[Analytical Perspectives]
[Economic and Accounting Analyses]
[2. Stewardship: Toward a Federal Balance Sheet]
[From the U.S. Government Publishing Office, www.gpo.gov]
[[Page 17]]
2. STEWARDSHIP: TOWARD A FEDERAL BALANCE SHEET
Introduction
A full evaluation of the Government's financial condition must
consider a broader range of data than would usually be shown on a
business balance sheet. A balanced assessment of the Government's
financial condition requires several complementary perspectives. This
chapter presents a framework for such analysis. No single table in this
chapter is ``the balance sheet'' of the Federal Government. Rather, the
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 these resources. This is the kind of
assessment for which a financial analyst would turn to a business
balance sheet, but this chapter is expanded to take into account the
Government's unique roles 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 caution. The conclusions
are tentative and subject to 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 analysis, but they are only a partial reflection of
the full range of Government resources and responsibilities.
Only those items actually owned by the Government are included
in the table, but its resources extend beyond the assets
defined in this narrow way. Government can also rely on taxes
and other measures to meet future obligations. Similarly,
while the table's liabilities include all of the binding
commitments resulting from prior Government action,
Government's responsibilities are much broader than this.
The second part presents possible paths for the Federal
budget extending well into the next century, beginning with an
extension of the 2000 Budget. Table 2-2 summarizes this
information. This part offers the clearest indication of the
long-run financial demands that the Government faces and the
resources that will be available to meet them. Some future
claims on the Government deserve 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 1997.
The third part of the presentation features information on
economic and social conditions which the Government affects by
its actions. Table 2-4 presents summary data for national
wealth while highlighting the Federal investments that have
contributed to that wealth. Table 2-5 presents a small sample
of economic and social indicators.
Relationship with FASAB Objectives
The framework presented here meets the stewardship objective \1\ for
Federal financial reporting recommended by the Federal Accounting
Standards Advisory Board and adopted for use by the Federal Government
in September 1993.
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\1\ Objectives of Federal Financial Reporting, Statement of Federal
Financial Accounting Concepts Number 1, September 2, 1993. The other
objectives relate to budgetary integrity, operating performance, and
systems and controls.
Federal financial reporting should assist report users in
assessing the impact on the country of the Government's operations
and investments for the period and how, as a result, the
Government's and the Nation's financial conditions have changed and
may change in the future. Federal financial reporting should provide
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information that helps the reader to determine:
3a. Whether the Government's financial position improved or
deteriorated over the period.
3b. Whether future budgetary resources will likely be sufficient
to sustain public services and to meet obligations as they come due.
3c. Whether Government operations have contributed to the Nation's
current and future well-being.
The presentation here explores an experimental approach for meeting
this objective at the Government-wide level.
What Can Be Learned from a Balance Sheet Approach
The budget is an essential tool for allocating resources within the
Federal Government and between the public and private sectors; but the
standard budget presentation, with its focus on annual outlays,
receipts, and the surplus/deficit, does not provide all the information
needed for a full analysis of the Government's financial and investment
decisions. 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.
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QUESTIONS AND ANSWERS ABOUT THE GOVERNMENT'S ``BALANCE SHEET''
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1. According to Table 2-1, the Government's liabilities exceed its
assets. No business could operate in such a fashion. Why does the
Government not manage its finances more 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 own balance sheet, but to benefit the
Nation--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 early 1980s has been a decline in the relative
price of gold, which has reduced the real value of the
Government's gold holdings. But that price decline--and
the resulting deterioration of the Government's balance
sheet--began as 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 Table 2-1 seems to imply that the Government is insolvent. Is
it?
No. Just as the Federal Government's responsibilities are
of a different nature than those of a private business,
so are its resources. Government 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. These powers
give the Government the ability to meet present
obligations and those that are anticipated from 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 or likely to become
so. In countries where governments totter on the brink
of insolvency, lenders are either unwilling to lend them
money, or do so only in return for a substantial
interest premium.
However, the Federal Government's balance sheet was
clearly worsened by the budget policies of the 1980s.
Under President Clinton, the deterioration in the
balance sheet has been halted, and as the budget has
moved from deficit to surplus, the excess of Government
liabilities over assets has leveled off and begun to
shrink relative to the size of the economy.
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QUESTIONS AND ANSWERS ABOUT THE GOVERNMENT'S ``BALANCE SHEET''--
Continued
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3. The Government does not comply with the accounting requirements
Because the Government is not a business, and its primary
goal is not to earn profits or to enhance its own
wealth. Accounting standards designed to illuminate how
much a business earns and how much equity it has would
not provide useful information if applied to the
Government, and might even be misleading. In recent
years, the Federal Accounting Standards Advisory Board
has developed, and the Federal Government has adopted, a
conceptual accounting framework that reflects the
Government's functions and answers the questions for
which Government should be accountable. This framework
addresses 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; an audited Government-wide consolidated
financial report was issued last year.
This chapter addresses the ``stewardship objective''--
assessing the interrelated condition of the Federal
Government and of the Nation. The data in this chapter
are intended to illuminate 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 is Social Security not shown as a liability in Table 2-1?
Formally, construing Social Security as a liability would
entail several conceptual contradictions. There are
other Federal programs that are very similar to Social
Security in the promises they make--Medicare, Medicaid,
Veterans pensions, and Food Stamps, to name a few.
Should the future benefits expected from these programs
also be treated as liabilities? It would be difficult to
justify a different accounting treatment for them if
Social Security were classified as a liability of the
Government. There is no bright dividing line separating
Social Security from other income-maintenance programs.
Furthermore, if future Social Security benefits were to
be treated as liabilities, logic would suggest that
future Social Security payroll tax receipts that are
earmarked to finance those benefits ought to be
considered assets. However, other tax receipts are not
counted as assets; and drawing a line between Social
Security taxes and other taxes would be questionable.
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QUESTIONS AND ANSWERS ABOUT THE GOVERNMENT'S ``BALANCE SHEET''--
Continued
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5. It is all very well to run a budget surplus now, but can this be
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, the surplus in
the budget means the country is better prepared to
address these problems. If current projections prove
correct and the surplus is preserved for some time to
come, then there will be a significant decline in
Federal net interest payments because of the decline in
Federal debt resulting from the surpluses. This is a key
step towards keeping the budget 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 for the Government to borrow to finance needed
capital--permitting a deficit in the budget--so long as it was no
larger than the amount spent on Federal investments?
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 really only applies to net
investment, after depreciation is subtracted, because
only net investment augments the Government's assets and
offsets the increase in liabilities that result from
borrowing. If the Government financed all new capital by
borrowing, it should pay off the debt as the capital
acquired in this way loses value. As discussed in
Chapter 6 of Analytical Perspectives, net investment in
physical capital owned by the Federal Government is
estimated to have been negative in 1998 and to remain
negative in 1999 and 2000, so no deficit spending would
actually be justified by this borrowing-for-investment
criterion.
The Federal Government also funds substantial amounts of
physical capital that it does not own, such as highways
and research facilities, and it funds investment in
intangible ``capital'' such as education and training
and 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 slightly positive in 1999
and 2000. It is not clear whether this type of capital
investment would satisfy the borrowing-for-investment
criterion. Certainly, these investments do not create
Federally owned assets, even though they are part of
national wealth.
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
surplus/deficit.
Finally, the Federal Government must pursue policies that
support the overall financial and economic well-being of
the Nation. In this broader context, the Government may
need to manage its fiscal policy to run a surplus, so as
to augment private saving and investment, even if this
means paying for its own investments from current
revenues, instead of borrowing in the credit market and
crowding out private investment. Other considerations
than the size of Federal investment need to be weighed
in choosing the appropriate level of the surplus or
deficit.
