[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 broad range of data--more than would usually be shown on a 
business balance sheet. A balanced assessment of the Government's 
financial condition requires several alternative 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 expected 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 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 future revision.
  The presentation consists of three parts:
     The first part reports on what the Federal Government owns 
          and what it owes. Table 2-1 summarizes this information. The 
          assets and liabilities in this table are a useful starting 
          point for 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 Government's resources extend beyond the 
          assets defined in this narrow way. Government can 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 full responsibilities are much broader than this.
     The second part presents possible paths for extending the 
          Federal budget, beginning with an extension of the 2001 
          Budget. Table 2-2 summarizes this information. This part 
          offers the clearest indication of the long-run financial 
          burdens that the Government faces and the resources that will 
          be available to meet them. Some future claims on the 
          Government 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 1998.
     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.
---------------------------------------------------------------------------
  \1\ Objectives of Federal Financial Reporting, Statement of Federal 
Financial Accounting Concepts Number 1, September 2, 1993. The other 
objectives relate to budgetary integrity, operating performance, and 
systems and controls.
---------------------------------------------------------------------------
           Federal financial reporting should assist report users in 
     assessing the impact on the country of the Government's operations 
          and investments for the period and how, as a result, the 
    Government's and the Nation's financial conditions have changed and 
    may change in the future. Federal financial reporting should provide 
               information that helps the reader to determine:
          3a. Whether the Government's financial position improved or 
                        deteriorated over the period.
       3b. Whether future budgetary resources will likely be sufficient 
    to sustain public services and to meet obligations as they come due.
           3c. Whether Government operations have contributed to the 
                   Nation's current and future well-being.
  The 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.

[[Page 18]]

                                     

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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.

               For example, 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. 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 both in real terms and relative to the size of
                the economy.

3.   The Government does not comply with the accounting requirements
 imposed on private businesses. Why does the Government not keep a
 proper set of books?

               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 has been issued.

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    QUESTIONS AND ANSWERS ABOUT THE GOVERNMENT'S ``BALANCE SHEET''--
                                Continued


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               This chapter addresses the ``stewardship objective''--

4.   Why is Social Security not shown as a liability in Table 2-1?

               Providing promised Social Security benefits is a
                political and moral responsibility of the Federal
                Government, but these benefits are not a liability in
                the usual sense. In the past, the Government has
                unilaterally decreased as well as increased Social
                Security benefits, and the Social Security Advisory
                Council has suggested further reforms that would alter
                future benefits if enacted by Congress. When the amount
                in question can be changed unilaterally, it is not
                ordinarily considered a liability.

               Furthermore, 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.

               Finally, 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.

5.   It is all very well to run a budget surplus now, but can it be
 sustained? When the baby-boom generation retires, will the deficit not
 return larger and meaner than ever before?

               The aging of the U.S. population, which will become
                dramatically evident when the baby-boomers retire, poses
                serious long-term problems for the Federal budget and
                its major entitlement programs. However, the current
                budget surplus means the country will be better prepared
                to address these problems. If the surplus is maintained,
                there will be a significant decline in Federal debt
                which will substantially reduce Federal net interest
                payments. 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.

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    QUESTIONS AND ANSWERS ABOUT THE GOVERNMENT'S ``BALANCE SHEET''--
                                Continued


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6.   Would it be sensible for the Government to borrow to finance needed

               Probably not, 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 recently,
                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. It is
                not clear whether this type of capital investment would
                fall under 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.

7.   Is it misleading to include the Social Security surplus when
 measuring the Government's budget surplus?

               Experts say 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 effects 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.

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    QUESTIONS AND ANSWERS ABOUT THE GOVERNMENT'S ``BALANCE SHEET''--
                                Continued


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               For the purpose of measuring the Government's effects on

               To plan the government's fiscal program, however,
                alternative perspectives can sometimes be useful. In
                particular, by law, Social Security has been moved off-
                budget. The purpose was to stress the need to provide
                independent, sustainable funding for Social Security in
                the long term; and to show the extent to which the rest
                of the budget had relied on annual Social Security
                surpluses to make up for its own shortfall. Policy under
                this Administration has been consistent with these
                goals. The non-Social Security deficit has been
                eliminated, and the President has made long-term Social
                Security soundness a key priority.

               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 and early 1990s, Federal
                debt, measured relative to the size of the economy, has
                reached levels not seen since the early 1960s, although
                it is now on a downward trend. Further reducing the
                accumulated debt will have several desirable economic
                effects. It will help to hold down real interest rates,
                which is good for business 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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[[Page 22]]


  The data needed to judge Government's 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 does not accrue to the Federal Government.
  A good starting point for the evaluation of Government finances is to 
measure its assets and liabilities. An illustrative tabulation of net 
liabilities 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 and early 1990s 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 appear on a conventional 
balance sheet. These include 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 is expected to use its powers 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 pension obligations to Government employees. 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 in Table 2-1 with other Government liabilities. These formal 
obligations, however, are only a subset of the Government's financial 
responsibilities.
  The Government has established a broad range of programs that dispense 
cash and other benefits to individual recipients. The Government is not 
constitutionally obligated to continue payments under these programs; 
the benefits can be modified or even ended at any time, subject to the 
decisions of the Nation's elected representatives in Congress. Such 
changes are a regular part of the legislative cycle. Allowing for the 
possibility of 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 in 
part two 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 economy 
and society. Some such data are currently available, but more need to be 
developed to obtain a full picture. Examples of what might be done are 
also shown below.
  The presentation that follows consists of a series of tables and 
charts. All of them taken together function as a 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 Chart 2-1 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.

[[Page 23]]

          
          


[[Page 24]]

         PART I--THE FEDERAL GOVERNMENT'S ASSETS AND LIABILITIES

  Table 2-1 summarizes what the Government owes as a result of its past 
operations netted against the value of what it owns, for selected years 
beginning in 1960. Assets and liabilities are measured in terms of 
constant FY 1999 dollars. Ever since 1960, 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 18 percent greater 
than it was in 1960. Meanwhile, Federal liabilities have increased by 
185 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 $11,600 per capita.
---------------------------------------------------------------------------
  \2\ This temporary improvement highlights the importance of the other 
tables in this presentation. What is good for the Federal Government as 
an asset holder is not necessarily favorable to the economy. The decline 
in inflation in the early 1980s reversed the speculative runup in gold 
and other commodity prices. This reduced the balance of Federal net 
assets, but it was good for the economy and the Nation as a whole.

