    [Analytical Perspectives]
    [Special Analyses and Presentations]
    [7. Federal Investment Spending and Capital Budgeting]
    [From the U.S. Government Publishing Office, www.gpo.gov]

    [[Page 129]]

      ======================================================================

                       SPECIAL ANALYSES AND PRESENTATIONS

    ========================================================================

    [[Page 131]]

              7.  FEDERAL INVESTMENT SPENDING AND CAPITAL BUDGETING

      Investment spending is spending that yields long-term benefits. Its
    purpose may be to improve the efficiency of internal Federal agency
    operations or to increase the Nation's overall stock of capital for
    economic growth. The spending can be direct Federal spending or grants
    to State and local governments. It can be for physical capital, which
    yields a stream of services over a period of years, or for research and
    development or education and training, which are intangible but also
    increase income in the future or provide other long-term benefits.
      Most presentations in the Federal budget combine investment spending
    with spending for current use. This chapter focuses solely on Federal
    and federally financed investment. An Administration proposal for
    capital acquisition funds that is being developed is discussed in
    Chapter 1, ``Budget and Performance Integration,'' in this volume.
      In this chapter, investments are discussed in the following sections:
        a description of the size and composition of Federal
              investment spending;
        a presentation of trends in the stock of federally financed
              physical capital, research and development, and education;
        alternative capital budget and capital expenditure
              presentations; and
        projections of Federal physical capital outlays and recent
              assessments of public civilian capital needs, as required by
              the Federal Capital Investment Program Information Act of
              1984.

                    Part I: DESCRIPTION OF FEDERAL INVESTMENT

      For more than fifty years, the Federal budget has included a chapter
    on Federal investment--defined as those outlays that yield long-term
    benefits--separately from outlays for current use. In recent years the
    discussion of the composition of investment includes estimates of budget
    authority as well as outlays and extends these estimates four years
    beyond the budget year, to 2007.
      The classification of spending between investment and current outlays
    is a matter of judgment. The budget has historically employed a
    relatively broad classification, encompassing physical investment,
    research, development, education, and training. The budget further
    classifies investments into those that are grants to State and local
    governments, such as grants for highways or education, and all other
    investments, called ``direct Federal programs,'' in this analysis. This
    ``direct Federal'' category consists primarily of spending for assets
    owned by the Federal Government, such as defense weapons systems and
    general purpose office buildings, but also includes grants to private
    organizations and individuals for investment, such as capital grants to
    Amtrak or higher education loans directly to individuals.
      Presentations for particular purposes could adopt different
    definitions of investment:
        To suit the purposes of a traditional balance sheet,
              investment might include only those physical assets owned by
              the Federal Government, excluding capital financed through
              grants and intangible assets such as research and education.
        Focusing on the role of investment in improving national
              productivity and enhancing economic growth would exclude items
              such as national defense assets, the direct benefits of which
              enhance national security rather than economic growth.
        Concern with the efficiency of Federal operations would
              confine the coverage to investments that reduce costs or
              improve the effectiveness of internal Federal agency
              operations, such as computer systems.
        A ``social investment'' perspective might broaden the
              coverage of investment beyond what is included in this chapter
              to include programs such as childhood immunization, maternal
              health, certain nutrition programs, and substance abuse
              treatment, which are designed in part to prevent more costly
              health problems in future years.
      The relatively broad definition of investment used in this section
    provides consistency over time--historical figures on investment outlays
    back to 1940 can be found in the separate Historical Tables volume. The
    detailed tables at the end of this section allow disaggregation of the
    data to focus on those investment outlays that best suit a particular
    purpose.
      In addition to this basic issue of definition, there are two technical
    problems in the classification of investment data, involving the
    treatment of grants to State and local governments and the
    classification of spending that could be shown in more than one
    category.
      First, for some grants to State and local governments it is the
    recipient jurisdiction, not the Federal Government, that ultimately
    determines whether the money is used to finance investment or current
    purposes. This analysis classifies all of the outlays in the category
    where the recipient jurisdictions are expected to spend most of the
    money. Hence, the community development

