[Page 31]]
States is an open society. In the 19th century, a huge wave of
immigration helped build the country; and the last two decades of the
20th century have witnessed another burst of immigration. The annual net
flow of legal immigrants has been averaging around 850,000 since 1992.
This is the highest absolute rate in U.S. history, but as a percentage
of population it is only about a third as high as immigration was in
1901-1910. Chart 2-9 illustrates the effects on the deficit of varying
immigration assumptions. In general, faster immigration yields a larger
work force, and lower deficits.
5. What To Do With the Budget Surpluses: The current projections show
the budget running surpluses for several decades. These surpluses pay
down the debt held by the public, after which, by the conventions of
current-services budget projections, policy continues unchanged, and so
negative debt accumulates for a time (though demographic pressures soon
erode that negative debt again). Thus, the surpluses sharply reduce net
interest expenses in future years, closing the virtuous cycle of deficit
reduction and balanced budgets. If these surpluses were ``spent'' by
increased spending or reduced taxes, it would worsen the outlook
significantly. Chart 2-10 shows two alternative scenarious: one in which
spending or tax cuts using the surpluses were purely temporary, and a
second in which the additional budgetary costs grew with inflation over
time. If the spending or tax cuts were purely temporary, the period of
budget surpluses would be shortened by 30 years, with deficits recurring
in 2025; by 2070, the deficit would grow to 10.8 percent of GDP. If the
budgetary costs grew with inflation, however, budget surpluses would
extend barely beyond the budget window, with deficits recurring in 2012.
By 2070, the deficit would grow to an unsustainable 17.9 percent of GDP.
Conclusion.--Under President Clinton, the long-run outlook for the
budget deficit has improved significantly. When this Administration took
office, the deficit was projected to begin spiraling out of control
early in the next century, reaching levels never seen before (except
temporarily during major wars). The outlook now is drastically
different. Under current policy assumptions, a period of balanced
budgets is expected to begin in 1999. This period is eventually followed
by a return to deficits of a size that would demand the attention of
policymakers.
Both social security and Medicare continue to confront long-run
deficits in their respective Trust Funds, which must be addressed. But
the favorable outlook for the unified budget should make it easier to
address these difficult problems.
The budget outlook is based on many assumptions regarding demographic
patterns, economic conditions, and budget policy. Under alternative
assumptions, the budget outlook could be either more or less favorable,
[[Page 32]]
and the degree of uncertainty increases with time. A key policy
assumption is that budget discipline is maintained. This favorable
outlook could easily be altered by future policy action, or by
unforeseen events.
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 long-run budget projections
presented above, although the budget projections do rely on the social
security assumptions for population growth and labor force growth after
the year 2008. Even with these differences, the message is similar: The
retirement of the baby-boom generation coupled with expected high rates
of growth in per capita health care costs will exhaust the Trust Funds
unless further remedial action is taken.
The Trustees' reports feature the 75-year actuarial balance of the
Trust Funds as a summary measure of their financial status. For each
Trust Fund, the balance is calculated as the change in receipts or
program benefits, expressed as a percentage of taxable payroll, that
would be needed to preserve a small positive balance in the Trust Fund
at the end of 75 years.
Table 2-3 shows the changes in the 75-year actuarial balances of the
social security and Medicare Trust Funds since 1996. There were only
relatively small changes in the projected balances last year. The modest
improvement in the Hospital Insurance fund was estimated prior to the
passage of the Balanced Budget Agreement, which made numerous changes in
Medicare. Prior to the Agreement the HI Trust Fund was expected to reach
zero in 2001. The reforms in the Agreement have extended the projected
life of the Trust Fund until 2010.
