[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.
---------------------------------------------------------------------------
  \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 
---------------------------------------------------------------------------
               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''     
------------------------------------------------------------------------
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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[[Page 17]]
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    QUESTIONS AND ANSWERS ABOUT THE GOVERNMENT'S ``BALANCE SHEET''--    
                                Continued                               
------------------------------------------------------------------------
                                                                        
               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                               
------------------------------------------------------------------------
                                                                        
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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[[Page 19]]

            What Can Be Learned from a Balance Sheet Approach

  The budget is an essential tool for allocating resources within the 
Federal Government and between the public and private sectors. 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.

[[Page 20]]

          

[[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.
---------------------------------------------------------------------------
  \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  
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                                                                
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
                                                               ---------------------------------------------------------------------------------------------------------------------------------
    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
                                                               ---------------------------------------------------------------------------------------------------------------------------------
      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
                                                               ---------------------------------------------------------------------------------------------------------------------------------
    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
                                                               ---------------------------------------------------------------------------------------------------------------------------------
    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 

[[Page 23]]

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\
---------------------------------------------------------------------------
  \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.
---------------------------------------------------------------------------

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.