    [[Page 132]]

    block grants are classified as physical investment, although some may be
    spent for current purposes. General purpose fiscal assistance is
    classified as current spending, although some may be spent by recipient
    jurisdictions on physical investment.
      Second, some spending could be classified in more than one category of
    investment. For example, outlays for construction of research facilities
    finance the acquisition of physical assets, but they also contribute to
    research and development. To avoid double counting, the outlays are
    classified in the category that is most commonly recognized as
    investment. Consequently outlays for the conduct of research and
    development do not include outlays for research facilities, because
    these outlays are included in the category for physical investment.
    Similarly, physical investment and research and development related to
    education and training are included in the categories of physical assets
    and the conduct of research and development.
      When direct loans and loan guarantees are used to fund investment, the
    subsidy value is included as investment. The subsidies are classified
    according to their program purpose, such as construction or education
    and training. For more information about the treatment of Federal credit
    programs, refer to Chapter 25, ``Budget System and Concepts and
    Glossary.''
      This section presents spending for gross investment, without adjusting
    for depreciation. A subsequent section discusses depreciation, shows
    investment both gross and net of depreciation, and displays net capital
    stocks.

                    Composition of Federal Investment Outlays

    Major Federal Investment

      The composition of major Federal investment outlays is summarized in
    Table 7-1. They include major public physical investment, the conduct of
    research and development, and the conduct of education and training.
    Defense and nondefense investment outlays were $292.6 billion in 2001.
    They are estimated to increase to $324.6 billion in 2002 and are
    projected to increase further to $342.6 billion in 2003. Major Federal
    investment outlays will comprise an estimated 16.1 percent of total
    Federal outlays in 2003 and 3.1 percent of the Nation's gross domestic
    product (GDP). Greater detail on Federal investment is available in
    Tables 7-2 and 7-3 at the end of this Part. Those tables include both
    budget authority and outlays.
      Physical investment.--Outlays for major public physical capital
    investment (hereafter referred to as physical investment outlays) are
    estimated to be $159.6 billion in 2003. Physical investment outlays are
    for construction and rehabilitation, the purchase of major equipment,
    and the purchase or sale of land and structures. More than three-fifths
    of these outlays are for direct physical investment by the Federal
    Government, with the remainder being grants to State and local
    governments for physical investment.
      Direct physical investment outlays by the Federal Government are
    primarily for national defense. Defense outlays for physical investment
    are estimated to increase from $69.1 billion in 2002 to $72.6 billion in
    2003. Almost all of these outlays, or an estimated $63.7 billion in
    2003, are for the procurement of weapons and other defense equipment,
    and the remainder is primarily for construction on military bases,
    family housing for military personnel, and Department of Energy defense
    facilities.

                                  Table 7-1.  COMPOSITION OF FEDERAL INVESTMENT OUTLAYS
                                                (In billions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                                       Estimate
                                                                                           2001  -------------------
                                                                                         Actual     2002      2003
    ----------------------------------------------------------------------------------------------------------------
                                    Federal Investment

    Major public physical capital investment:
      Direct Federal:
        National defense..............................................................      63.7      69.1      72.6
         Nondefense...................................................................      27.8      31.5      29.8
                                                                                       -----------------------------
        Subtotal, direct major public physical capital investment.....................      91.4     100.6     102.4

        Grants to State and local governments.........................................      53.4      56.8      57.2
                                                                                       -----------------------------
        Subtotal, major public physical capital investment............................     144.8     157.4     159.6

    Conduct of research and development:
         National defense.............................................................      48.4      54.3      59.9
         Nondefense...................................................................      38.0      42.9      47.0
                                                                                       -----------------------------
        Subtotal, conduct of research and development.................................      86.4      97.3     106.9

    Conduct of education and training:
         Grants to State and local governments........................................      34.8      40.2      45.5
         Direct Federal...............................................................      26.5      29.6      30.5
                                                                                       -----------------------------
        Subtotal, conduct of education and training...................................      61.3      69.9      76.1