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QUESTIONS AND ANSWERS ABOUT THE GOVERNMENT'S ``BALANCE SHEET''--
Continued
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7. Is it misleading to include the Social Security surplus when
For many years, experts have said that the Federal budget
has three purposes: to plan the Government's fiscal
program; to impose financial discipline on the
Government's activities; and to measure the Government's
effect on the economy. It should not be surprising that,
with more than one purpose, the budget is routinely
presented in more than one way. For years, there have
been several alternative measures of the budget, each
with its appropriate use. None of these measures is
always right, or always wrong; it depends upon the
purpose to which the budget is put.
For the purpose of measuring the Government's effect on
the economy, it would be misleading to omit any part of
the budget; doing so would simply miss part of what we
were trying to measure. For example, we would need to
know all of the Federal Government's receipts and
outlays to know whether it will have the wherewithal to
meet its future obligations--such as Social Security.
And for purposes of fiscal discipline, leaving out
particular Government activities could be dangerous. In
fact, the principle of a ``unified,'' all-inclusive
budget was established by President Johnson's Commission
on Budget Concepts largely to forestall a trend toward
moving favored programs off-budget--which had been done
explicitly to shield those programs from scrutiny and
funding discipline.
To plan the Government's program, however, alternative
perspectives can sometimes be useful. In particular, the
Congress has moved Social Security off-budget. The
purpose was to stress the need to provide independent,
sustainable funding of Social Security in the long term;
and to show the extent to which the rest of budget had
relied on annual Social Security surpluses to make up
for its own shortfalls.
Policy under this Administration has been consistent with
these goals. The non-Social Security deficit has been
virtually eliminated--falling consistently from its
record $340 billion in 1992 to only $30 billion, the
lowest in more than a quarter of a century, in 1998. We
anticipate that the non- Social Security budget will
move solidly into surplus within the time horizon of
this budget. And the President has made long-term Social
Security soundness a key priority for this year.
In sum, the budget is like a toolbox that contains
different tools to perform different functions. There is
a right tool for each task, but no one tool is right for
every task. If we choose the right tool for the job at
hand, we can achieve our objectives.
8. What good does it do for the Federal Government to run a budget
surplus, if the surplus is only used to retire Government debt? Is this
just another way of pouring the money down the drain?
When the Government retires its debt, it is not pouring
money down the drain. The Government contributes to the
accumulation of national wealth by using a budget
surplus to repay Government debt. Because of the large
budget deficits of the 1980s, Federal debt measured
relative to the size of the economy has risen to levels
not seen since the early 1960s. Reducing this
accumulated debt will have several desirable economic
effects. It will help to hold down real interest rates,
which is good for investment and home ownership.
Lowering the debt will give the Government more
flexibility should it face an unexpected need to borrow
in the future. When the Government uses a budget surplus
to reduce its debt, it adds to national saving. Even
though the Government is simply repaying its debt, the
resources represented by the surplus are available for
private investment in new plant and equipment, new
homes, and other durable assets.
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The data needed to judge its performance go beyond a simple measure of
net assets. Consider, for example, Federal investments in education or
infrastructure whose returns flow mainly to the private sector and which
are often owned by households, private businesses or other levels of
government. 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 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
(as is done in the second part of this chapter). The budget provides a
comprehensive measure of the Government's annual cash flows. 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 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. These formal obligations, however, form 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. Such changes are a
regular part of the legislative cycle. 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. Such data are currently available, but much more
need to be developed to obtain a full picture. Examples of what might be
done are also shown below. (Performance measures are discussed more
fully in Section VI of this year's Budget.)
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
affects society or the economy.
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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 1998 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 12 percent greater
than it was in 1960. Meanwhile, Federal liabilities have increased by
167 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 certain asset values. Currently, the net excess of liabilities
over assets is about $3.2 trillion, or $12,000 per capita.
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\2\ This temportary improvement highlights the importance of the othr
tables in this presentation. What is good for the Federal Government as
an asset holder is not necessary favorable to the economy. The decline
in inflation in the early 1980s reversed the speculative runnup 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.
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Assets
The assets in Table 2-1 are 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 $0.2 trillion at the end of FY 1998. 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 as
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 subsidies on these loans is $45 billion as of 1998. 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 FY 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
about $1.0 trillion in 1998 (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 (and of course, in a realistic sense, much of
this land could or would never be sold). 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 declined sharply in recent years and are now lower in
nominal terms than at any time since the late 1980s, reducing the value
of Federal mineral deposits. (The estimates omit other types of valuable
assets owned by the Government, such as works of art or historical
artefacts, simply because the valuation of such assets would have little
realistic basis in fact, and because most of these objects would never
be sold.)
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 1998, the value of Government assets is
estimated to have been about $2.3 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 civilian and military employees, and
liabilities for Federal insurance and loan guarantee programs.
Financial Liabilities: Financial liabilities amounted to about $3.9
trillion at the end of 1998. The largest component was Federal debt held
by the public, amounting to around $3.3 trillion. This measure of
Federal debt is net of the holdings of the Federal Reserve System (about
$0.4 trillion at the end of FY 1998). Although independent in its policy
deliberations, the Federal Reserve is part of the Federal Government,
and its assets and liabilities are included here in the Federal totals.
In addition to debt held by the public, the Government's financial
liabilities include approximately $0.5 trillion in currency and bank
reserves, which are mainly obligations of the Federal Reserve System,
and about $0.1 trillion 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,
cash disbursements may initially be small or, if a fee is charged, the
Government may even collect money; but the risk of future cash payments
associated with such commitments can be very large. The figures reported
in Table 2-1 are prospective estimates showing the current discounted
value of expected future losses. The
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Table 2-1. GOVERNMENT ASSETS AND LIABILITIES *
(As of the end of the fiscal year, in billions of 1998 dollars)
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1960 1965 1970 1975 1980 1985 1990 1991 1992 1993 1994 1995 1996 1997 1998
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ASSETS
Financial Assets:
Gold and Foreign Exchange......................... 103 72 61 136 336 161 202 181 178 178 178 185 170 142 140
Other Monetary Assets............................. 39 55 33 15 39 25 32 23 41 41 32 32 44 45 46
Mortgages and Other Loans......................... 127 163 211 211 290 356 289 293 270 240 225 213 202 200 211
less Expected Loan and Losses................... -1 -3 -4 -9 -17 -17 -19 -21 -23 -25 -27 -23 -23 -41 -45
Other Financial Assets............................ 61 81 65 66 82 106 159 190 222 201 188 186 187 185 179
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Subtotal........................................ 329 370 365 419 731 631 663 665 688 636 596 592 580 530 531
Physical Assets:
Fixed Reproducible Capital:
Defense......................................... 932 911 887 724 628 789 818 831 828 815 803 779 754 712 695
Nondefense...................................... 138 212 249 273 296 319 337 340 342 343 346 351 352 345 348
Inventories....................................... 264 228 212 189 230 263 229 208 202 186 177 158 141 130 121
Nonreproducible Capital:..........................