                                                     Table 2-1.  GOVERNMENT ASSETS AND LIABILITIES *
                                             (As of the end of the fiscal year, in billions of 1999 dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                      1960    1965     1970     1975     1980     1985     1990     1995      1997      1998      1999
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                       ASSETS

Financial Assets:
   Foreign Exchange, SDRs, and Gold................       9       7       15       12       17       31       41        58        40        47        46
   Cash and Checking Deposits......................      40      58       36       29       45       30       40        41        51        48        63
   Other Monetary Assets...........................       1       1        1        1        2        2        2         1         3         4         5
   Mortgages.......................................      26      25       37       39       72       74       94        65        47        45        45
   Other Loans.....................................      96     133      166      165      211      276      194       150       156       168       179
     less Expected Loan Losses.....................      -1      -3       -4       -9      -16      -16      -19       -23       -42       -46       -50
   Other Treasury Financial Assets.................      49      66       48       45       63       89      150       172       158       153       164
                                                    ----------------------------------------------------------------------------------------------------
     Total.........................................     222     287      300      283      393      485      503       463       412       419       452

 Fixed Reproducible Capital:.......................   1,042   1,101    1,123    1,015      945    1,111    1,159     1,145     1,075     1,037     1,030
   Defense.........................................     908     895      873      736      643      778      808       779       709       677       663
   Nondefense......................................     134     206      250      280      302      333      351       367       366       360       367
 Inventories.......................................     254     220      204      182      224      259      229       162       139       136       135
 Nonreproducible Capital...........................     412     422      400      581      925    1,027      802       605       688       633       658
   Land............................................      89     124      154      239      303      327      328       251       265       279       294
   Mineral Rights..................................     323     299      246      342      621      701      474       354       423       354       364
                                                    ----------------------------------------------------------------------------------------------------
     Subtotal......................................   1,708   1,743    1,727    1,778    2,093    2,397    2,190     1,913     1,902     1,806     1,823
                                                    ====================================================================================================
      Total Assets.................................   1,930   2,030    2,027    2,061    2,487    2,882    2,692     2,376     2,315     2,225     2,275

                    LIABILITIES

Financial Liabilities:
   Currency and SDRs...............................      12      13       21       21       25       25       29        30        29        28        26
   Debt held by the Public.........................   1,085   1,118    1,011    1,024    1,263    2,105    2,875     3,821     3,867     3,771     3,633
   Trade Payables..................................      14      20       20       30       53       79      114        88        86        84        82
   Miscellaneous...................................       6       3        1        4        0        0        9         7         4         7         7
                                                    ----------------------------------------------------------------------------------------------------
     Total.........................................   1,117   1,154    1,053    1,079    1,342    2,209    3,027     3,946     3,986     3,890     3,748

Insurance Liabilities:
   Deposit Insurance...............................       0       0        0        0        2        9       69         5         1         1         1
   Pension Benefit Guarantee \1\...................       0       0        0       41       30       42       42        20        30        48        41
   Loan Guarantees.................................       0       0        2        6       12       10       15        29        31        29        29
   Other Insurance.................................      30      27       21       20       26       16       19        17        16        16        16
                                                    ----------------------------------------------------------------------------------------------------
     Subtotal......................................      30      27       24       67       70       78      146        70        79        94        86

Federal Pension Liabilities........................     766     971    1,155    1,312    1,734    1,736    1,693     1,642     1,612     1,624     1,627

Total Liabilities..................................   1,913   2,152    2,232    2,457    3,147    4,023    4,866     5,658     5,676     5,609     5,461

Balance............................................      17    -122     -205     -396     -660   -1,141   -2,173    -3,282    -3,362    -3,384    -3,186
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Addenda:...........................................

Balance Per Capita (in 1999 dollars)...............      95    -626     -997   -1,836   -2,889   -4,771   -8,669   -12,444   -12,509   -12,474   -11,634

Ratio to GDP (in percent)..........................     0.7    -3.9     -5.5     -9.4    -13.0    -19.0    -31.2     -41.4     -39.0     -37.6     -34.1
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* This table shows assets and liabilites for the Government as a whole excluding the Federal Reserve System.
\1\ The model and data used to calculate this liability were revised for 1996-1999.


[[Page 25]]

                                     


Assets

  Table 2-1 shows a comprehensive list of assets--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 almost $0.5 trillion at the end of FY 1999. 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 about $50 billion as of 1999. 
These estimated losses are subtracted from the face value of outstanding 
loans to obtain a better estimate of their economic worth.
  Reproducible Capital: The Federal Government is a major investor in 
physical capital and computer software. Government-owned stocks of such 
capital amounted to about $1.0 trillion in 1999 (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 declined sharply in 1997-1998 but rebounded sharply in 1999, 
causing the value of Federal mineral deposits to fluctuate. (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, as part of the Nation's historical heritage, 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, because of declines in defense capital and 
the real value of nonreproducible assets. Even so, the Government's 
holdings are vast. At the end of 1999, the value of

[[Page 26]]

Government assets is estimated to have been about $2.3 trillion.

Liabilities

  Table 2-1 includes those liabilities that would appear on a business 
balance sheet, and only those liabilities. These include various forms 
of Federal debt, Federal pension obligations to civilian and military 
employees, and the estimated liability arising from Federal insurance 
and loan guarantee programs.
  Financial Liabilities: Financial liabilities amounted to about $3.7 
trillion at the end of 1999. The single largest component was Federal 
debt held by the public, amounting to around $3.6 trillion. In addition 
to debt held by the public, the Government's financial liabilities 
include approximately $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 present value of all such losses 
taken together is less than $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 1999. \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 1999 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 only 
about 13 percent of GDP; by 1995, it was 41 percent of GDP. Since then, 
the net balance as a percentage of GDP has fallen for four straight 
years. The real value--adjusted for inflation--of net liabilities has 
also fallen by about $180 billion since 1997, reflecting the back-to-
back budget surpluses in these 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 
Government assets and liabilities does not reflect the Government's 
unique sovereign powers, such as taxation. The best way to examine the 
balance between future Government obligations and resources is by 
projecting the budget over a long enough period to reveal any long-run 
stresses. The budget provides a comprehensive measure of the 
Government's annual financial burdens and resources. By projecting 
annual receipts and outlays, it is possible to consider 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 that extend beyond the normal 5- to 10-year 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 current policies and to sound 
warnings about future problems that could be avoided by timely action. 
Federal responsibilities extend well beyond the next decade. There is no 
time limit on the 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 this 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 and for the Government's health programs--Medicare and 
Medicaid--which serve the elderly. Long-range projections can help 
indicate how serious these strains might become and what would be needed 
to withstand them.
  The retirement of the baby-boomers will dictate the timing of the 
future budgetary problem, but the underlying cause is deeper. U.S. 
population growth 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. That change has 
been held temporarily in abeyance as the baby-boom cohort has moved into 
its prime earning years, while the retirement of the much smaller 
cohorts born during the Great Depression and World War II has been 
holding down the rate of growth in the retired population. The 
suppressed budgetary pressures are likely to burst forth when the baby-

[[Page 27]]

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 will persist, given the underlying pattern of low fertility 
and improving longevity, with concomitant problems for Federal 
retirement programs. These same problems are gripping other developed 
nations, even those that never experienced a baby-boom; in fact, some of 
the nations that did not have baby-booms are facing demographic 
pressures already.