                                                                                       -----------------------------
    Total, major Federal investment outlays...........................................     292.6     324.6     342.6

                                        MEMORANDUM

    Major Federal investment outlays:
         National defense.............................................................     112.1     123.5     132.6
         Nondefense...................................................................     180.4     201.1     210.0
                                                                                       -----------------------------
     Total, major Federal investment outlays..........................................     292.6     324.6     342.6

    Miscellaneous physical investments:
         Commodity inventories........................................................       1.5       0.4         *
         Other physical investment (direct)...........................................       3.8       4.3       4.5
                                                                                       -----------------------------
     Total, miscellaneous physical investment.........................................       5.4       4.7       4.5
                                                                                       -----------------------------
    Total, Federal investment outlays, including miscellaneous physical investment....     297.9     329.3     347.1
    ----------------------------------------------------------------------------------------------------------------
    * Indicates $50 million or less.

      Outlays for direct physical investment for nondefense purposes are
    estimated to be $29.8 billion in 2003. These outlays include $17.7
    billion for construction and rehabilitation. This amount includes funds
    for water, power, and natural resources projects of the Corps of
    Engineers, the Bureau of Reclamation within the Department of the
    Interior, the Tennessee Valley Authority, and the power administrations
    in the Department of Energy; construction and rehabilitation of veterans
    hospitals and Postal Service facilities; facilities for space and
    science programs, and Indian Health Service hospitals and clinics.
    Outlays for the acquisition of major equipment are estimated to be $11.7
    billion in 2003. The largest amounts are for the air traffic control
    system. For the purchase or sale of land and structures, disbursements
    are estimated to exceed collections by $0.4 billion in 2003. These
    purchases are largely for buildings and land for parks and other
    recreation purposes.
      Grants to State and local governments for physical investment are
    estimated to be $57.2 billion in 2003. Almost two-thirds of these
    outlays, or $37.4 billion, are to assist States and localities with
    transportation infrastructure, primarily highways. Other major grants
    for physical investment fund sewage treatment plants, community
    development, and public housing.
      Conduct of research and development.--Outlays for the conduct of
    research and development are devoted to increasing basic scientific
    knowledge and promoting research and development. They increase the
    Nation's security, improve the productivity of capital and labor for
    both public and private purposes, and enhance the quality of life. More
    than half of these outlays are for national defense. Physical investment
    for research and development facilities and equipment is included in the
    physical investment category.
      Nondefense outlays for the conduct of research and development are
    largely for the space programs, the National Science Foundation, the
    National Institutes of Health, and research for nuclear and non-nuclear
    energy programs.
      A more complete and detailed discussion of research and development
    funding appears in Chapter 8, ``Research and Development Funding,'' in
    this volume.
      Conduct of education and training.--Outlays for the conduct of
    education and training are estimated to be $76.1 billion in 2003. These
    outlays add to the stock

    [[Page 133]]

    of human capital by developing a more skilled and productive labor
    force. Grants to State and local governments for this category are
    estimated to be $45.5 billion in 2003, almost three-fifths of the total.
    They include education programs for the disadvantaged and the
    handicapped, vocational and adult education programs, training programs
    in the Department of Labor, and Head Start. Direct Federal education and
    training outlays are estimated to be $30.5 billion in 2003. Programs in
    this category are primarily aid for higher education through student
    financial assistance, loan subsidies, the veterans GI bill, and health
    training programs.
      This category does not include outlays for education and training of
    Federal civilian and military employees. Outlays for education and
    training that are for physical investment and for research and
    development are in the categories for physical investment and the
    conduct of research and development.