Land............................................ 91 126 157 243 309 332 328 299 267 251 247 248 251 261 277
Mineral Rights.................................. 329 304 250 348 632 712 476 451 425 404 374 351 398 418 351
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Subtotal...................................... 1,753 1,782 1,755 1,776 2,095 2,415 2,188 2,129 2,065 2,000 1,948 1,887 1,895 1,867 1,792
===========================================================================================================================================
Total Assets................................ 2,082 2,152 2,120 2,196 2,826 3,047 2,851 2,795 2,753 2,636 2,544 2,479 2,475 2,397 2,323
LIABILITIES
Financial Liabilities:
Currency and Bank Reserves........................ 230 253 279 284 285 302 360 365 383 413 439 447 458 478 514
Debt held by the Public........................... 999 986 836 822 1,063 1,887 2,590 2,793 3,050 3,201 3,287 3,381 3,438 3,390 3,274
Miscellaneous..................................... 26 28 30 43 67 93 139 127 119 118 115 111 112 105 106
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Subtotal........................................ 1,254 1,265 1,145 1,149 1,415 2,283 3,089 3,286 3,552 3,732 3,840 3,940 4,008 3,974 3,894
Insurance Liabilities:
Deposit Insurance................................. 0 0 0 0 2 9 69 76 39 13 9 5 2 1 1
Pension Benefit Guarantee \1\..................... 0 0 0 43 31 43 42 46 51 66 32 20 54 30 40
Loan Guarantees................................... 0 0 2 6 12 10 15 24 27 30 32 28 32 30 22
Other Insurance................................... 31 28 22 20 27 17 19 19 19 18 17 17 16 16 16
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Subtotal........................................ 31 29 24 70 72 79 146 165 135 127 90 69 105 77 78
Federal Pension Liabilities......................... 794 1,006 1,194 1,355 1,781 1,766 1,694 1,683 1,694 1,629 1,603 1,619 1,579 1,588 1,587
Total Liabilities................................... 2,080 3,301 2,363 2,574 3,269 4,127 4,929 5,133 5,381 5,488 5,534 5,628 5,691 5,640 5,559
Balance............................................. 2 -149 -243 -378 -443 -1,080 -2,077 -2,339 -2,629 -2,851 -2,989 -3,149 -3,216 -3,243 -3,235
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Addenda:
Balance Per Capita (in 1998 dollars)................ 12 -766 -1,184 -1,752 -1,938 -4,519 -8,288 -9,231 -10,262 -11,016 -11,438 -11,936 -12,081 -12,077 -11,947
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 -41.0 -40.3 -39.1 -37.7
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* This table shows assets and liabilites for the Government as a whole, including the Federal Reserve System. Therefore, it does not break out separately the assets held in Government
accounts, such as Social Security, that are the obligation of specific Government agencies. Estimates for FY 1998 are extrapolated in some cases.
\1\ The model and data used to calculate this liability were revised for 1996-1997.
[[Page 26]]
[[Page 26]]
present value of all such losses taken together is about $0.1 trillion.
The resolution of the many failures in the savings and loan and banking
industries has helped to reduce the liabilities in this category by more
than 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. The
discounted present value of the benefits is estimated to have been
around $1.6 trillion at the end of FY 1998.\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 1998 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 1995 it was 41 percent of GDP. Since then,
the net balance as a percentage of GDP has improved for three straight
years. If a budget surplus is maintained, the net balance will continue
to improve.
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. Therefore, the best way to examine
the balance between future Government obligations and resources is by
projecting the budget over the long run. The budget offers a
comprehensive measure of the Government's annual financial burdens and
resources. By projecting annual 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 into the future the projections are pushed. Even so, long-run
budget projections are needed to assess the full implications of cur
[[Page 27]]
rent 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 intended to continue indefinitely.
It is evident even now that there will be mounting challenges to the
budget early in the next 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
Social Security, Medicare, and Medicaid. 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 given current retirement patterns. 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 pattern of
low fertility and improving longevity, with concomitant 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 Improvement in the Long-Range Outlook.--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 unstable
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\ At that time, the deficit was
projected to rise to over 10 percent of GDP by 2010--a level
unprecedented for peacetime--and to continue sharply upward thereafter.
This would have driven Federal debt held by the public 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 1998 dollar
by 50 percent by 2030, and by almost 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) 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 the Balanced Budget Agreement in 1997, however,
the deficit was expected to persist, though at a more moderate level. In
the absence of further policy changes, it was projected to remain at
around 1.5 percent of GDP through 2010, and afterwards to begin an
unsustainable rise that would eventually exceed 20 percent of GDP.
The Balanced Budget Agreement (BBA) took the next major step. With the
strength of the economy over the last three years, the budget reached
balance ahead of schedule; and thanks to the BBA, it is now projected to
remain in surplus throughout the next decade. Extending the policies in
this budget beyond the usual budget window, a surplus may be sustained
for many years, although a deficit is projected to reemerge in the long
run absent further policy changes. How long the surplus can be preserved
depends on certain key factors, some of the most important of which are
illustrated in Chart 2-3.
Fiscal discipline is crucial for long-run budget stability. The rate
of growth in discretionary spending helps determine the margin of
resources available to devote to other purposes, such as debt reduction.
Chart 2-3 illustrates how the surplus varies depending on assumptions
about future growth in discretionary spending. Another key factor is the
expected growth of Federal health care costs. The usual forecasting
convention in past budgets was to adopt the long-range projections of
the Medicare actuaries. Those projections include a slowdown in the rate
of growth in real per capita spending under Medicare beginning in about
15 years. More rapid growth of Medicare, closer to the historical trend
for the program, would result in a faster return to deficits, as shown
in Chart 2-3.
Under most reasonable alternatives, the long-run budget outlook
contrasts favorably with the generally prevailing opinion among budget
experts just a few years back. Then, it was held that the long-run
outlook for the deficit was necessarily bleak. For some time, there has
been a general consensus among demographers and economists that
population trends in the next century will put strains on the budget,
and it was thought that these strains must inevitably lead to large
deficits. 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 (CBO) 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 Social Security and Medicare 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 have shifted somewhat as a result of
recent policy actions is provided
[[Page 28]]
by the most recent of a series of reports from the General Accounting
Office (GAO) on the long-run budget outlook.\6\ 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 emerge
in the long run absent major entitlement reforms, but the date at which
the deficit starts to rise has been postponed significantly as a result
of recent actions.
---------------------------------------------------------------------------
\6\ Analysis of Long-Term Fiscal Outlook, October 1997.
---------------------------------------------------------------------------
Another sign is provided by CBO's projection last August of how the
surplus would evolve under the policies in place at that time. CBO
foresaw a rising budget surplus through 2008, reaching almost 2 percent
of GDP.\7\ CBO's long-range projections envisioned continued surpluses
that would bring debt held by the public close to zero by around 2020.
Beyond that point, however, CBO projected a return of the deficit which
would eventually drive up the level of Federal debt to unsustainable
levels. The summary measure that CBO has used to indicate the magnitude
of the long-run fiscal imbalance--the permanent change in taxes needed
to stabilize the ratio of debt to GDP--declined to 1.2 percent of GDP
from 5.4 percent of GDP in its original long-range projections from May
1996.
---------------------------------------------------------------------------
\7\ The Economic and Budget Outlook: An Update, August 1998.
---------------------------------------------------------------------------
The main reason for this improvement in the outlook has been the
unexpected increase in the near-term budget surplus. Using the surpluses
to retire Federal debt, as was done in 1998, will dramatically reduce
debt held by the public and Federal net interest payments. Last year,
net interest amounted to almost 3 percent of GDP. Under current
estimates that would be cut to under 1 percent of GDP in 2009, assuming
future surpluses are actually realized. This means that when the
demographic pressures on Social Security and the Federal health programs
begin to mount after 2008, there will be more budgetary resources
available to meet the problem, and that postpones the date on which the
deficit in the unified budget returns.
Economic and Demographic Assumptions.--Long-run budget projections
require a long-run demographic and economic forecast even though any
such forecast is highly uncertain and is 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 budget projections, 2009: 2.3 percent per year
for CPI inflation, 5.3
[[Page 29]]
Productivity growth is assumed to continue at the same
constant rate as it averages in the Administration's medium-
term projections: 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. The slowdown is expected to lower
the rate of population growth from over 1 percent per year in
the early 1990s to about half that rate by 2025.
Labor force participation is also expected to decline as the
population ages and the proportion of retirees in the
population increases. The Administration projects a higher
rate of labor force participation over the next decade than is
assumed in the latest Trustees' Report. That difference is
preserved in the long-run projections below.
The projected rate of economic growth is determined in the
long run by growth of the labor force plus productivity
growth. Because labor force growth is expected to slow and
productivity growth is assumed to be constant, real GDP growth
is expected to decline from around 2.4 percent per year to an
average rate of 1.5 percent per year after 2020. This is a
logical implication of the other assumptions which are based
on reasonable forecasting conventions; however, it implies a
marked departure from the historical rate of growth in the
U.S. economy.