  The Improvement in the Long-Range Outlook.--Since this Administration 
first took office, there has been a major change in the long-run budget 
outlook. In January 1993, the deficit was on an unstable trajectory. Had 
the policies then in place continued unchanged, the deficit was 
projected to mount steadily not only in dollar terms, but relative to 
the size of the economy. \4\ The unified deficit was projected to rise 
to over 10 percent of GDP by 2010--an unprecedented level in peacetime--
and to continue sharply upward thereafter. This pattern of rising 
deficits also would have driven Federal debt held by the public to 
unprecedented 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 1999 dollar 
by over 50 percent by 2030, and by 70 percent by the year 2050. For 
long-run comparisons, it is much more useful to examine the ratio of the 
surplus/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 bring about, it also reduced the long-term 
deficit. Prior to enactment of the Balanced Budget Act in 1997, however, 
the deficit was still expected to persist into the long run, although at 
a more moderate level. Under the policies in place at the beginning of 
1997, the deficit was projected to remain at around 1.5 percent of GDP 
through 2010, and only afterwards to begin a steady rise that would push 
it above 20 percent of GDP shortly after 2050.
  The 1997 Balanced Budget Agreement (BBA) took the next major step by 
eliminating the deficit in the unified budget. When the BBA was passed, 
that was expected to happen in 2002; but the unexpected strength of the 
economy and the boom in the financial markets over the last four years 
have enabled the unified budget to reach balance much sooner than was 
expected. The unified budget is now projected to remain in surplus 
throughout the coming decade under policies in this budget. Extending 
those policies beyond the usual budget window, a unified budget surplus 
could be sustained for many years, although in the very long run a 
deficit is projected to reemerge absent further policy changes. How long 
the surplus will actually be preserved depends on certain key factors, 
some of the most important of which are illustrated in Chart 2-3.



[[Page 28]]


  Budget discipline is crucial for long-run budget stability. Another 
key factor is the expected growth of Federal health care costs. Chart 2-
3 illustrates how the surplus varies depending on assumptions about 
future growth in discretionary spending and health care costs. The 
conventions adopted in past budgets were to assume future growth in 
discretionary spending sufficient to preserve a constant real level of 
spending, and to base long-range projections for Medicare on the latest 
projections of the Medicare actuaries as reflected in the annual 
Medicare Trustees' Report. Those projections include an expected 
slowdown in the rate of growth in real per capita Medicare spending. 
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 alternative assumptions, 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 21st century would put strains on the budget, 
and it was thought until recently that those strains must inevitably 
lead to large deficits. For example, the 1994 report of the Bipartisan 
Commission on Entitlement and Tax Reform found 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) 
observed as recently as 1997: ``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 
projected for some time long-run actuarial deficiencies that would 
deplete those programs' Trust funds over the next several decades.
---------------------------------------------------------------------------
  \5\ Long-Term Budgetary Pressures and Policy Options, March 1997.
---------------------------------------------------------------------------
  The consensus has shifted somewhat as a result of recent policy 
actions and because of the unexpected strength of the economy in the 
second half of the 1990s, which put the budget on a much sounder footing 
and thereby provided a better jumping-off point for long-range budget 
projections. The General Accounting Office (GAO) in its 1997 report on 
the long-run budget outlook observed 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.'' \6\ GAO 
continues to find that unsustainable deficits will emerge in the long 
run absent major entitlement reforms, but the date at which the deficit 
starts to rise has been postponed significantly as a result of recent 
actions.
---------------------------------------------------------------------------
  \6\ Analysis of Long-Term Fiscal Outlook, October 1997.
---------------------------------------------------------------------------
  Another sign of the shifting consensus is provided in CBO's latest 
long-run budget projections released in December 1999. Under current 
policies, CBO foresees a unified budget surplus through 2010, reaching 3 
percent of GDP in that year. \7\ As CBO correctly points out, how long 
the surplus can be extended depends on uncertain future policy and 
economic developments, but: ``Saving all of the surpluses projected in 
CBO's 10-year baseline could delay the onset of serious fiscal problems 
until the second half of the next century.'' The summary measure that 
CBO uses to indicate the magnitude of the long-run fiscal imbalance--the 
permanent change in taxes needed to stabilize the ratio of publicly held 
Federal debt to GDP--has declined to 0.5 percent of GDP in its most 
optimistic projections, compared with a baseline projection of 5.4 
percent of GDP in its May 1996 projections. Under other assumptions, CBO 
shows a larger imbalance, but even under its most pessimistic 
alternative, the imbalance is only about half as large as projected in 
1996.
---------------------------------------------------------------------------
  \7\ The Long-Term Budget Outlook: An Update, December 1999.
---------------------------------------------------------------------------
  The main reason for this improvement in the outlook can be traced to 
the increase in the near-term budget surplus. If the surpluses are 
allowed to continue reducing Federal debt, as was done in 1998 and 1999, 
they will bring about dramatic reduction in Federal debt held by the 
public and in the Government's net interest payments over the next 
several years. In FY 1999, net interest amounted to 2\1/2\ percent of 
GDP. Under current estimates that could be cut to around \1/2\ percent 
of GDP by 2010, and soon thereafter, if the surpluses were allowed to 
continue, the Government would begin to acquire financial assets that 
would generate interest income that would add to the unified budget 
surplus.
  This means that when demographic pressures on Social Security and the 
Federal health programs begin to mount around that time, there would be 
more budgetary resources available to meet the problem, postponing the 
date on which a deficit in the unified budget reappears. While the long-
range outlook for Social Security has improved only modestly, it now 
appears that there could be more resources available in the rest of the 
budget when the Social Security shortfall begins to emerge.

  Economic and Demographic Projections.--Long-run budget projections 
require a long-run demographic and economic forecast--even though any 
such forecast is highly uncertain. 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, 2010--2.6 percent per year 
          for CPI inflation, 5.2 percent for the unemployment rate, and 
          6.1 percent for the yield on 10-year Treasury notes.
     Productivity growth as measured by real GDP per hour is 
          assumed to continue at the same constant rate as it averages 
          in the Administration's me

[[Page 29]]

          dium-term projections--1.7 percent per year. (In 1999, there 
          were substantial upward revisions to recorded productivity 
          growth, which have resulted in an increase in the budget 
          projections for this series; see the discussion of statistical 
          issues in Chapter 1 of this volume.)
     In line with the current projections of the Social Security 
          Trustees, U.S. population growth is expected to slow over the 
          next several decades. This is consistent with recent trends in 
          the birth rate, and it allows for further reductions in 
          mortality and continuing immigration at around current levels. 
          The slowdown is expected to lower the rate of population 
          growth from over 1 percent per year in the 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 somewhat 
          higher rate of labor force participation over the next ten 
          years than is assumed in the latest annual report of the 
          Social Security Trustees. That difference in the level of 
          labor force participation is preserved in the long-run 
          projections.
     The projected rate of real economic growth in the long run 
          is determined by labor force growth 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 gradually after 2006 from around 3 
          percent per year to an average rate of just under 2 percent 
          per year by 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, which has 
          averaged over 3 percent per year.
  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 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 reduce outlays, 
further augmenting projected surpluses.