                    Miscellaneous Physical Investment Outlays

      In addition to the categories of major Federal investment, several
    miscellaneous categories of investment outlays are shown at the bottom
    of Table 7-1. These items, all for physical investment, are generally
    unrelated to improving Government operations or enhancing economic
    activity.
      Outlays for commodity inventories are for the purchase or sale of
    agricultural products pursuant to farm price support programs and the
    purchase and sale of other commodities such as oil and gas. Purchases
    are estimated to exceed sales by $28 million in 2003.
      Outlays for other miscellaneous physical investment are estimated to
    be $4.5 billion in 2003. This category includes primarily conservation
    programs. These are entirely direct Federal outlays.

    [[Page 134]]

                     Detailed Tables on Investment Spending

      This section provides data on budget authority as well as outlays for
    major Federal investment. These estimates extend four years beyond the
    budget year to 2007. Table 7-2 displays budget authority (BA) and
    outlays (O) by major programs according to defense and nondefense
    categories. The greatest level of detail appears in Table 7-3, which
    shows budget authority and outlays divided according to grants to State
    and local governments and direct Federal spending. Miscellaneous
    investment is not included in these tables because it is generally
    unrelated to improving Government operations or enhancing economic
    activity.

    [[Page 135]]

                                   Table 7-2. FEDERAL INVESTMENT BUDGET AUTHORITY AND OUTLAYS: DEFENSE AND NONDEFENSE PROGRAMS
                                                                    (in millions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                     Estimate
                    Description                                              2001    -----------------------------------------------------------------------
                                                                            Actual       2002        2003        2004        2005        2006        2007
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                 NATIONAL DEFENSE
    Major public physical investment:
      Construction and rehabilitation.........  BA                            8,163      10,082       8,416       9,503      10,740      15,232      18,216
                                                O                             7,452       8,218       8,947       8,815       8,592       9,558      11,939
      Acquisition of major equipment..........  BA                           63,789      63,103      70,414      76,277      80,747      88,476     100,533
                                                O                            56,237      60,907      63,708      66,824      76,580      83,331      89,141
      Purchase or sale of land and structures.  BA                              -14          -4         -14         -31         -31         -31         -31
                                                O                               -21          -9         -12         -31         -31         -31         -31
                                                                         -----------------------------------------------------------------------------------
        Subtotal, major public physical         BA                           71,938      73,181      78,816      85,749      91,456     103,677     118,718
         investment.
                                                O                            63,668      69,116      72,643      75,608      85,141      92,858     101,049
                                                                         -----------------------------------------------------------------------------------
    Conduct of research and development.......  BA                           49,713      57,855      62,983      66,227      69,954      68,279      67,427
                                                O                            48,444      54,346      59,939      61,467      65,453      66,931      66,825
    Conduct of education and training           BA                                7           8           8           8           8           8           8
     (civilian).
                                                O                                 7           8           8           8           8           8           8
                                                                         -----------------------------------------------------------------------------------
      Subtotal, national defense investment...  BA                          121,658     131,044     141,807     151,984     161,418     171,964     186,153
                                                O                           112,119     123,470     132,590     137,083     150,602     159,797     167,882
                    NONDEFENSE
    Major public physical investment:
      Construction and rehabilitation:
        Highways..............................  BA                           34,564      35,136      30,716      26,336      31,775      32,365      32,966
                                                O                            27,207      28,843      27,808      24,880      24,054      24,271      24,662
        Mass transportation...................  BA                            7,210       6,576       6,915       7,059       7,218       7,386       7,559
                                                O                             6,760       6,222       6,330       6,425       6,457       6,408       7,106
        Rail transportation...................  BA                               53          21          21          21          22          22          23
                                                O                                15          20          53          43          22          24          22