Achieving a positive 75-year balance may not be sufficient to put the
Trust Funds on a self-sustaining basis. For example, raising the social
security payroll tax by 2.2 percentage points would eliminate the 75-
year actuarial imbalance in the Social Security Trust Fund, as seen from
Table 2-3. However, even with the higher taxes, the income to the Fund
would be insufficient to cover program outgo after 2020. Beyond that
point the Trust Fund assets would have to be drawn down. Even though at
the end of 75 years there would still be a small positive balance in the
Trust Fund, one year later the balance would be gone. Based on the 75-
year balance measure, some have claimed that social security could be
``fixed'' by a relatively small 2.2 percentage point change in payroll
taxes. That statement ignores the fact that if social security were
fixed in this way, it would remain fixed for only one year.
[[Page 33]]
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 1996 Report........................................ -1.85 -0.34 -2.19 -4.52
Changes in balance due to changes in:
Valuation period...................................................... -0.07 -0.01 -0.08 -0.09
Economic and demographic assumptions.................................. 0.03 0.00 0.03 0.20
Technical and other assumptions....................................... 0.03 -0.04 0.01 0.09
---------------------------------------
Total Changes....................................................... -0.01 -0.05 -0.04 0.20
Actuarial balance in 1997 Report........................................ -1.84 -0.39 -2.23 -4.32
----------------------------------------------------------------------------------------------------------------
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 show up 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 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.
To show the importance of these kinds of issues, 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 shown in the table. Data
in this table are especially uncertain, because of the assumptions
needed to prepare the estimates.
Federal investments are responsible for about 7 percent of total
national wealth. This may seem like a small fraction, but it represents
a large volume of capital--$4.4 trillion. The Federal contribution is
down from around 8 percent at the end of the 1980s, and from around 12
percent in 1960. Much of this reflects the shrinking size of the defense
capital stocks, which have gone down from 13 percent of GDP to 9 percent
in the last few years.
Physical Assets
The physical assets in the table 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,
around $26 trillion in 1997; by comparison, GDP was only about $8
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-sixth of the physical capital held by
other levels of government.
Education Capital
Economists have developed the concept of human capital to reflect the
notion that individuals and society invest in people as well as in
physical assets. Investment in education is a good example of how human
capital is accumulated.
This table includes an estimate of the stock of capital represented by
the Nation's investment in education. The estimate is based on the cost
of replacing the years of schooling embodied in the U.S. population aged
16 and over. The idea is to measure how much it would cost to reeducate
the U.S. workforce at today's prices. The estimate attempts to measure
the replacement value of education rather than its original cost. This
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
$31 trillion in 1997, of which about 3 percent was financed by the
Federal Government. It exceeds the total value of the Nation's private
stock of physical capital. The main investors in education capital have
been State and local governments, parents, and students themselves (who
forgo earning opportunities in order to acquire education).
Even broader concepts of human capital have been suggested. 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. However, labor compensation
amounts to about two thirds of national income, and thinking of this
income as the product of human capital suggests that the total value of