  Alternative Budget Baselines.--Chart 2-3 above shows four alternative 
budget projections: one based on the policies in place prior to 
enactment of OBRA 1993 and three others showing current policy 
projections under alternative assumptions about discretionary spending 
and future Federal health care costs. \8\ The chart illustrates the 
dramatic improvement in the deficit that has already been achieved. 
Furthermore, it shows that if the unified budget remains in surplus 
throughout the coming decade, as is now expected, the task of 
maintaining fiscal stability will be eased 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 current policy alternatives 
shown in Chart 2-3. Under each of these alternatives, the major 
entitlement programs are expected to absorb an increasing share of 
budget resources.
---------------------------------------------------------------------------
  \8\ The President's budget program includes investing no more than 15 
percent of the Social Security trust fund in corporate equities. To be 
conservative, these projections assume that the equities in the trust 
fund have the same yield as Government securities (so the equity 
investment does not add to the Government's projected investment 
income), and net the value of the equities against the amount of 
outstanding Federal debt. This yields the same numerical outcome as if 
Social Security did not invest in equities. If, as expected, Social 
Security equity investment yields a higher rate of return, the financial 
position of the Federal Government will be better than is presented in 
these projections.
---------------------------------------------------------------------------
     Social Security benefits, driven by the retirement of the 
          baby-boom generation, rise from 4.2 percent of GDP in 2000 to 
          6.7 percent in 2030. They continue to rise after that but more 
          gradually, eventually reaching 7.4 percent of GDP by 2075.
     Federal Medicaid spending goes up from 1.2 percent of GDP 
          in 2000 to 3.2 percent in 2030 and to 8.6 percent of GDP in 
          2075.
     Based on the Medicare actuaries' long-range projections of 
          future health-care cost trends, Medicare spending would rise 
          from 2.1 percent of GDP in 2000 to 4.1 percent in 2030 and 4.8 
          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 4.7 
          percent of GDP in 2030, and 8.9 percent by 2075.
     Assuming that discretionary spending grows only with 
          inflation it would decline as a share of GDP, from 6.5 percent 
          in 2000 to 3.9 percent in 2030 and 2.3 percent of GDP in 2075. 
          The programs funded by this spending grow with inflation under 
          this assumption, but they do not keep pace with population 
          growth or any growth in real per capita income. 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 4.4 
          percent of GDP in 2030, and 2.9 percent of GDP in 2075.

                                              Table 2-2.  LONG-RUN BUDGET PROJECTIONS OF 2001 BUDGET POLICY
                                                                    (Percent of GDP)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   1995    2000    2005    2010    2015    2020    2030    2040    2050    2060    2075
--------------------------------------------------------------------------------------------------------------------------------------------------------
Discretionary Grows with Inflation
   Receipts.....................................................    18.5    20.4    19.4    19.1    19.2    19.3    19.5    19.7    19.9    19.9    20.0
   Outlays......................................................    20.7    18.7    17.6    16.7    16.5    16.9    18.2    18.7    19.3    21.1    26.3
     Discretionary..............................................     7.4     6.5     5.8     5.1     4.7     4.4     3.9     3.4     3.1     2.7     2.3
     Mandatory..................................................    10.1     9.9    10.4    11.1    12.0    13.3    15.6    16.7    17.6    19.1    22.1
       Social Security..........................................     4.6     4.2     4.3     4.5     5.0     5.7     6.7     6.8     6.9     7.2     7.4
       Medicare.................................................     2.1     2.1     2.3     2.5     2.9     3.3     4.1     4.4     4.4     4.5     4.8
       Medicaid.................................................     1.2     1.2     1.5     1.8     2.1     2.4     3.2     4.0     5.0     6.2     8.6
       Other....................................................     2.2     2.4     2.3     2.3     2.1     2.0     1.7     1.5     1.4     1.3     1.2
     Net Interest...............................................     3.2     2.3     1.4     0.5    -0.3    -0.9    -1.4    -1.4    -1.3    -0.8     1.9
   Surplus(+)/Deficit(-)........................................    -2.2     1.7     1.8     2.4     2.7     2.5     1.4     1.0     0.5    -1.1    -6.3
   Federal Debt Held by Public..................................    49.2    36.3    21.3     7.1    -6.3   -16.9   -26.9   -26.9   -24.5   -13.8    37.3
   Primary Surplus(+)/Deficit(-)................................     0.9     4.0     3.1     2.9     2.5     1.6     0.0    -0.5    -0.8    -2.0    -4.5

Discretionary Grows with Population and Inflation
   Receipts.....................................................    18.5    20.4    19.4    19.1    19.2    19.3    19.5    19.7    19.9    19.9    20.0
   Outlays......................................................    20.7    18.7    17.6    16.7    16.6    17.3    18.9    20.0    21.1    23.3    29.6
     Discretionary..............................................     7.4     6.5     5.8     5.1     4.9     4.7     4.4     4.0     3.6     3.3     2.9
     Mandatory..................................................    10.1     9.9    10.4    11.1    12.0    13.3    15.6    16.7    17.6    19.1    22.1
       Social Security..........................................     4.6     4.2     4.3     4.5     5.0     5.7     6.7     6.8     6.9     7.2     7.4
       Medicare.................................................     2.1     2.1     2.3     2.5     2.9     3.3     4.1     4.4     4.4     4.5     4.8
       Medicaid.................................................     1.2     1.2     1.5     1.8     2.1     2.4     3.2     4.0     5.0     6.2     8.6
       Other....................................................     2.2     2.4     2.3     2.3     2.1     2.0     1.7     1.5     1.4     1.3     1.2
     Net Interest...............................................     3.2     2.3     1.4     0.5    -0.2    -0.8    -1.1    -0.7    -0.2     0.9     4.6
   Surplus(+)/Deficit(-)........................................    -2.2     1.7     1.8     2.4     2.6     2.1     0.6    -0.3    -1.2    -3.4    -9.6
   Federal Debt Held by Public..................................    49.2    36.3    21.3     7.1    -5.8   -15.1   -20.3   -13.3    -2.3    18.8    89.0
   Primary Surplus(+)/Deficit(-)................................     0.9     4.0     3.1     2.9     2.3     1.3    -0.5    -1.0    -1.4    -2.5    -5.0