        Air transportation....................  BA                            2,611       3,193       3,432       3,490       3,553       3,620       3,689
                                                O                             2,024       2,816       3,298       3,433       3,528       3,640       3,718
        Community development block grants....  BA                            5,112       7,000       4,732       4,831       4,938       5,053       5,171
                                                O                             4,939       5,235       5,878       6,526       5,472       4,950       5,014
        Other community and regional            BA                            2,424       1,775       1,685       1,722       1,758       1,800       1,843
         development.
                                                O                             1,684       1,909       1,933       1,790       1,783       1,729       1,787
        Pollution control and abatement.......  BA                            4,307       4,144       3,804       3,883       3,970       3,160       3,234
                                                O                             4,214       3,902       4,130       4,255       4,244       4,222       4,142
        Water resources.......................  BA                            5,084       4,415       3,902       3,970       4,338       4,201       4,293
                                                O                             4,542       4,634       4,284       4,042       4,188       4,314       4,315
        Housing assistance....................  BA                            7,319       7,273       7,092       7,241       7,402       7,575       7,751
                                                O                             7,220       7,644       7,706       8,093       8,124       8,614       7,672
        Energy................................  BA                            1,426       1,990       1,271       1,357       1,760       1,385       1,316
                                                O                             1,436       1,981       1,272       1,359       1,762       1,386       1,318
        Veterans hospitals and other health...  BA                            1,398       1,866       1,991       2,029       2,072       2,120       2,170
                                                O                             1,297       1,684       1,686       1,802       1,876       1,922       1,969
        Postal Service........................  BA                              327         851       1,331         983       1,114       1,048       1,532
                                                O                             1,039         612       1,039       1,080       1,070       1,103       1,267
        GSA real property activities..........  BA                            1,184       1,545       1,543       1,575       1,610       1,648       1,687
                                                O                               959       1,325       1,298       1,336       1,388       1,420       1,449
        Other programs........................  BA                           10,355       8,164       6,032       6,069       6,210       6,352       6,493
                                                O                             6,258       8,240       6,937       6,831       6,609       6,562       6,662
                                                                         -----------------------------------------------------------------------------------
          Subtotal, construction and            BA                           83,374      83,949      74,467      70,566      77,740      77,735      79,727
           rehabilitation.
                                                O                            69,594      75,067      73,652      71,895      70,577      70,565      71,103
                                                                         -----------------------------------------------------------------------------------
      Acquisition of major equipment:
        Air transportation....................  BA                            2,634       3,123       3,034       3,097       3,166       3,239       3,315
                                                O                             2,327       2,516       2,766       2,895       2,961       3,156       3,229
        Postal Service........................  BA                              299         493         900         994         675         675       1,123
                                                O                               675         694         612         787         796         736         839
        Other.................................  BA                            6,683       7,997       8,323       8,443       8,610       8,801       9,002
                                                O                             6,929       8,304       8,392       8,592       8,808       9,058       9,268
                                                                         -----------------------------------------------------------------------------------
          Subtotal, acquisition of major        BA                            9,616      11,613      12,257      12,534      12,451      12,715      13,440
           equipment.
                                                O                             9,931      11,514      11,770      12,274      12,565      12,950      13,336
                                                                         -----------------------------------------------------------------------------------
      Purchase or sale of land and structures.  BA                              747         589         219         532         220         555         571
                                                O                               704         614         377         627         290         612         621