[[Page 34]]
Table 2-4 NATIONAL WEALTH
(As of the end of the fiscal year, in trillions of 1997 dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
1960 1965 1970 1975 1980 1985 1990 1991 1992 1993 1994 1995 1996 1997
--------------------------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Publicly Owned Physical Assets:
Structures and Equipment.............. 2.1 2.4 2.9 3.5 3.7 3.9 4.2 4.3 4.3 4.4 4.5 4.6 4.7 4.7
Federally Owned or Financed......... 1.2 1.3 1.5 1.5 1.5 1.8 1.9 2.0 2.0 2.0 2.0 2.0 2.0 2.0
Federally Owned................... 1.1 1.1 1.1 1.0 0.9 1.1 1.2 1.2 1.2 1.2 1.1 1.1 1.1 1.1
Grants to State and Local
Governments...................... 0.1 0.2 0.3 0.5 0.6 0.7 0.8 0.8 0.8 0.8 0.8 0.9 0.9 0.9
Funded by State and Local
Governments........................ 0.9 1.1 1.5 2.0 2.1 2.1 2.3 2.3 2.3 2.4 2.5 2.6 2.6 2.6
Other Federal Assets.................. 0.8 0.7 0.7 0.9 1.5 1.5 1.2 1.1 1.1 1.0 1.0 0.9 0.9 0.9
---------------------------------------------------------------------------------------------------------------
Subtotal........................ 2.9 3.2 3.6 4.4 5.2 5.4 5.5 5.4 5.4 5.4 5.5 5.5 5.6 5.6
Privately Owned Physical Assets:
Reproducible Assets................... 6.8 7.8 9.6 12.2 15.7 16.5 18.5 18.3 18.4 18.8 19.5 19.9 20.4 21.0
Residential Structures................ 2.6 3.0 3.6 4.6 6.2 6.5 7.3 7.2 7.3 7.5 7.8 8.0 8.2 8.5
Nonresidential Plant and Equipment.. 2.7 3.1 3.9 5.1 6.4 7.1 7.7 7.7 7.7 7.8 8.0 8.2 8.4 8.7
Inventories......................... 0.7 0.7 0.9 1.1 1.3 1.2 1.3 1.2 1.2 1.2 1.2 1.3 1.3 1.3
Consumer Durables................... 0.8 0.9 1.2 1.4 1.6 1.8 2.2 2.2 2.2 2.3 2.3 2.4 2.5 2.5
Land.................................. 2.0 2.4 2.8 3.8 5.6 6.2 6.0 5.6 4.9 4.7 4.7 4.6 4.6 4.6
---------------------------------------------------------------------------------------------------------------
Subtotal........................ 8.8 10.2 12.4 16.0 21.2 22.7 24.5 23.8 23.3 23.5 24.1 24.5 25.0 25.6
Education Capital:
Federally Financed.................... 0.1 0.1 0.2 0.3 0.4 0.6 0.7 0.8 0.8 0.8 0.8 0.9 0.9 0.9
Financed from Other Sources........... 6.4 8.3 11.0 12.8 15.7 18.8 23.9 24.7 25.4 26.2 26.9 28.0 29.0 30.3
---------------------------------------------------------------------------------------------------------------
Subtotal........................ 6.4 8.4 11.3 13.2 16.1 19.4 24.6 25.5 26.2 27.0 27.8 28.9 29.9 31.3
Research and Development Capital:
Federally Financed R&D................ 0.2 0.3 0.5 0.5 0.6 0.7 0.8 0.8 0.8 0.8 0.9 0.9 0.9 0.9
R&D Financed from Other Sources....... 0.1 0.2 0.3 0.4 0.5 0.6 0.8 0.9 0.9 1.0 1.0 1.0 1.1 1.2
---------------------------------------------------------------------------------------------------------------
Subtotal........................ 0.3 0.5 0.8 0.9 1.0 1.3 1.6 1.7 1.7 1.8 1.9 1.9 2.0 2.1
===============================================================================================================
Total Assets.................. 18.4 22.3 28.1 34.5 43.5 48.8 56.2 56.4 56.6 57.7 59.2 60.8 62.5 64.5
Net Claims of Foreigners on U.S......... -0.1 -0.2 -0.2 -0.0 -0.3 0.0 0.8 0.8 0.9 1.1 1.3 1.4 1.9 2.2
Balance....................... 18.5 22.5 28.2 34.5 43.8 48.8 55.4 55.6 55.7 56.6 57.9 59.5 60.6 62.3
Per Capita (thousands of dollars)....... 102.5 115.8 137.7 159.7 191.9 203.9 221.2 219.6 217.5 218.8 221.6 225.4 227.7 231.9
Ratio to GDP............................ 723.2 693.2 733.6 789.0 841.7 803.1 803.6 807.7 783.5 779.3 770.1 776.7 769.2 760.6
ADDENDA:
Total Federally Funded Capital........ 0.5 0.6 0.8 1.2 2.2 3.2 3.9 4.1 4.1 4.3 4.4 4.5 4.7 4.8
Percent of National Wealth............ 12.1 11.2 10.1 9.5 9.3 9.3 8.5 8.4 8.4 8.2 8.1 7.9 7.8 7.7
--------------------------------------------------------------------------------------------------------------------------------------------------------
human capital might be two times the estimated value of physical
capital. Thus, 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 an
estimate of the current R&D stock. \9\ That stock is estimated to have
been about $2.0 trillion in 1997. 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.