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. Both CBO and GAO in their investigations of the long-run
outlook have explored such feedback effects and found that they
accelerate the destabilizing effects of sustained budget deficits.
Similarly, but in the opposite direction, budget surpluses would be
expected to lead to higher national saving, lower real interest rates,
and more economic growth which would increase Federal receipts and lower
outlays, further augmenting projected surpluses.
Alternative Budget Baselines.--Chart 2-3 shows four alternative budget
projections: one based on the policies in place prior to enactment of
OBRA; and three others showing current projections, including the
mandatory spending proposals in this budget under alternative
assumptions about discretionary spending and future Federal health care
costs. The chart illustrates the dramatic improvement in the deficit
that has already been achieved. Furthermore, it shows that if the budget
remains in surplus throughout the next decade, as is now expected, it
will substantially ease the task of maintaining fiscal stability when
the demographic bulge begins to hit after 2008. Table 2-2 shows long-
range projections for the major categories of spending under the three
alternatives based on the current budget and shown in Chart 2-3.
The table shows that for all three alternatives the entitlement
programs are expected to absorb an increasing share of budget resources.
In all three alternatives, Social Security benefits, driven
by the retirement of the baby-boom generation, rise from 4.5
percent of GDP in 2000 to 7.0 percent in 2030. They continue
to rise after that but more gradually, eventually reaching 7.8
percent of GDP by 2075.
In all three alternatives, Federal Medicaid spending goes
up from 1.3 percent of GDP in 2000 to 3.1 percent in 2030 and
almost 9 percent of GDP in 2075.
Under the Medicare actuaries' long-range projections,
Medicare rises from 2.3 percent of GDP in 2000 to 4.4 percent
in 2030 and 5.0 percent by 2075. If the real per capita growth
rate in Medicare does not slow as much as the actuaries have
assumed, the program could expand even more rapidly. In the
alternative with faster spending growth, Medicare outlays
reach 5.1 percent of GDP in 2030, and 9.5 percent by 2075.
Under current services assumptions, discretionary spending
falls as a share of GDP, from 6.5 percent in 2000 to 4.3
percent in 2030 and 3.0 percent of GDP in 2075. The programs
grow with inflation and Government wages keep pace with those
paid in the private sector, but they do not keep up with
population. Allowing discretionary spending to expand with
both inflation and population would moderate the decline in
spending as a share of GDP. Under this assumption,
discretionary spending is 4.7 percent of GDP in 2030, and 3.6
percent of GDP in 2075.
The long-run budget outlook is much improved because of actions taken
by this Administration in cooperation with the Congress. Eliminating the
budget deficit has set the budget on a solid footing for many years to
come. With a continuation of the Administration's economic assumptions,
the budget could remain in surplus for several decades.
However, although receipts are higher and net interest outlays are
lower in these projections than they were before, the underlying
demographic problems have not been eliminated, and rising health care
costs are also likely to continue to put pressure on the budget. Under
current services assumptions, a primary, or non-interest, deficit
reappears in 2033, after the retirement of the baby-boom generation is
virtually completed. Although the underlying imbalance is small, and the
unified budget remains in surplus for many more years, a sustained
primary deficit is sufficient to begin a slow but irreversible spiral.
The recurrence of the unified deficit is inevitable once this happens
unless there are future changes in policy.\8\ Under the alternative
base-
[[Page 30]]
Table 2-2. LONG-RUN BUDGET PROJECTIONS OF 2000 BUDGET POLICY
(Percent of GDP)
--------------------------------------------------------------------------------------------------------------------------------------------------------
1995 2000 2005 2010 2020 2030 2040 2050 2060 2070 2075
--------------------------------------------------------------------------------------------------------------------------------------------------------
Current Services
Receipts...................................................... 18.8 20.7 20.0 20.1 20.6 20.9 21.2 21.4 21.5 21.6 21.6
Outlays....................................................... 21.1 19.4 18.0 17.1 17.6 19.0 19.6 20.3 22.0 24.9 26.8
Discretionary............................................... 7.6 6.5 5.6 5.1 4.6 4.3 3.9 3.6 3.4 3.1 3.0
Mandatory................................................... 10.3 10.5 11.0 11.5 14.0 16.4 17.5 18.5 20.1 22.0 23.1
Social Security........................................... 4.6 4.5 4.5 4.7 6.0 7.0 7.2 7.2 7.5 7.7 7.8
Medicare.................................................. 2.2 2.3 2.5 2.7 3.5 4.4 4.7 4.7 4.8 5.0 5.0
Medicaid.................................................. 1.2 1.3 1.5 1.7 2.4 3.1 4.0 5.0 6.3 7.9 8.9
Other..................................................... 2.2 2.5 2.5 2.4 2.1 1.9 1.7 1.5 1.4 1.4 1.4
Net Interest................................................ 3.2 2.4 1.4 0.5 -1.0 -1.7 -1.9 -1.9 -1.5 -0.2 0.8
Surplus(+)/Deficit(-)......................................... -2.3 1.3 2.0 3.1 2.9 1.9 1.6 1.1 -0.5 -3.3 -5.2
Federal debt held by the public............................... 50.1 39.2 24.0 7.0 -21.8 -35.2 -38.3 -38.5 -29.3 -3.4 17.9
Primary surplus/deficit (-)................................... 0.9 3.7 3.5 3.6 1.9 0.2 -0.3 -0.8 -2.0 -3.5 -4.4
Discretionary Grows with Population
Receipts...................................................... 18.8 20.7 20.0 20.1 20.6 20.9 21.2 21.4 21.5 21.6 21.6
Outlays....................................................... 21.1 19.4 18.0 17.1 17.8 19.6 20.5 21.5 23.6 27.0 29.2
Discretionary............................................... 7.6 6.5 5.6 5.1 4.8 4.7 4.4 4.2 3.9 3.7 3.6
Mandatory................................................... 10.3 10.5 11.0 11.5 14.0 16.4 17.5 18.5 20.1 22.0 23.1
Social Security............................................. 4.6 4.5 4.5 4.7 6.0 7.0 7.2 7.2 7.5 7.7 7.8
Medicare.................................................... 2.2 2.3 2.5 2.7 3.5 4.4 4.7 4.7 4.8 5.0 5.0
Medicaid.................................................... 1.2 1.3 1.5 1.7 2.4 3.1 4.0 5.0 6.3 7.9 8.9
Other....................................................... 2.2 2.5 2.5 2.4 2.1 1.9 1.7 1.5 1.4 1.4 1.4
Net Interest.................................................. 3.2 2.4 1.4 0.5 -1.0 -1.5 -1.5 -1.2 -0.4 1.3 2.5
Surplus(+)/Deficit(-)........................................... -2.3 1.3 2.0 3.1 2.8 1.4 0.7 -0.1 -2.1 -5.4 -7.6
Federal debt held............................................... 50.1 39.2 24.0 7.0 -21.3 -31.7 -29.7 -23.3 -6.0 29.3 55.8
Primary surplus/deficit(-)...................................... 0.9 3.7 3.5 3.6 1.8 -0.1 -0.7 -1.3 -2.5 -4.1 -5.1
Continued Rapid Medicare Growth
Receipts...................................................... 18.8 20.7 20.0 20.1 20.6 20.9 21.2 21.4 21.5 21.6 21.6
Outlays....................................................... 21.1 19.4 18.0 17.1 17.8 20.0 21.8 24.2 28.3 34.3 38.2
Discretionary............................................... 7.6 6.5 5.6 5.1 4.6 4.3 3.9 3.6 3.4 3.1 3.0
Mandatory................................................... 10.3 10.5 11.0 11.5 14.2 17.2 19.0 20.6 23.0 25.9 27.5
Social Security........................................... 4.6 4.5 4.5 4.7 6.0 7.0 7.2 7.2 7.5 7.7 7.8
Medicare.................................................. 2.2 2.3 2.5 2.7 3.7 5.1 6.1 6.8 7.8 8.9 9.5
Medicaid.................................................. 1.2 1.3 1.5 1.7 2.4 3.1 4.0 5.0 6.3 7.9 8.9
Other..................................................... 2.2 2.5 2.5 2.4 2.1 1.9 1.7 1.5 1.4 1.4 1.4
Net Interest................................................ 3.2 2.4 1.4 0.5 -1.0 -1.4 -1.0 -0.1 1.9 5.3 7.6
Surplus(+)/Deficit(-)......................................... -2.3 1.3 2.0 3.1 2.7 0.9 -0.7 -2.9 -6.8 -12.7 -16.6
Federal debt held by the public............................... 50.1 39.2 24.0 7.0 -21.2 -29.4 -19.8 1.9 44.1 117.5 168.9
Primary surplus/deficit(-).................................... 0.9 3.7 3.5 3.6 1.7 -0.5 -1.7 -2.9 -4.9 -7.5 -8.9
--------------------------------------------------------------------------------------------------------------------------------------------------------
lines shown in Chart 2-3 and Table 2-2, the primary deficit reappears
even sooner. When discretionary spending grows with both population and
inflation, the primary deficit reappears in 2030, and when Medicare
grows more rapidly, it recurs in 2028. In all cases, a unified deficit
reappears before the end of the 75 year forecast period.