Continued Rapid Medicare Growth.................................
   Receipts.....................................................    18.5    20.4    19.4    19.1    19.2    19.3    19.5    19.7    19.9    19.9    20.0
   Outlays......................................................    20.7    18.7    17.6    16.7    16.5    17.1    19.1    20.9    23.2    27.3    38.1
     Discretionary..............................................     7.4     6.5     5.8     5.1     4.7     4.4     3.9     3.4     3.1     2.7     2.3
     Mandatory..................................................    10.1     9.9    10.4    11.1    12.0    13.5    16.3    18.0    19.5    21.7    26.2
       Social Security..........................................     4.6     4.2     4.3     4.5     5.0     5.7     6.7     6.8     6.9     7.2     7.4
       Medicare.................................................     2.1     2.1     2.3     2.5     2.9     3.4     4.7     5.7     6.3     7.1     8.9
       Medicaid.................................................     1.2     1.2     1.5     1.8     2.1     2.4     3.2     4.0     5.0     6.2     8.6
       Other....................................................     2.2     2.4     2.3     2.3     2.1     2.0     1.7     1.5     1.4     1.3     1.2
     Net Interest...............................................     3.2     2.3     1.4     0.5    -0.3    -0.8    -1.2    -0.6     0.6     2.9     9.6
   Surplus(+)/Deficit(-)........................................    -2.2     1.7     1.8     2.4     2.7     2.3     0.5    -1.2    -3.3    -7.4   -18.2
   Federal Debt Held by Public..................................    49.2    36.3    21.3     7.1    -6.3   -16.4   -21.6    -9.6   -13.5    56.5   186.0
   Primary Surplus(+)/Deficit(-)................................     0.9     4.0     3.1     2.9     2.5     1.4    -0.7    -1.8    -2.7    -4.6    -8.6
--------------------------------------------------------------------------------------------------------------------------------------------------------

  The long-run budget outlook has been much improved by the actions 
taken by this Administration in cooperation with the Congress. 
Eliminating the unified deficit has set the budget on a solid footing 
for many years to come. Under a conservative extension of the 
Administration's latest economic assumptions and using various 
reasonable technical assumptions regarding future spending and taxes, 
the budget could continue in surplus for several decades.
  As currently projected, receipts are higher and net interest outlays 
are lower than they were before meas

[[Page 30]]

ures were taken to bring down the deficit, but the long-run demographic 
challenge has not been changed, and rising per capita health care costs 
are also likely to continue to put pressure on the budget. Extending the 
2001 budget under the assumption that discretionary spending grows with 
inflation, a primary, or non-interest, deficit reappears in 2030. 
Although the underlying imbalance remains small, and the unified budget 
is projected to continue in surplus for many more years, a sustained 
primary deficit is sufficient to begin a slow but irreversible spiral. 
The recurrence of a unified deficit is inevitable once this spiral is 
set in motion unless there are future changes in policy that eliminate 
the primary deficit. \9\ Under the alternative baselines shown in Chart 
2-3 and Table 2-2, the primary deficit would reappear even sooner. When 
discretionary spending grows with both population and inflation, the 
primary deficit reappears in 2027, and when Medicare grows more rapidly, 
it also recurs in 2027. In all cases, a unified deficit reappears before 
the end of the 75-year forecast period.
---------------------------------------------------------------------------
  \9\ The primary or non-interest surplus is the difference between all 
outlays, excluding interest, and total receipts. It is positive even 
when the total budget is in deficit provided that interest outlays 
exceed the overall 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 sensitive to changes in underlying economic 
and technical assumptions. The three alternatives in Table 2-2 
illustrate the impact of some of the key assumptions, but other 
scenarios are also possible. 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, 
negative possibilities receive more attention than positive ones in 
these scenarios, because the dangers would seem to be greater in this 
direction.
  1. Discretionary Spending: By convention, the current services 
estimates of discretionary spending are as

[[Page 31]]

sumed to rise only 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 real value of Federal 
services is unchanging over time, which has the implication that the 
size of Federal discretionary spending would shrink relative to the size 
of the economy. It also implies that the Nation's future defense needs 
do not vary systematically from currently projected levels.
  One alternative to this assumption has already been presented in Chart 
2-3 and Table 2-2. The second alternative for current policy considered 
there allows discretionary spending to increase with both population and 
inflation. Discretionary spending is frozen in real per capita terms, 
but not in absolute terms. This might be the appropriate assumption for 
such domestic activities as those of the FBI or the Social Security 
Administration (for program administration, not benefit costs), which 
are sensitive to population trends.
  Some budget analysts have assumed alternatively that discretionary 
spending is proportional 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 
current services assumption or even 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 roads, and additional Federal support for scientific research--
will increase as well. 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 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 6.5 percent in 2000. 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.


  2. Health Spending: After 2010, which is the last year of the standard 
budget estimates, real per capita growth rates for Medicare benefits are 
based on the actuarial projections in the latest report of the Medicare 
Trustees. These projections slow down markedly in the long run. At some 
point, spending for Medicare must grow at approximately the same rate as 
GDP. Eventually, the 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 an even 
larger share of income on them than it has heretofore. As an 
alternative, one of the current policy baselines allows real per capita 
Medicare benefits to rise at an annual rate of 2\1/4\ percent per year. 
This is about twice as fast as the actuarial assumption, and implies a 
rapidly rising level of Medicare spending for many years

[[Page 32]]

to come. Eventually, Medicare would approach 9 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. Individual 
income taxes tend 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 terms in the absence of 
policy changes. Many excise taxes are set in nominal terms, so 
collections tend to decline as a share of GDP. In the very long run, 
Federal receipts are projected to rise by about 1 percentage point of 
GDP compared with their level in 2010.
  The starting point for these projections is the current ratio of 
Federal receipts to GDP. That ratio reached 20.0 percent in 1999, and it 
is expected to be 20.4 percent in 2000--the highest levels 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 about 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 the share of tax 
receipts instead return to near its historical average that would have 
an adverse 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, 18.9 percent of GDP; in the other, 
to its level in 1994, before the recent runup in the revenue share--18.1 
percent of GDP. The return to these earlier levels is completed by 2001. 
Afterwards, the current services rules apply, under which the share of 
receipts rises over time, but at a very gradual rate. 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. 


  4. Alternative Uses of the Budget Surpluses: Current projections show 
the unified budget in surplus for several decades under a wide range of 
assumptions. These surpluses dramatically reduce debt held by the public 
and net interest outlays, which in turn augments the surpluses. 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

[[Page 33]]

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 could eventually return to their original baseline paths 
after the temporary spending and taxes came to an end, 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 the changes took form of tax rate cuts or 
increases in entitlements. Such changes would alter the baselines for 
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 When the Federal Debt Is Repaid? 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 happened only 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 real 
possibility. When the budget window closes in 2010, the Administration 
projects that debt held by the public will be 7 percent of GDP, a lower 
level than at any time since before the United States entered World War 
I. 