---------------------------------------------------------------------------
\9\ R&D depreciates in the sense that the economic value of applied
research and development tends to decline with the passage of time, as
still newer ideas move 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. This means they do
not belong in Table 2-4, but it does not mean they are unimportant. An
unwise buildup in debt, most of which was owed to other Americans, was
partly responsible for the recession of 1990-1991 and the sluggishness
of the early stages of the recovery that followed. 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 about 3\1/2\ percent of national wealth
in 1997.
Most Federal debt does not appear in Table 2-4 because it is held by
Americans; only that portion of the Federal debt held by foreigners is
included. However, comparing the Federal Government's net liabilities
with
[[Page 35]]
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 5.2 percent
of total U.S. wealth as shown in Table 2-4.
Trends in National Wealth
The net stock of wealth in the United States at the end of 1997 was
about $62 trillion. Since 1980, it has increased in real terms at an
annual rate of 2.0 percent per year--less than half the 4.4 percent real
growth rate it averaged from 1960 to 1980. Public capital formation
slowed down even more between the two periods. Since 1980, public
capital has increased at an annual rate of only 0.5 percent, compared
with 2.9 percent over the previous 20 years.
The net stock of private nonresidential plant and equipment grew 1.8
percent per year from 1980 to 1997 compared with 4.4 percent in the
1960s and 1970s, and the stock of business inventories increased less
than 0.1 percent per year. However, private nonresidential fixed capital
has increased more rapidly since 1992--2.4 percent per year--reflecting
the recent investment boom.
The accumulation of education capital, as measured here, has also
slowed down since 1980, but not nearly as much. It grew at an average
rate of 4.7 percent per year in the 1960s and 1970s, about the same as
the average rate of growth in private physical capital during the same
period. Since 1980, education capital has grown at a 4.0 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 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
requirement. 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 1997 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 is the Government's role in
fostering healthy economic conditions, promoting health and social
welfare, and protecting the environment. Table 2-5 offers a rough cut of
information that can be useful in assessing how well the Federal
Government has been doing in promoting these general objectives.
The indicators shown here are only a limited subset drawn from the
wide 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 some of the ultimate values that
government policy is intended to promote.
Such a table can serve two functions. First, it highlights areas where
the Federal Government might need to modify its current practices or
consider new approaches. Where there are clear signs of deteriorating
conditions, corrective action might be appropriate. Second, the table
provides a context for evaluating other data on Government activities.
For example, Government actions that weaken its own financial position
may be appropriate when they promote a broader social objective.