    [[Page 136]]

      Other physical assets (grants)..........  BA                            1,332       1,321       1,257       1,330       1,388       1,422       1,470
                                                O                               939       1,087       1,114       1,182       1,260       1,346       1,396
                                                                         -----------------------------------------------------------------------------------
        Subtotal, major public physical         BA                           95,069      97,472      88,200      84,962      91,799      92,427      95,208
         investment.
                                                O                            81,168      88,282      86,913      85,978      84,692      85,473      86,456
                                                                         -----------------------------------------------------------------------------------
    Conduct of research and development:
      General science, space and technology...  BA                           11,898      12,046      13,155      13,966      14,275      14,608      14,954
                                                O                            10,913      11,453      12,418      13,276      13,924      14,231      14,589
      Energy..................................  BA                            1,445       1,685       1,533       1,674       1,724       1,790       1,827
                                                O                             1,336       1,635       1,596       1,637       1,682       1,747       1,777
      Transportation..........................  BA                            1,679       1,706       1,456       1,401       1,474       1,507       1,541
                                                O                             1,420       1,208       1,603       1,531       1,511       1,539       1,570
      Health..................................  BA                           22,114      25,104      28,625      29,139      29,789      30,480      31,155
                                                O                            18,852      22,488      25,207      27,976      29,342      29,994      30,716
      Natural resources and environment.......  BA                            2,122       2,183       2,087       2,129       2,174       2,225       2,278
                                                O                             1,749       1,897       1,888       1,860       1,887       1,933       1,960
      All other research and development......  BA                            4,061       4,243       4,029       4,103       4,175       4,264       4,355
                                                O                             3,683       4,253       4,297       4,458       4,512       4,639       4,748
                                                                         -----------------------------------------------------------------------------------
        Subtotal, conduct of research and       BA                           43,319      46,967      50,885      52,412      53,611      54,874      56,110
         development.
                                                O                            37,953      42,934      47,009      50,738      52,858      54,083      55,360
                                                                         -----------------------------------------------------------------------------------
    Conduct of education and training:
      Education, training, employment and
       social services:
        Elementary, secondary, and vocational   BA                           24,981      32,986      34,387      35,104      35,888      36,725      37,588
         education.
                                                O                            22,993      26,644      31,786      34,065      35,019      35,778      36,607
        Higher education......................  BA                           18,040      20,621      19,187      18,743      19,254      19,775      20,301
                                                O                            17,202      18,295      19,080      18,264      18,563      19,042      19,560
        Research and general education aids...  BA                            2,857       2,587       2,552       2,605       2,643       2,698       2,753
                                                O                             2,572       2,995       2,680       2,598       2,608       2,664       2,713
        Training and employment...............  BA                            5,555       5,338       4,800       4,907       5,018       5,136       5,257
                                                O                             5,129       5,953       5,804       5,425       4,973       4,989       5,107
        Social services.......................  BA                            9,339       9,946      10,057      10,271      10,501      10,746      10,999
                                                O                             8,265       9,347       9,866      10,133      10,395      10,618      10,859
                                                                         -----------------------------------------------------------------------------------
          Subtotal, education, training, and    BA                           60,772      71,478      70,983      71,630      73,304      75,080      76,898
           social services.
                                                O                            56,161      63,234      69,216      70,485      71,558      73,091      74,846
                                                                         -----------------------------------------------------------------------------------
      Veterans education, training, and         BA                            2,635       2,804       2,939       3,427       3,592       3,764       3,923
       rehabilitation.
                                                O                             2,221       2,893       3,255       3,443       3,627       3,759       3,898
      Health..................................  BA                            1,408       1,563       1,257       1,280       1,309       1,339       1,370
                                                O                             1,161       1,399       1,340       1,309       1,358       1,394       1,418
      Other education and training............  BA                            2,180       2,312       2,246       2,221       2,285       2,348       2,412
                                                O                             1,773       2,340       2,250       2,311       2,372       2,412       2,470
                                                                         -----------------------------------------------------------------------------------
        Subtotal, conduct of education and      BA                           66,995      78,157      77,425      78,558      80,490      82,531      84,603
         training.
                                                O                            61,316      69,866      76,061      77,548      78,915      80,656      82,632
                                                                         -----------------------------------------------------------------------------------
      Subtotal, nondefense investment.........  BA                          205,383     222,596     216,510     215,932     225,900     229,832     235,921
                                                O                           180,437     201,082     209,983     214,264     216,465     220,212     224,448
                                                                         ===================================================================================
    Total, Federal investment.................  BA                          327,041     353,640     358,317     367,916     387,318     401,796     422,074
                                                O                           292,556     324,552     342,573     351,347     367,067     380,009     392,330
    --------------------------------------------------------------------------------------------------------------------------------------------------------

    [[Page 137]]