  With unified budget surpluses projected to be running between 2 and 3 
percent of GDP, it is obvious where the debt is headed. All of the debt 
held by the public could be repaid. At that point, any further surpluses 
would no longer be used to retire Federal debt; instead, they would have 
to be accumulated in the form of Federal assets. Assuming the Government 
used them to acquire financial reserves, these reserves would earn 
interest which would add to the surplus further adding to the assets. In 
the long-run budget projections, Federal financial assets continue to 
build up until shifts in the underlying budgetary position cause the 
surplus gradually to unwind. Eventually, a deficit reappears and the 
assets are 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 a scenario is somewhat artificial and would have been thought 
most unlikely just a few years ago, but to assume any other approach 
would require a policy judgment. The purpose of these long-range projec

[[Page 34]]

tions, is to show what would happen to the budget if current policies 
were extended. That assumption implies that, with sufficient discipline, 
the Federal debt would be repaid under an extension of current budget 
policies and a Federal asset accumulated. Given the ground rules, the 
base scenario presents that result.
  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 after 
1973. This slowdown was responsible for the slower rise in U.S.real 
incomes after that time. Recently, productivity growth has increased. 
Since the end of 1995, productivity has grown about as fast as it did 
during the 25-year period prior to 1973. The revival of productivity 
growth is one of the most welcome developments of the last several 
years. Productivity is affected by changes in the budget surplus/deficit 
which alter the level of national saving and investment, but many other 
factors also influence productivity as well. The surplus/deficit in turn 
is affected by changes in productivity growth which determine the size 
of the economy, and hence future receipts. Two alternative scenarios 
illustrate 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 worsening the 
budget picture. 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 in the 21st century 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

[[Page 35]]

          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 projected for the 
          U.S. population is due to both low 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 79.5 years, and it is projected to rise to 82.8 
          years by 2050. Men do not live as long as women on average, 
          but their lifespan has also increased from 67.2 years in 1970 
          to 73.6 years in 1999, and it is expected to reach 78.1 years 
          by 2050. If the U.S. population were to experience much slower 
          improvements in mortality, than in the recent past, the 
          relatively shorter lifespans would help to improve the 
          surplus/deficit by reducing Social Security benefits. 
          Conversely, if the population were to live significantly 
          longer than is now expected, the outlook for the surplus/
          deficit would worsen. This is illustrated in Chart 2-10. Last 
          year, the technical panel to the Social Security Advisory 
          Board recommended raising expected lifespans in the annual 
          Trustees' Report. The recommendation essentially is to adopt 
          what had been the high-cost assumption as the intermediate or 
          base case. This would raise expected lifespans in 2050 to 85.6 
          years for women and to 80.8 years for men.
          
          
     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 below the intermediate actuarial assumptions 
          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 continue spiraling out of control until, early 
in the 21st century, it was projected to reach levels seen before only 
during major wars. The outlook now is drastically different. Under 
current policy assumptions, the unified budget surpluses in 1998-1999 
mark the beginning of a period of sustained budget surpluses. 
Eventually, without further reforms to the entitlement programs, a 
return to budget deficits is still projected, but how soon this will 
occur is difficult to estimate. A quick

[[Page 37]]

return to deficits can be avoided with continued budget discipline. Both 
Social Security and Medicare 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 otherwise 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 budget projections do rely on the Social 
Security assumptions for population growth and labor force growth after 
the year 2010. Even with these differences, the message is similar: The 
retirement of the baby-boom generation coupled with expected high rates 
of growth in per capita health care costs will exhaust the Trust Funds 
unless further remedial action is taken.
  The Trustees' reports feature the 75-year actuarial balance of the 
Trust Funds as a summary measure of their financial status. For each 
Trust Fund, the balance is calculated as the change in receipts or 
program benefits (expressed as a percentage of taxable payroll) that 
would be needed to preserve a small positive balance in the Trust Fund 
at the end of 75 years.
  Table 2-3 shows the changes in the 75-year actuarial balances of the 
Social Security and Medicare Trust Funds from 1998 to 1999. There was a 
small improvement in the consolidated OASDI Trust fund and a larger gain 
in the HI Trust Fund. The changes were due to revisions in the actuarial 
assumptions. In the case of the OASDI funds, a small improvement in the 
economic assumptions was made; while for the HI program the actuaries 
revised their view of likely health care cost trends, which helped to 
prolong the projected surplus in the Trust Fund. The Trustees now 
project that the HI Trust Fund will not be depleted until 2015, which 
they describe as ``a substantial improvement over prior estimates.''

     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 1998 Trustees' Report..............................     -1.81     -0.38     -2.19     -2.10
Changes in balance due to changes in:
   Legislation..........................................................      0.00      0.00      0.00      0.00
   Valuation period.....................................................     -0.07     -0.01     -0.08     -0.05
   Economic and demographic assumptions.................................      0.16      0.02      0.18      0.01
   Technical and other assumptions......................................      0.02      0.00      0.02      0.68
                                                                         ---------------------------------------
   Total Changes........................................................      0.10      0.02      0.12      0.64

Actuarial balance in 1999 Trustees' Report..............................     -1.70     -0.36     -2.07     -1.46
----------------------------------------------------------------------------------------------------------------


[[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 conventional 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 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 down from 
12 percent of GDP to 7 percent since the end of the Cold War.

[[Page 39]]



                                                               Table 2-4.  NATIONAL WEALTH
                                            (As of the end of the fiscal year, in trillions of 1999 dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   1960    1965    1970    1975    1980    1985    1990    1995    1997    1998    1999
--------------------------------------------------------------------------------------------------------------------------------------------------------

ASSETS
Publically Owned Physical Assets:
   Structures and Equipment.....................................     2.0     2.4     2.9     3.4     3.6     3.9     4.2     4.7     4.9     4.8     4.8
     Federally Owned or Financed................................     1.2     1.3     1.4     1.5     1.6     1.8     2.0     2.0     2.0     2.0     2.0
       Federally Owned..........................................     1.0     1.1     1.1     1.0     0.9     1.1     1.2     1.1     1.1     1.0     1.0
       Grants to State and Local Governments....................     0.1     0.2     0.3     0.5     0.6     0.7     0.8     0.9     1.0     1.0     1.0
     Funded by State and Local Governments......................     0.8     1.0     1.4     1.9     2.1     2.1     2.3     2.6     2.8     2.8     2.7
   Other Federal Assets.........................................     0.7     0.6     0.6     0.8     1.1     1.3     1.0     0.8     0.8     0.8     0.8
                                                                 ---------------------------------------------------------------------------------------
       Subtotal.................................................     2.7     3.0     3.5     4.2     4.8     5.2     5.3     5.4     5.7     5.6     5.6

Privately Owned Physical Assets:
   Reproducible Assets..........................................     6.5     7.5     9.2    11.7    15.2    16.2    18.4    20.2    21.4    22.2    23.2
     Residential Structures.....................................     2.5     2.9     3.5     4.5     6.1     6.3     7.3     8.2     8.7     9.1     9.4
     Nonresidential Plant & Equipment...........................     2.6     3.0     3.7     4.9     6.3     6.9     7.7     8.3     8.8     9.2     9.7
     Inventories................................................     0.6     0.7     0.8     1.0     1.2     1.2     1.3     1.3     1.3     1.3     1.4
     Consumer Durables..........................................     0.8     0.9     1.1     1.3     1.6     1.7     2.2     2.4     2.5     2.6     2.7
   Land.........................................................     2.0     2.4     2.7     3.6     5.4     6.1     6.0     4.8     5.1     5.3     5.6
                                                                 ---------------------------------------------------------------------------------------
     Subtotal...................................................     8.5     9.8    11.9    15.4    20.6    22.3    24.4    25.0    26.5    27.6    28.8