An example of this occurs during economic recessions when reductions
in tax collections lead to increased government borrowing that adds to
Federal liabilities. This 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 here offers a 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
[[Page 36]]
Table 2-5. ECONOMIC AND SOCIAL INDICATORS
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
General categories Specific measures 1960 1965 1970 1975 1980 1985 1990 1991 1992 1993 1994 1995 1996 1997
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
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 26,833
Average annual percent change.................................... 0.3 5.0 -1.1 -1.6 -1.4 2.8 0.3 -2.0 1.6 1.2 2.5 1.1 1.4 3.2
Median income (1994 dollars):
All households................................................. NA NA 33,181 32,943 33,763 34,439 35,945 34,705 34,261 33,922 34,158 35,082 35,492 NA
Married couple families........................................ 28,617 33,330 39,951 41,506 44,118 45,350 47,893 47,225 46,847 46,695 47,598 48,452 49,707 NA
Female householder, no spouse present.......................... 14,461 16,203 19,348 19,107 19,841 19,918 20,325 19,228 19,039 18,940 19,307 20,272 19,911 NA
Income share of middle three quintiles (%)....................... 54.0 53.9 53.6 53.8 53.6 52.2 51.2 51.4 51.0 48.9 49.0 49.1 48.9 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 13.7 NA
Economic security.................... Inflation and unemployment:
Civilian unemployment (%)...................................... 5.5 4.5 4.9 8.5 7.1 7.2 5.5 6.7 7.4 6.8 6.1 5.6 5.4 5.0
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 2.3
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 3.9 2.2 2.5 3.2
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 29.1
Wealth creation..................... Net national saving rate (% of GDP).............................. 10.8 12.5 8.7 6.7 7.5 6.2 4.4 4.3 3.1 3.4 4.3 5.1 5.7 6.4
Innovation.......................... Patents issued to U.S. residents (thousands)..................... 42.0 53.9 50.1 51.4 40.8 43.4 53.0 57.8 58.8 61.2 64.3 64.5 69.4 NA
Multifactor productivity (average annual percent change)......... 0.4 3.0 -0.2 0.8 -2.3 0.5 -0.2 -1.0 1.5 0.5 0.7 NA NA NA
Social:
Families............................ Children living with female Householder, no spouse present (% of
all children)................................................... 9 10 12 16 18 21 22 22 23 23 23 23 24 NA
Safe communities.................... Violent crime rate (per 100,000 population) \2\.................. 160 199 364 482 597 557 732 758 758 747 714 685 634 597
Murder rate (per 100,000 population) \2\........................ 5 5 8 10 10 8 9 10 9 10 9 8 7 7
Juvenile crime (murders and nonnegligent manslaughter per
100,000 persons age 14-17)...................................... NA NA NA NA 13 10 24 27 26 30 29 24 NA NA
Health and illness.................. Infant mortality (per 1,000 live births) \3\..................... 26.0 24.7 20.0 16.1 12.6 10.6 9.2 8.9 8.5 8.4 8.0 7.6 7.2 6.3
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 7.3 7.4 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 75.8 76.1 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 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 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 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 23.6 NA
National assessment of educational progress: \4\
Mathematics--high school seniors.............................. NA NA NA 302 300 301 305 306 307 307 306 307 307 NA
Science--high school seniors.................................. NA NA 305 293 286 288 290 292 294 294 294 295 296 NA
Participation....................... Voting for President (% eligible population)..................... 62.8 NA NA NA 52.8 NA NA NA 55.1 NA NA NA 48.9 NA
Voting for Congress (% of eligible population).................. 58.5 NA 43.5 NA 47.6 NA 33.1 NA 50.8 NA 37.4 NA 45.7 NA
Individual charitable giving per capita (1997 dollars)........... 210 251 301 320 349 367 448 448 441 439 434 465 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 NA
Water quality....................... Population served by secondary treatment or better (millions).... NA NA NA NA NA 134 155 157 159 162 164 166 168 NA
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\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, the figures for 1997 are preliminary estimates based on partial reporting.
\3\ The figure for 1997 is based on preliminary data through April.
\4\ Some data from the national educational assessments have been interpolated.
to promote national wealth and improve the future financial condition of
the Federal Government. As that occurs, the efforts will be revealed in
these tables.
TECHNICAL NOTE: SOURCES OF DATA AND METHOD OF ESTIMATING
Federally Owned Assets and Liabilities
Assets
Financial Assets: The source of data is the Federal Reserve Board's
Flow-of-Funds Accounts. Two adjustments were made to these data. First,
U.S. Government holdings of financial assets were consolidated with the
holdings of the monetary authority, i.e., the Federal Reserve System.
Second, the gold stock, which is valued in the Flow-of-Funds at a
constant historical price, is revalued using the market value for gold.
Physical Assets
Fixed Reproducible Capital: Estimates were developed from the OMB
historical 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
[[Page 37]]
available going back as far as 1940. 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 1979-1996, 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 1997 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 1998-2008 the
assumptions are identical to those used in the budget. As always, these
budget assumptions reflect the President's policy proposals. 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
1997 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. Income shares of GDP are held constant at their
levels in the last year of the Administration forecast with one
exception: wages and salaries decline gradually as a share of GDP
through 2028.