---------------------------------------------------------------------------
\8\ 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 Effects of Alternative Economic and Technical Assumptions. The
results discussed above are highly sensitive to changes in underlying
economic and technical assumptions. The three alternatives in Table 2-2
illustrate the impact of some of the key variables, but other scenarios
are possible as well. There are also other policy choices that would
make a large difference in the outlook. While the budget could remain
under control for several decades before underlying problems reemerge,
other assumptions can produce more pessimistic or more optimistic
outcomes. Some of the most important of these alternative economic and
technical assumptions and their effects on the budget outlook are
described below. Each highlights one of the key uncertainties in the
outlook. Generally, the negative possibilities receive more attention
than the positive ones, because the dangers are greater in this
direction.
1. Discretionary Spending. By convention, the current services
estimates of discretionary spending are assumed to 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. The current services assumption implies that the
physical quantity of Federal services is unchanging over time. This
requires, for example, that the Nation's future defense needs do not
vary systematically from their current projected levels.
One alternative to this assumption has already been presented in Chart
2-3 and Table 2-2. The second alternative considered there allowed
discretionary spending to increase with both population and inflation
after
[[Page 31]]
2014. This might be the appropriate assumption for such domestic
activities as those of the FBI or the Social Security Administration
which are sensitive to population trends.
Some budget analysts have assumed alternatively that discretionary
spending rises in proportion to GDP in the long run; this requires it to
increase in real terms whenever there is positive real economic growth.
That is a more generous assumption for Government spending than the
assumption of constant real per capita spending. It might be argued that
with rising real per capita incomes, the public demand for Government
services--more national parks, better transportation, additional Federal
support for scientific research--would increase as well. However, some
of these demands might be met within fixed real spending limits through
increased productivity in the Federal sector, such as has accompanied
recent reductions of the Federal workforce. The assumption that
discretionary spending will rise proportionately with GDP also flies in
the face of recent experience; since its peak in 1968, the discretionary
spending share of GDP has been cut in half--from 13.6 percent to 6.6
percent in 1998.
Thus, there are arguments on both sides. Chart 2-4 compares the
baseline alternatives with a scenario in which discretionary spending
rises in step with nominal GDP after 2014.
2. Health Spending: Some of the most volatile and unpredictable
elements in recent budgets have been 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 2009, real per capita growth rates for
Medicare benefits are based on the actuarial projections in the latest
report of the Medicare Trustees, which slow down markedly in the long
run. Eventually, spending for Medicare is assumed to grow at
approximately the same rate as GDP. Such a slowdown may occur, and
eventually, the ever-rising trend in health care costs for both
Government and the private sector will have to end, but it is hard to
know when and how that will happen. Improved health and increased
longevity are highly valued, and society may be willing to spend even
more on them than it does now. As an alternative, one of the current
policy baselines allows real per capita Medicare benefits to rise at an
annual rate of 2.2 percent per year in the long run. This is about twice
as fast as the actuarial assumption, and implies a rapidly rising level
of Medicare spending for many years to come. Eventually, Medicare would
exceed 10 percent of GDP on this assumption (see Table 2-2).
3. Taxes: In the absence of policy changes, the ratio of taxes to GDP
is not assumed to vary much in these long-range projections. There is a
tendency for individual income taxes to rise relative to income, because
the assumed rate of real income growth implies some ``real bracket
creep.'' The tax code is indexed for inflation, but not for increases in
real income. Eventually, a larger percentage of taxpayers will be in
higher tax brackets and this will raise the ratio of taxes to income.
However, other Federal taxes tend to decline in real
[[Page 32]]
terms in the absence of policy changes. Many excise taxes are set in
nominal terms, so collections decline as a share of GDP when there is
inflation. Overall, Federal receipts are projected to rise by about 1
percentage point of GDP in the very long run.
The starting point for these projections is the current ratio of
Federal receipts to GDP. That ratio reached 20.5 percent in 1998, the
highest level since World War II. This was not the result of new Federal
taxes. Tax rates have been essentially unchanged since 1994, when the
changes enacted in OBRA took effect. Since then, however, tax
collections as a share of GDP have risen by two percentage points. The
reasons for this increase are not yet fully understood. The rapid rise
in the stock market, which has generated large capital gains for
investors and made possible lucrative stock options and bonuses for
executives, is generally believed to be a major factor. This Budget
assumes that there will be some moderation in the ratio of receipts to
GDP over the next few years. The share of revenues in the medium term is
below the peak levels recently experienced. Even so, receipts are
projected to remain above their historical average relative to the
economy. Should this assumption prove overoptimistic, it would have a
strong effect on the long-range budget projections.
In Chart 2-5, the current services baseline is compared with two
alternatives for receipts. In one, the share of receipts is assumed to
return to the level posted in 1996, 19.2 percent of GDP; in the other,
to the level in 1994, 18.4 percent of GDP. The return to these earlier
levels is completed by 2001. Afterwards, taxes grow at the rates
projected under current policies. The difference in the starting point
for taxes can alter the outlook for the surplus/deficit quite
dramatically. This is another example of how small differences in the
primary surplus can eventually produce large effects on the total
surplus/deficit because of mounting or falling interest expense.
4. What To Do With the Budget Surpluses. The current projections show
the budget in surplus for several decades under a wide range of
assumptions. These surpluses dramatically reduce debt held by the
public, and therefore net interest outlays, which augments the surplus.
In a sense, a budget surplus that is used to reduce debt feeds on itself
by reducing future interest outlays. Thus, if these surpluses were
limited by increased spending or reduced taxes, it would change the
outlook. Chart 2-6 shows the budget's path if it were held exactly in
balance rather than being allowed to run surpluses. This would require
policy changes to increase spending or reduce taxes. These changes could
take two general forms. The spending or tax changes made possible by the
surpluses could be purely temporary. This would be the case for tax
rebates or one-time grants. If such changes were made, program spending
and receipts would eventually return to their original baseline paths,
although interest spending would be permanently higher. Alternatively,
the spending increases or tax reductions could be permanently built into
the budget. This would be the case if they took the form of tax rate
cuts or increases in entitlements. Such changes are assumed to alter the
baselines for
[[Page 33]]
outlays or receipts permanently, and have a larger long-run effect on
the projected surplus. In both cases, the deficit returns sooner than it
would if the surplus were used to reduce debt.