                                  Table 7-3. FEDERAL INVESTMENT BUDGET AUTHORITY AND OUTLAYS: GRANT AND DIRECT FEDERAL PROGRAMS
                                                                    (in millions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                     Estimate
                    Description                                              2001    -----------------------------------------------------------------------
                                                                            Actual       2002        2003        2004        2005        2006        2007
    --------------------------------------------------------------------------------------------------------------------------------------------------------
       GRANTS TO STATE AND LOCAL GOVERNMENTS
    Major public physical investments:
      Construction and rehabilitation:
        Transportation:
          Highways............................  BA                           34,564      35,136      30,716      26,336      31,775      32,365      32,966
                                                O                            27,206      28,841      27,804      24,879      24,054      24,271      24,662
          Mass transportation.................  BA                            7,210       6,576       6,915       7,059       7,218       7,386       7,559
                                                O                             6,760       6,222       6,330       6,425       6,457       6,408       7,106
          Rail transportation.................  BA                        ..........  ..........  ..........  ..........  ..........  ..........  ..........
                                                O                                 7           2   ..........  ..........  ..........  ..........  ..........
          Air transportation..................  BA                            2,597       3,176       3,404       3,462       3,524       3,591       3,659
                                                O                             2,020       2,801       3,273       3,407       3,502       3,613       3,689
                                                                         -----------------------------------------------------------------------------------
            Subtotal, transportation..........  BA                           44,371      44,888      41,035      36,857      42,517      43,342      44,184
                                                O                            35,993      37,866      37,407      34,711      34,013      34,292      35,457
                                                                         -----------------------------------------------------------------------------------
      Other construction and rehabilitation:
        Pollution control and abatement.......  BA                            2,851       2,898       2,581       2,635       2,694       1,853       1,897
                                                O                             2,720       2,651       2,891       2,922       2,919       2,875       2,742
        Other natural resources and             BA                               82          36          41          42          43          44          45
         environment.
                                                O                                67          66          75          59          58          48          49
        Community development block grants....  BA                            5,112       7,000       4,732       4,831       4,938       5,053       5,171
                                                O                             4,939       5,235       5,878       6,526       5,472       4,950       5,014
        Other community and regional            BA                            1,921       1,304       1,227       1,254       1,280       1,311       1,342
         development.
                                                O                             1,320       1,530       1,499       1,405       1,316       1,262       1,303
        Housing assistance....................  BA                            7,285       7,238       7,057       7,205       7,365       7,538       7,713
                                                O                             7,198       7,618       7,673       8,060       8,091       8,580       7,637
        Department of Education...............  BA                            1,213          48          45          46          47          48          49
                                                O                                11         506         329         342         343         347         355
        Other construction....................  BA                              913         204         203         207         210         215         219
                                                O                               165         185         201         213         216         220         226
                                                                         -----------------------------------------------------------------------------------
            Subtotal, other construction and    BA                           19,377      18,728      15,886      16,220      16,577      16,062      16,436
             rehabilitation.
                                                O                            16,420      17,791      18,546      19,527      18,415      18,282      17,326
                                                                         -----------------------------------------------------------------------------------
          Subtotal, construction and            BA                           63,748      63,616      56,921      53,077      59,094      59,404      60,620
           rehabilitation.
                                                O                            52,413      55,657      55,953      54,238      52,428      52,574      52,783
                                                                         -----------------------------------------------------------------------------------
      Other physical assets...................  BA                            1,417       1,417       1,318       1,393       1,451       1,487       1,537
                                                O                               990       1,158       1,209       1,237       1,316       1,407       1,453
                                                                         -----------------------------------------------------------------------------------
        Subtotal, major public physical         BA                           65,165      65,033      58,239      54,470      60,545      60,891      62,157
         investments.
                                                O                            53,403      56,815      57,162      55,475      53,744      53,981      54,236
                                                                         -----------------------------------------------------------------------------------
    Conduct of research and development:
      Agriculture.............................  BA                              269         268         258         263         270         275         282
                                                O                               238         259         265         298         281         297         304
      Other...................................  BA                              264         249         250         237         266         269         231
                                                O                               144         191         304         288         283         292         293
                                                                         -----------------------------------------------------------------------------------
        Subtotal, conduct of research and       BA                              533         517         508         500         536         544         513
         development.
                                                O                               382         450         569         586         564         589         597
                                                                         -----------------------------------------------------------------------------------
    Conduct of education and training:
      Elementary, secondary, and vocational     BA                           22,511      31,180      33,172      33,864      34,621      35,429      36,261
       education.
                                                O                            21,326      24,671      29,750      32,260      33,261      33,991      34,778
      Higher education........................  BA                              449         449         382         390         399         408         418
                                                O                               360         523         445         445         449         455         467
      Research and general education aids.....  BA                              775         635         633         655         659         675         690
                                                O                               670         896         734         680         660         675         690
      Training and employment.................  BA                            4,090       3,827       3,261       3,376       3,452       3,533       3,616
                                                O                             3,791       4,516       4,317       4,030       3,646       3,664       3,755
      Social services.........................  BA                            8,967       9,569       9,701       9,908      10,129      10,365      10,609
                                                O                             7,960       8,739       9,526       9,784      10,038      10,254      10,485
      Agriculture.............................  BA                              461         465         448         457         468         478         490
                                                O                               458         505         463         470         487         504         515
      Other...................................  BA                              268         451         328         338         359         379         399