Education Capital:
   Federally Financed...........................................     0.1     0.1     0.2     0.3     0.4     0.6     0.7     0.8     0.9     1.0     1.0
   Financed from Other Sources..................................     5.8     7.4    10.0    12.3    15.9    19.3    24.9    27.5    29.7    31.5    33.3
                                                                 ---------------------------------------------------------------------------------------
     Subtotal...................................................     5.8     7.5    10.2    12.6    16.4    19.8    25.6    28.3    30.6    32.5    34.3

Research and Development Capital:
   Federally Financed R&D.......................................     0.2     0.3     0.5     0.5     0.6     0.6     0.8     0.9     0.9     0.9     0.9
   R&D Financed from Other Sources..............................     0.1     0.2     0.3     0.4     0.4     0.6     0.8     1.0     1.2     1.2     1.3
                                                                 ---------------------------------------------------------------------------------------
     Subtotal...................................................     0.3     0.5     0.7     0.9     1.0     1.3     1.6     1.9     2.1     2.2     2.2
                                                                 =======================================================================================
      Total Assets..............................................    17.3    20.8    26.2    33.0    42.8    48.6    56.9    60.6    64.8    67.8    70.9

Net Claims of Foreigners on U.S. (+)............................    -0.1    -0.2    -0.1    -0.1    -0.3     0.0     0.8     1.5     2.2     2.5     3.5

      Balance...................................................    17.4    21.0    26.4    33.1    43.1    48.5    56.1    59.1    62.6    65.2    67.4
ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½

ADDENDA:
 Per Capita Balance (thousands of dollars)......................    96.1   107.8   128.7   153.2   188.7   203.0   223.7   224.3   232.9   240.5   246.1
 Ratio of Balance to GDP (in percent)...........................     7.0     6.7     7.1     7.8     8.5     8.1     8.0     7.5     7.3     7.3     7.2
 Total Federally Funded Capital (trillions of 1999 dollars).....     0.4     0.5     0.8     1.2     2.1     3.1     3.8     4.2     4.5     4.6     4.8
 Percent of National Wealth.....................................    11.9    11.3    10.3     9.3     8.6     8.9     8.0     7.6     7.4     7.1     7.1
--------------------------------------------------------------------------------------------------------------------------------------------------------

Physical Assets:

  The physical assets in the table include stocks of plant and 
equipment, office buildings, residential structures, land, and the 
Government's physical assets such as military hardware and highways. 
Automobiles and consumer appliances are also included in this category. 
The total amount of such capital is vast, around $34 trillion in 1999; 
by comparison, GDP was about $9 trillion.
  The Federal Government's contribution to this stock of capital 
includes its own physical assets plus $1 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 formal education and training. 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 at 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 for the current value of the investment in education. 
According to this measure, the stock of education capital amounted to 
$34 trillion in 1999, of which about 3 percent was financed by the 
Federal Government. It is equal in total value to the Nation's stock of 
physical capital. The main investors in education capital have been 
State and local

[[Page 40]]

governments, parents, and students themselves (who forgo earning 
opportunities in order to acquire education).
  Even broader concepts of human capital have been suggested. Not all 
useful training occurs in a schoolroom or in formal training programs at 
work. Much informal learning occurs within families or on the job, but 
measuring its value is very difficult. However, labor compensation 
amounts to about two-thirds of national income, and thinking of this 
income as the product of human capital suggests that the total value of 
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 the costs of acquiring only 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 1999. Although this is a large amount of 
research, it is a relatively small portion of total National wealth. Of 
this stock, about 40 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, which is intended to show National totals only, 
but it does not mean they are unimportant. (An unwise buildup in debt, 
most of which was owed to other Americans, was partly responsible for 
the recession of 1990-1991 and the sluggishness of the early stages of 
the recovery that followed.) The only debt that appears in Table 2-4 is 
the debt that Americans owe to foreign investors. America's foreign debt 
has been increasing rapidly in recent years, because of the continuing 
deficit in the U.S. current account which has been rising; but even so, 
the size of this debt remains small compared with the total stock of 
U.S. assets. It amounted to 5 percent of the total assets in Table 2-4 
in 1999.
  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 about 
5 percent of net U.S. wealth as shown in Table 2-4.

                        Trends in National Wealth

  The net stock of wealth in the United States at the end of 1999 was 
about $67 trillion. Since 1980, the stocks of it has increased in real 
terms at an average annual rate of 2.4 percent per year--only half the 
4.7 percent real growth rate it averaged from 1960 to 1980. Public 
physical capital formation has slowed even more drastically. Since 1980, 
the stock of public physical capital has increased at an annual rate of 
only 0.8 percent, compared with 2.9 percent over the previous 20 years.
  The net stock of private nonresidential plant and equipment grew 2.3 
percent per year from 1980 to 1999, compared with 4.5 percent in the 
1960s and 1970s; and the stock of business inventories increased even 
less, just 0.6 percent per year on average since 1980. However, private 
nonresidential fixed capital has increased more rapidly since 1992--3.2 
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 0.9 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 4.0 
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 4.4 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. The Federal Reserve's monetary policy affects the rate and 
direction of capital formation in the short run, and Federal 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, the gap between Federal liabilities and 
assets shown in Table 2-1 would be smaller today. 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 3 to 5 percent 
larger in 1999 had fiscal policy avoided the buildup in the debt.

[[Page 41]]

                            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.

                                                                           Table 2-5.  ECONOMIC AND SOCIAL INDICATORS
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
       General categories                              Specific measures                         1960     1965     1970     1975     1980     1985     1990     1995     1997     1998     1999
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Economic:
   Living Standards.............  Real GDP per person (1996 dollars).........................   13,038   15,454   17,306   18,751   21,398   23,857   26,734   28,647   30,467   31,472   32,407
                                    average annual percent change (5-year trend).............       NA      3.5      2.3      1.6      2.7      2.2      2.3      1.4      2.5      2.9      2.9
                                  Median Income (1998 dollars):..............................
                                     All Households..........................................       NA       NA   34,471   34,224   35,076   35,778   37,343   36,446   37,581   38,885       NA
                                     Married Couple Families.................................   29,730   34,626   41,504   43,120   45,832   47,112   49,754   50,335   52,395   54,180       NA
                                     Female Householder, No Spouse Present...................   15,024   16,834   20,101   19,850   20,614   20,693   21,116   21,061   21,350   22,163       NA
                                  Income Share of Lower 60 percent of All Families...........     34.8     35.2     35.2     35.2     34.5     32.7     32.0     30.3     29.8     29.8       NA