5. What Happens to the Debt? A surplus means the Government takes in
more receipts from the public than it pays out in the form of Government
outlays. The extra receipts are used to retire debt. This is not unlike
a family paying off its mortgage, and like a family with a mortgage, the
Government may eventually be free from debt. This has only happened once
before in the history of the United States, and then only briefly a
century and a half ago, but with the current level of projected
surpluses, such an eventuality has become a possibility. When the budget
window closes in 2009, the Administration projects that debt held by the
public will have fallen to around 10 percent of GDP, lower than at any
time since before U.S. entry into World War I.
With surpluses running at around 2\1/2\ percent to 3 percent of GDP in
the Administration's projections, it is obvious where the trend is
headed. At this rate, within a few years after 2009, the entire debt
held by the public would be repaid. At that point, further surpluses
would no longer be used to retire Federal debt; instead, they would be
accumulated in the form of Federal assets. As the Government accumulated
financial reserves, these reserves would earn interest which would add
to the surplus, further adding to the assets. In the long-run budget
projections, the asset continues to build up until shifts in the
underlying budgetary position cause the surplus gradually to unwind.
Eventually, a deficit reappears and the asset is drawn down; ultimately,
Federal debt is issued again. It is a measure of the severity of the
impending demographic pressures that the national asset does not grow
into the indefinite future--which it could, just as easily as did the
national debt in the adverse projections of just a few years ago.
Such an outcome is unlikely to happen--certainly in the simple form
sketched here--but it stems from a reasonable desire to avoid making
policy judgments. The projections imply that with sufficient discipline,
the Federal debt could be repaid under an extension of current budget
policies. It would require a change in policy to avoid that outcome.
Chart 2-7 compares the current services baseline with a scenario in
which spending is permanently increased or taxes permanently cut when
Federal debt held by the public reaches zero. Without the national
asset, the deficit reappears much sooner. The interest earned by the
asset is no longer available to fill the budgetary hole when the drain
of future entitlement claims begins to mount.
6. Productivity: Productivity growth in the U.S. economy slowed down
after 1973. This slowdown is responsible for the slower rise in U.S.
real incomes since that time. Productivity growth is affected by changes
in the budget surplus/deficit which influence national saving, but many
other factors influence it as well. The surplus/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
[[Page 34]]
[[Page 35]]
what would happen to the budget deficit if productivity growth were
either higher or lower than assumed. A higher rate of growth would make
the task of preserving a balanced budget much easier; indeed, it would
permit expanded spending or reduced taxes without threatening to drive
the budget back into deficit. A lower productivity growth rate would
have the opposite effect. Chart 2-8 shows how the surplus/deficit varies
with changes of one-half percentage point of average productivity growth
in either direction.
7. Population: In the long run, shifting demographic patterns are the
main source of change in these projections. The changing rate of
population growth feeds into real economic growth through its effect on
labor supply and employment. Changing demographic patterns also affect
entitlement spending, contributing to the surge of spending expected for
Social Security, Medicare, and Medicaid. The key assumptions underlying
these demographic projections concern future fertility, mortality and
immigration.
The main reason for the projected 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--slightly below the
replacement rate needed to maintain a constant population. The
fertility rate was even lower than this 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 1940s and 1950s
and the baby bust in the 1960s and 1970s surprised
demographers. A return to higher fertility rates is possible,
but so is another drop in fertility. The U.S. fertility rate
has never fallen below 1.7, but such low rates have been
observed recently in some European countries. Chart 2-9 shows
the effects of alternative fertility assumptions on the
surplus/deficit; higher fertility contributes to a larger
labor force, increased aggregate incomes, and revenues; and
hence increases the projected surplus. Lower fertility has the
opposite effect.
The increasing proportion of the elderly in the U.S.
population is due to both lower fertility, which reduces the
number of children per adult, and longer lifespans. Since
1970, the average lifespan for U.S. women has increased from
74.9 years to 79.4 years, and it is projected to rise to 80.4
years by 2010. Men do not live as long as women on average,
but their lifespan has also increased, from 67.1 years in 1970
to 73.1 years in 1995, and it is expected to reach 74.9 years
by 2010. Longer lifespans mean that more people will live to
receive Social Security and Medicare benefits, and will
receive them for a longer time. If, on the other hand, the
U.S. population were to experience no further reductions in
mortality from current levels, the shorter lifespans would
help to improve the surplus/deficit. Conversely, if the
population lives longer than now expected, the
[[Page 36]]
outlook for the surplus/deficit would worsen. This is illustrated in
Chart 2-10.
A final factor influencing long-run projections is the rate
of immigration. The United States is an open society. In the
19th century, a huge wave of immigration helped build the
country; the last two decades of the 20th century have
witnessed another burst of immigration. The net flow of legal
immigrants has been averaging around 850,000 per year since
1992, while illegal immigration adds to these figures. 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 2-11 presents alternatives in which
future immigration is held to zero and allowed to rise 50
percent above and 50 percent below the intermediate actuarial
assumption in the Social Security Trustees' Report.
Conclusion.--Under President Clinton, the long-run budget outlook has
improved significantly. When this Administration took office, the
deficit was projected to spiral 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, last year's surplus marks the beginning of a period
of sustained budget surpluses. Eventually, without further reforms to
the entitlement programs, a return to budget deficits is projected. How
soon that will occur is difficult to estimate. Avoiding a quick return
to deficits will require budget discipline. Both Social Security and
Medicare continue to confront long-run deficits in their respective
Trust Funds, which must be addressed regardless of the prospects for the
unified surplus. But the favorable outlook for the unified budget should
make it easier to solve these difficult problems.
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 projections do rely on a common set of
assumptions for population growth and labor force growth after the year
2009. 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)
[[Page 37]]
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 from 1997 to 1998. There were
only relatively small changes in the projected balances last year for
the OASDI Trust Funds, but there was a large improvement in the HI Trust
Fund balance. This change incorporates the expected effects of the
Balanced Budget Agreement enacted in 1997, which made numerous changes
in Medicare. The reforms in the Agreement have extended the projected
solvency of the Trust Fund from 2001 until 2008.
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 1997 Trustees' Report.............................. -1.84 -0.39 -2.23 -4.32
Changes in balance due to changes in:...................................
Legislation........................................................... 0.00 0.00 0.00 2.10
Valuation period...................................................... -0.07 -0.01 -0.08 -0.10
Economic and demographic assumptions.................................. 0.10 0.01 0.11 -0.08
Technical and other assumptions....................................... 0.00 0.01 0.01 0.30
---------------------------------------
Total changes....................................................... 0.03 0.01 0.04 2.22
Actuarial balance in 1998 Trustees' Report.............................. -1.81 -0.38 -2.19 -2.10
----------------------------------------------------------------------------------------------------------------
[[Page 38]]
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
Federal 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, such hypothetical capital
stocks are obviously not owned by the Federal Government, nor would they
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 into three categories: physical assets, education capital,
and R&D capital. The Federal Government has made contributions to each
of these categories of capital, and these contributions are shown
separately in the table. Data in this table are especially uncertain,
because of the strong assumptions needed to prepare the estimates.
The conclusion of the table is that Federal investments are
responsible for about 7\1/2\ percent of total national wealth. This may
seem like a small fraction, but it represents a large volume of capital
$4.8 trillion. The Federal contribution is down from around 9 percent in
the mid-1980s, and from around 12 percent in 1960. Much of this reflects
the shrinking size of the defense capital stocks, which have gone from
12 percent of GDP to under 9 percent since the end of the Cold War.
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 $27 trillion in 1998; by comparison, GDP was only about $8.5
trillion.
The Federal Government's contribution to this stock of capital
includes its own physical assets plus $1.0 trillion in accumulated
grants to State and local governments for capital projects. The Federal
Government has financed about one-fourth 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; in other words, the idea is to measure how much it would
cost to reeducate the U.S. workforce at today's prices (rather than its
original cost). This is more meaningful economically than the historical
cost, 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 1998, of which about 3 percent was financed by the
Federal Government. It exceeds the total value of the Nation's privately
owned 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 over two thirds of national income, and thinking of labor
income as the product of human capital suggests that the total value of
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.\10\ That stock is estimated to have
been about $2 trillion in 1998. Although this is a large amount of
research, it is a relatively small portion of total National wealth. Of
this stock, 43 percent was funded by the Federal Government.