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. These projections are
repriced using Administration inflation assumptions. Other entitlement
programs are projected based on rules of thumb linking program spending
to elements of the economic and demographic forecast such as the poverty
rate.
Surpluses after 2008 were assumed to be used to reduce taxes or
increase spending, leaving the budget recisely in balance.
Alternative Scenarios: The alternative budget scenarios are intended
to illustrate the impact of variations in key assumptions underlying the
projections.
Discretionary. The alternatives for discretionary spending
assume that discretionary budget authority after 2008 grows
with inflation and total population growth, or with nominal
GDP growth.
Health care costs. The high scenario for health care costs
assumes that Medicare and Medicaid real spending per
beneficiary grows one percent faster than in the basic
projections, while the low cost scenario assumes that real
spending per beneficiary grows at the rate of real GDP per
capita. The scenario eliminating the Medicare trustees'
assumed slowdown in costs holds real growth per beneficiary at
an average of 2.4 percent annually for Medicare Parts A and B
combined.
Productivity. The scenarios for productivity growth assume
that productivity grows one-half percentage point faster or
slower than in the basic projections.
Fertility. The scenarios for fertility assume that the total
fertility rate rises to 2.2 or falls to 1.6, consistent with
the social security trustees' range for fertility in their
high and low cost assumptions.
Life expectancy. The scenarios for life expectancy are
consistent with the high and low life expectancy assumptions
in the long run population projections published by the Bureau
of the Census. The high scenario assumes that life expectancy
rises to 86.4 years for males and 92.3 years for females in
2050. The low scenario assumes that life expectancy falls
slightly to 70.9 years for males and 78.8 years for females in
2050.
[[Page 38]]
Immigration. The scenarios for higher and lower immigration
assume that net immigration is 1,350,000 persons per year and
450,000 persons per year, 50 percent higher and lower than the
900,000 persons assumed in the basic projections.
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. Federal grants for State and local government
capital were included 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.
Privately Owned Physical Assets: Data are from the Flow-of-Funds
national balance sheets and from the private net capital stock estimates
prepared by the Bureau of Economic Analysis. Values for 1997 were
extrapolated using 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' forgone earnings, i.e., it reflects the opportunity cost of
education.
For this presentation, Federal investment in education capital is a
portion of the Federal outlays included in the conduct of education and
training. This portion includes direct Federal outlays and grants for
elementary, secondary, and vocational education and for higher
education. The data exclude Federal outlays for physical capital at
educational institutions and for research and development conducted at
colleges and universities because these outlays are classified elsewhere
as investment in physical capital and investment in R&D capital. The
data also exclude outlays under the GI Bill; outlays for graduate and
post-graduate education spending in HHS, Defense and Agriculture; and
most outlays for vocational training.
Data on investment in education financed from other sources come from
educational institution reports on 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. The 1993 Budget contains
additional details on the estimates of the total federally financed R&D
stock, as well as its national defense and nondefense components (see
Budget for Fiscal Year 1993, January 1992, Part Three, pages 39-40).
A similar method was used to estimate the stock of R&D capital
financed from sources other than the Federal Government. The component
financed by universities, colleges, and other nonprofit organizations is
based on data from the National Science Foundation, Surveys of Science
Resources. The industry-financed R&D stock component is from that source
and from the U.S. Department of Labor, The Impact of Research and
Development on Productivity Growth, Bulletin 2331, September 1989.
Experimental estimates of R&D capital stocks have recently been
prepared by BEA. The results are described in ``A Satellite Account for
Research and Development,'' Survey of Current Business, November 1994.
These BEA estimates are lower than those presented here primarily
because BEA assumes that the stock of basic research depreciates, while
the estimates in Table 2-3 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.