Analytical Perspectives - 2. Stewardship: Toward a Federal Balance Sheet

[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.
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\1\ Objectives of Federal Financial Reporting, Statement of Federal
Financial Accounting Concepts Number 1, September 2, 1993. The other
objectives relate to budgetary integrity, operating performance, and
systems and controls.
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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.

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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.

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

Table 2-1 summarizes what the Government owes as a result of its past
operations 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.
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\2\ This temporary improvement highlights the importance of the other
tables in this presentation. What is good for the Federal Government as
an asset holder is not necessarily favorable to the economy. The decline
in inflation in the early 1980s reversed the speculative runup in gold
and other commodity prices. This reduced the balance of Federal net
assets, but it was good for the economy and the Nation as a whole.

Table 2-1. GOVERNMENT ASSETS AND LIABILITIES *
(As of the end of the fiscal year, in billions of 1999 dollars)
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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
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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
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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
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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
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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

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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\
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\3\ These pension liabilities are expressed as the actuarial present
value of benefits accrued-to-date based on past and projected salaries.
The cost of retiree health benefits is not included. The 1999 liability
is extrapolated from recent trends.
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The Balance of Net Liabilities

Because of its sovereign powers, the Government need not maintain a
positive balance of net assets, and the rapid buildup in liabilities
since 1980 has not damaged Federal creditworthiness. However, from 1980
to 1992, the balance between Federal liabilities and Federal assets did
deteriorate at a very rapid rate. In 1980, the negative balance was 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
��������������������������������������������������������������������������������������������������������������������������������������������������������

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

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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.

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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.