---------------------------------------------------------------------------
\10\ 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
[[Page 39]]
Table 2-4. NATIONAL WEALTH
(As of the end of the fiscal year, in trillions of 1998 dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
1960 1965 1970 1975 1980 1985 1990 1995 1996 1997 1998
--------------------------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Publicly Owned Physical Assets:
Structures and Equipment
Publicly Owned Physical Assets:
Structures and Equipment.................................. 2.1 2.4 2.9 3.5 3.7 3.9 4.2 4.6 4.7 4.8 4.8
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
Federally Owned........................................... 1.1 1.1 1.1 1.0 0.9 1.1 1.2 1.1 1.1 1.1 1.0
Grants to State and Local Government...................... 0.1 0.2 0.3 0.5 0.6 0.7 0.8 0.9 0.9 1.0 1.0
Funded by State and Local Governments..................... 0.9 1.1 1.5 2.0 2.1 2.1 2.3 2.6 2.7 2.8 2.8
Other Federal Assets.......................................... 0.8 0.7 0.7 0.9 1.5 1.5 1.2 0.9 1.0 1.0 0.9
---------------------------------------------------------------------------------------
Subtotal................................................ 2.9 3.2 3.6 4.4 5.2 5.4 5.5 5.5 5.7 5.7 5.7
Privately Owned Physical Assets:
Reproducible Assets........................................... 6.8 7.8 9.6 12.2 15.7 16.5 18.5 20.0 20.5 21.1 21.9
Residential Structures...................................... 2.6 3.0 3.6 4.6 6.2 6.5 7.3 8.1 8.3 8.6 8.9
Nonresidential Plant and Equipment.......................... 2.7 3.1 3.9 5.1 6.4 7.1 7.7 8.2 8.4 8.7 9.1
Inventories................................................. 0.6 0.7 0.9 1.1 1.3 1.2 1.3 1.3 1.3 1.4 1.4
Consumer Durables........................................... 0.8 0.9 1.2 1.4 1.6 1.8 2.2 2.4 2.4 2.5 2.6
Land.......................................................... 2.0 2.4 2.8 3.8 5.6 6.2 6.0 4.7 4.7 5.0 5.3
---------------------------------------------------------------------------------------
Subtotal.................................................. 8.8 10.2 12.4 16.0 21.2 22.7 24.5 24.7 25.3 26.1 27.2
Education Capital:
Federally Financed............................................ 0.1 0.1 0.2 0.3 0.4 0.6 0.7 0.8 0.8 0.9 0.9
Financed from Other Sources................................... 6.0 7.7 10.3 12.7 16.4 19.6 24.9 27.1 28.0 29.1 30.5
---------------------------------------------------------------------------------------
Subtotal.................................................... 6.1 7.8 10.6 13.0 16.8 20.2 25.6 27.9 28.9 29.9 31.4
Research and Development Capital:
Federally Financed R&D........................................ 0.2 0.3 0.5 0.5 0.6 0.7 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 1.0 1.1 1.2 1.2
---------------------------------------------------------------------------------------
Subtotal.................................................... 0.3 0.5 0.8 0.9 1.0 1.3 1.6 1.9 2.0 2.1 2.1
=======================================================================================
Total Assets.............................................. 18.0 21.7 27.3 34.3 44.2 49.6 57.1 60.0 61.8 63.9 66.5
Net Claims of Foreigners on U.S................................. -0.1 -0.2 -0.2 -0.1 -0.3 0.0 0.7 1.3 1.7 2.0 2.3
Balance................................................... 18.2 21.8 27.5 34.4 44.6 49.6 56.4 58.7 60.0 61.9 64.2
��������������������������������������������������������������������������������������������������������������������������������������������������������
ADDENDA:
Per Capita (thousands of dollars)............................... 100.5 112.4 134.0 159.2 195.2 207.3 225.1 222.4 225.5 230.5 237.0
Ratio to GDP (percent).......................................... 709.1 673.0 714.0 786.7 856.0 816.3 817.8 763.6 753.1 746.2 748.1
Total Federally Funded Capital (trillions of 1998 dollars)...... 0.5 0.6 0.8 1.2 2.2 3.2 3.9 4.4 4.6 4.7 4.8
Percent of National Wealth...................................... 12.3 11.5 10.3 9.5 9.1 9.1 8.3 7.9 7.9 7.7 7.4
--------------------------------------------------------------------------------------------------------------------------------------------------------
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 deficit in the U.S. current account,
but even so the size of this debt remains small compared with the total
stock of U.S. assets. It amounted to 3.6 percent of net national wealth
in 1998.
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 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 5.0
percent of total U.S. wealth as shown in Table 2-4.
Trends in National Wealth
The inflation-adjusted net stock of wealth in the United States at the
end of 1998 was about $64 trillion. Since 1980, it has increased in real
terms at an average annual rate of 2.0 percent per year--less than half
the 4.6 percent real growth rate it averaged from 1960 to 1980. Public
physical capital formation slowed down even more between the two
periods. Since 1980, public physical capital has increased at an annual
rate of only 0.6 percent, compared with 3.0 percent over the previous 20
years.
The net stock of private nonresidential plant and equipment grew 1.9
percent per year from 1980 to 1998, compared with 4.4 percent in the
1960s and 1970s; and the stock of business inventories increased less
than 0.2 percent per year. However, private nonresidential fixed capital
has increased more rapidly since
[[Page 40]]
1992--2.8 percent per year--reflecting the recent investment boom.
The accumulation of education capital, as measured here, has also
slowed down since 1980, but not as much. It grew at an average rate of
5.2 percent per year in the 1960s and 1970s, about 3/4 percentage point
faster than the average rate of growth in private physical capital
during the same period. Since 1980, education capital has grown at a 3.5
percent annual rate. This reflects the extra resources devoted to
schooling in this period, and the fact that such resources were
increasing in economic value. R&D stocks have grown at about 4.1 percent
per year since 1980, the fastest growth rate for any major category of
investment over this period, but slower than the growth of R&D in the
1960s and 1970s.
Other Federal Influences on Economic Growth
Federal policies contributed to the slowdown in capital formation that
occurred after 1980. Federal investment decisions, as reflected in Table
2-4, obviously were important, but the Federal Government also
contributes to wealth in ways that cannot be easily captured in a formal
presentation. Monetary policy affects the rate and direction of capital
formation in the short run, and regulatory and tax policies also affect
how capital is invested, as do the Federal Government's policies on
credit assistance and insurance.
One important channel of influence is the Federal budget surplus/
deficit, which determines the size of Federal saving when it is positive
or the Federal borrowing requirement when it is negative. Had deficits
been smaller in the 1980s, there would have been a much 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 1998 had fiscal policy avoided the buildup in the
debt.
Social Indicators
There are certain broad responsibilities that are unique to the
Federal Government. Especially important are 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 a limited subset drawn from the vast
array of available data on conditions in the United States. In choosing
indicators for this table, priority was given to measures that were
consistently available over an extended period. Such indicators make it
easier to draw valid comparisons and evaluate trends. In some cases,
however, this meant choosing indicators with significant limitations.
The individual measures in this table are influenced to varying
degrees by many Government policies and programs, as well as by external
factors beyond the Government's control. They do not measure the
outcomes of Government policies, because they do not show 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 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
promotion of national saving through fiscal policy, and other
Administration policies to enhance economic growth are expected to
promote national wealth and improve the future financial condition of
the Federal Government. As that occurs, the efforts will be revealed in
these tables.