                                  Poverty Rate (percent) \1\.................................     22.2     17.3     12.6     12.3     13.0     14.0     13.5     13.8     13.3     12.7       NA
   Economic Security............  Civilian Unemployment (percent)............................      5.5      4.5      4.9      8.5      7.1      7.2      5.5      5.6      5.0      4.5      4.2
                                  CPI-U (Percent Change).....................................      1.7      1.6      5.8      9.1     13.5      3.5      5.4      2.8      2.3      1.6      2.2
   Employment Prospects.........  Increase in Total Payroll Employment (millions)............     -0.5      2.9     -0.5      0.4      0.2      2.5      0.3      2.2      3.4      2.9       NA
                                  Managerial or Professional Jobs (percent of total).........       NA       NA       NA       NA       NA     24.1     25.8     28.3     29.1     29.6       NA
   Wealth Creation..............  Net National Saving Rate (percent of GDP)..................     10.2     12.1      8.2      6.5      7.5      6.0      4.6      4.7      6.2      6.6      6.5
   Innovation...................  Patents Issued to U.S. Residents (thousands)...............     42.1     54.1     50.1     40.5     40.8     43.5     53.0     64.5     70.0     90.7       NA
                                  Multifactor Productivity (average annual percent change)...      1.0      3.1      1.0      1.2      0.7      0.6      0.3      0.2      0.6       NA       NA

Social:
   Families.....................  Children Living with Mother Only (percent of all children).      9.2     10.2     11.6     16.4     18.6     20.2     21.6     24.0     23.2     23.6       NA
   Safe Communities.............  Violent Crime Rate (per 100,000 population) \2\............      160      199      364      482      597      557      732      685      611      566      521
                                  Murder Rate (per 100,000 population) \2\...................        5        5        8       10       10        8        9        8        7        6        5
                                  Murders/Nonnegligent Manslaughter per 100,000 Persons Age         NA       NA       NA       11       13       10       24       24       17       NA       NA
                                   14 to 17).
   Health and Illness...........  Infant Mortality (per 1000 Live Births) \3\................     26.0     24.7     20.0     16.1     12.6     10.6      9.2      7.6      7.2      7.2       NA
                                  Low Birthweight [<2,500 gms] Babies (percent)..............      7.7      8.3      7.9      7.4      6.8      6.8      7.0      7.3      7.5      7.6       NA
                                  Life Expectancy at birth (years)...........................     69.7     70.2     70.8     72.6     73.7     74.7     75.4     75.8     76.5     76.7       NA
                                  Cigarette Smokers (percent population 18 and older)........       NA     42.3     39.5     36.5     33.2     30.0     25.4     24.7     24.7       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 (percent of population 25 and older).     44.6     49.0     55.2     62.5     68.6     73.9     77.6     81.7     82.1     82.8       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     23.9     24.4       NA
                                  National Assessment of Educational Progress \3\............
                                     Mathematics High School Seniors.........................       NA       NA       NA      302      300      301      305      307       NA       NA       NA
                                     Science High School Seniors.............................       NA       NA      305      293      286      288      290      295       NA       NA       NA
   Participation................  Voting for President (percent eligible population).........     62.8       NA       NA       NA     52.8       NA       NA       NA       NA       NA       NA
                                  Voting for Congress (percent eligible population)..........     58.5       NA     43.5       NA     47.6       NA     33.1       NA       NA     33.4       NA
                                  Individual Charitable Giving per Capita (1999 dollars).....      218      261      313      332      362      373      413      398      423       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   23,576       NA       NA
                                  Sulfur Dioxide Emissions (thousand short tons).............   22,245   26,380   31,161   28,011   25,905   23,230   23,678   19,189       NA       NA       NA
                                  Lead Emissions (thousand short tons).......................       NA       NA      221      160       74       23        5        4        4       NA       NA
   Water Quality................  Population Served by Secondary Treatment or Better                NA       NA       NA       NA       NA      134      155      166       NA       NA       NA
                                   (millions).
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\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, 1999 data are preliminary.

\3\ Some data from the national educational assessments have been interpolated.

  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 generally 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

[[Page 42]]

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.
  It is worth noting that, in recent years, many of the indicators in 
this table have turned around. The improvement in economic conditions 
has been widely noted, but there have also been some significant social 
improvements. Perhaps most notable has been the turnaround in the crime 
rate. Since reaching a peak in the early 1990s, the violent crime rate 
has fallen by over 25 percent, and preliminary data suggest that the 
improvement continued in 1999. The turnaround is especially dramatic in 
the murder rate, which is lower now than at any time since the 1960s. 
Government policies are only one set of factors in this remarkable 
reversal, but more effective policing along with broader changes that 
have helped improve economic prospects for all Americans appear to be 
having a good effect.

                   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.

         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. 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 and software 
purchases. 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 
was necessary to deflate the nominal investment series. This was done 
using price deflators for Federal investment 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 for oil deposits from the Producer 
Price Index for Crude Energy Materials.

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 1979-1998, 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 1999 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 2000-2010, 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 inflation, 
interest rates, and unemployment constant 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 1999 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 aver

[[Page 43]]

age rate of growth implied by the budget's economic assumptions.
  Budget Projections: For the budget period through 2010, 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 composite rate of inflation in 
Federal pay and non-pay spending; it is also projected on alternative 
assumptions which permit it to grow with both inflation and population, 
and also to grow with nominal GDP. Social Security is projected by the 
Social Security actuaries using these long-range assumptions. Medicare 
and Federal pensions are derived from the most recent actuarial 
forecasts available at the time the budget was prepared, repriced using 
Administration inflation assumptions. OMB's Health Division projects 
Medicaid outlays based on the economic and demographic projections in 
the model. 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 Federal investment 
flows described in Chapter 6. Federal grants for State and local 
Government capital are 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 extrapolated for 1998-1999.
  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 extrapolated for 1998-1999 
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.
  Estimates of students' forgone earnings are 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 because these outlays are classified elsewhere 
as investment in physical capital. The data also exclude outlays under 
the GI Bill; outlays for graduate and post-graduate education spending 
in HHS, Defense and Agriculture; and most outlays for vocational 
training.
  Data on investment in education financed from other sources come from 
educational institution reports on the sources of their funds, published 
in U.S. Department of Education, Digest of Education Statistics. Nominal 
expenditures were deflated by the implicit price deflator for GDP to 
convert them to constant dollar values. Education capital is assumed not 
to depreciate, but to be retired when a person dies. An education 
capital stock computed using this method with different source data can 
be found in Walter McMahon, ``Relative Returns To Human and Physical 
Capital in the U.S. and Efficient Investment Strategies,'' Economics of 
Education Review, Vol. 10, No. 4, 1991. The method is described in 
detail in Walter McMahon, Investment in Higher Education, 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 estimated stock of 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.

[[Page 44]]

  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 such 
general sources as the annual Economic Report of the President and the 
Statistical Abstract of the United States, and from the agencies' Web 
sites.