[[Page 41]]
Table 2-5. ECONOMIC AND SOCIAL INDICATORS
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
General categories Specific measures 1960 1965 1970 1975 1980 1985 1990 1995 1996 1997 1998
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Economic:
Living Standards.............. Real GDP per person (1992 dollars)......................... 12,516 14,828 16,566 17,935 20,268 22,321 24,545 25,690 26,336 27,136 27,915
average annual percent change............................ 0.3 5.1 -1.1 -1.4 -1.5 2.7 0.2 1.3 2.5 3.0 2.9
Median Income (1997 dollars):..............................
All Households............................................. NA NA 33,942 33,699 34,538 35,229 36,770 35,887 36,306 37,005 NA
Married Couple Families.................................... 29,274 34,095 40,867 42,458 45,129 46,390 48,991 49,563 50,848 51,591 NA
Female Householder, No Spouse Present...................... 14,794 16,576 19,792 19,546 20,297 20,376 20,793 20,738 20,368 21,023 NA
Income Share of Lower Three Quintiles (percent)............ 34.8 35.2 35.2 35.2 34.5 32.7 32.0 30.3 30.0 29.8 NA
Poverty Rate (percent) \1\................................. 22.2 17.3 12.6 12.3 13.0 14.0 13.5 13.8 13.7 13.3 NA
Economic Security............. Civilian Unemployment (percent)............................ 5.5 4.5 4.9 8.5 7.1 7.2 5.5 5.6 5.4 5.0 4.5
CPI-U (percent Change)..................................... 1.7 1.6 5.8 9.1 13.5 3.5 5.4 2.8 2.9 2.3 1.6
Employment Prospects.......... Increase in Total Payroll Employment (millions)............ -0.5 2.9 -0.5 0.4 0.2 2.5 0.3 2.2 2.8 3.4 2.9
Managerial or Professional Jobs (percent of total)......... NA NA NA NA NA 24.1 25.8 28.3 28.8 29.1 29.6
Wealth Creation............... Net National Saving Rate (percent of GDP).................. 10.8 12.6 8.7 6.7 7.5 6.2 4.4 5.3 5.8 6.6 6.6
Innovation.................... Patents Issued to U.S. Residents (thousands)............... 42.1 53.9 49.8 40.2 40.5 43.2 52.6 64.2 69.2 69.7 NA
Multifactor Productivity (average annual percent change)... 1.0 3.1 1.0 1.2 0.7 0.6 0.2 0.2 0.6 NA NA
Social:
Families...................... Children Living with Female Householder, No Spouse Present
(percent of all children)................................. 9 10 12 16 19 20 22 24 23 23 NA
Safe Communities.............. Violent Crime Rate (per 100,000 population) \2\............ 160 199 364 482 597 557 732 685 634 611 NA
Murder Rate (per 100,000 population) \2\................... 5 5 8 10 10 8 9 8 7 7 NA
Juvenile Crime (murders and nonnegligent manslaughter per
100,000 persons age 14 to 17)............................. NA NA NA 11 13 10 24 24 20 NA NA
Health and Illness............ Infant Mortality (per 1000 Live Births).................... 26.0 24.7 20.0 16.1 12.6 10.6 9.2 7.6 7.3 NA NA
Low Birthweight [<2,500 gms] Babies (percent).............. 7.7 8.3 7.9 7.4 6.8 6.8 7.0 7.3 7.4 NA NA
Life Expectancy at birth (years)........................... 69.7 70.2 70.8 72.6 73.7 74.7 75.4 75.8 76.1 NA NA
Cigarette Smokers (percent population 18 and older)........ NA 42.4 39.5 36.4 33.2 30.1 25.5 24.7 NA NA NA
Bed Disability Days (average days per person).............. 6.0 6.2 6.1 6.6 7.0 6.1 6.2 6.1 NA NA NA
Learning...................... High School Graduates (persent of population 25 and older). 44.6 49.0 55.2 62.5 68.6 73.9 77.6 81.7 81.7 82.1 NA
College Graduates (percent of population 25 and older)..... 8.4 9.4 11.0 13.9 17.0 19.4 21.3 23.0 23.6 23.9 NA
National Assessment of Educational Progress \3\............
Mathematics High School Seniors.......................... NA NA NA 302 300 301 305 307 307 NA NA
Science High School Seniors.............................. NA NA 305 293 286 288 290 295 296 NA NA
Participation................. Voting for President (percent eligible population)......... 62.8 NA NA NA 52.8 NA NA NA 49.0 NA NA
Voting for Congress (percent eligible population).......... 58.5 NA 43.5 NA 47.6 NA 33.1 NA 45.8 NA 33.4
Individual Charitable Giving per Capita (1997 dollars)..... 213 255 306 325 354 373 455 456 470 NA NA
Environment:
Air Quality................... Nitrogen Oxide Emissions (thousand short tons)............. 14,140 17,424 21,369 23,151 24,875 23,488 23,436 23,768 23,391 23,576 NA
Sulfur Dioxide Emissions (thousand short tons)............. 22,245 26,380 31,161 28,011 25,905 23,230 23,678 19,189 19,836 NA NA
Lead Emissions (thousand short tons)....................... NA NA 221 160 74 23 5 4 4 4 NA
Water Quality................. Population Served by Secondary Treatment or Better
(millions)................................................ NA NA NA NA NA 134 155 166 165 NA 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.
\3\ Some data from the national educational assessments have been interpolated.
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 was 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.
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.
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Liabilities:
Financial Liabilities: The principal source of data is the Federal
Reserve's Flow-of-Funds Accounts.
Insurance Liabilities: Sources of data are the OMB Deposit Insurance
Model and the OMB Pension Guarantee Model. Historical data on
liabilities for deposit insurance were also drawn from the CBO's study,
The Economic Effects of the Savings and Loan Crisis, issued January
1992.
Pension Liabilities: For 1979-1997, 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 extrapolations. The estimate for 1998 is a
projection.
Long-Run Budget Projections
The long-run budget projections are based on long-run demographic and
economic projections. A simplified model of the Federal budget developed
at OMB computes the budgetary implications of this forecast.
Demographic and Economic Projections: For the years 1999-2009, the
assumptions are identical to those used in the budget. 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 growth are
extended using the intermediate assumptions from the 1998 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.
Budget Projections: For the budget period through 2009, 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 is projected according to current services
assumptions in which it grows at the rate of inflation. As an
alternative, discretionary spending is also projected to grow at the
rate of inflation plus population. 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.
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 added, together with adjustments for inflation and
depreciation in the same way as described above for direct Federal
investment. Data for total State and local government capital come from
the revised 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 1998 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.
The historical estimates of education capital presented in this
section differ from previously published estimates because of the
incorporation of revised estimates of students' forgone earnings. These
are now based on the year-round, full-time earnings of 18-24 year olds
with selected educational attainment levels. These year-round earnings
are reduced by 25 percent because students are usually out of school
three months of the year. For high school students, these adjusted
earnings are further reduced by the unemployment rate for 16-17 year
olds; for college students, by the unemployment rate for 20-24 year
olds. Yearly earnings by age and educational attainment are from Money
Income in the United States, series P60, published by the Bureau of the
Census.
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 GDP chain-weighted price index 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.
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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, Lexington Books, 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
estimated based on data from the National Science Foundation, Surveys of
Science Resources. The industry-financed R&D stock component is
estimated from that source and from the U.S. Department of Labor, The
Impact of Research and Development on Productivity Growth, Bulletin
2331, September 1989.
Experimental estimates of R&D capital stocks have recently been
prepared by BEA. The results are described in ``A Satellite Account for
Research and Development,'' Survey of Current Business, November 1994.
These BEA estimates are lower than those presented here primarily
because BEA assumes that the stock of basic research depreciates, while
the estimates in Table 2-4 assume that basic research does not
depreciate. BEA also assumes a slightly higher rate of depreciation for
applied research and development, 11 percent, compared with the 10
percent rate used here.
Social Indicators
The main sources for the data in this table are the Government
statistical agencies. Generally, the data are publicly available in the
annual Economic Report of the President and the Statistical Abstract of
the United States.