    [[Page 138]]

                                                O                               244         394         301         285         298         313         326
                                                                         -----------------------------------------------------------------------------------
        Subtotal, conduct of education and      BA                           37,521      46,576      47,925      48,988      50,087      51,267      52,483
         training.
                                                O                            34,809      40,244      45,536      47,954      48,839      49,856      51,016
                                                                         -----------------------------------------------------------------------------------
      Subtotal, grants for investment.........  BA                          103,219     112,126     106,672     103,958     111,168     112,702     115,153
                                                O                            88,594      97,509     103,267     104,015     103,147     104,426     105,849
              DIRECT FEDERAL PROGRAMS
    Major public physical investment:
      Construction and rehabilitation:
        National defense:
          Military construction and family      BA                            7,672       9,330       7,753       8,827      10,050      14,528      17,497
           housing.
                                                O                             6,875       7,525       8,292       8,136       7,900       8,852      11,217
          Atomic energy defense activities and  BA                              491         752         663         676         690         704         719
           other.
                                                O                               577         693         655         679         692         706         722
                                                                         -----------------------------------------------------------------------------------
            Subtotal, national defense........  BA                            8,163      10,082       8,416       9,503      10,740      15,232      18,216
                                                O                             7,452       8,218       8,947       8,815       8,592       9,558      11,939
                                                                         -----------------------------------------------------------------------------------
        Nondefense:
          International affairs...............  BA                              758       1,343       1,440       1,470       1,504       1,539       1,574
                                                O                               392         932       1,058       1,242       1,352       1,401       1,434
          General science, space, and           BA                            3,026       2,394       2,065       2,033       2,078       2,126       2,177
           technology.
                                                O                             3,034       2,675       2,254       2,149       2,150       2,193       2,245
          Water resources projects............  BA                            5,002       4,379       3,861       3,928       4,295       4,157       4,248
                                                O                             4,476       4,569       4,209       3,983       4,130       4,266       4,266
          Other natural resources and           BA                            2,192       1,902       1,795       1,833       1,874       1,919       1,963
           environment.
                                                O                             1,970       1,893       1,910       1,999       1,961       1,960       2,001
          Energy..............................  BA                            1,426       1,990       1,271       1,357       1,760       1,385       1,316
                                                O                             1,436       1,981       1,272       1,359       1,762       1,386       1,318
          Postal Service......................  BA                              327         851       1,331         983       1,114       1,048       1,532
                                                O                             1,039         612       1,039       1,080       1,070       1,103       1,267
          Transportation......................  BA                              332         317         370         376         386         393         402
                                                O                               383         359         412         383         376         390         401
          Housing assistance..................  BA                               34          35          35          36          37          37          38
                                                O                                22          26          33          33          33          34          35
          Veterans hospitals and other health   BA                            1,298       1,766       1,891       1,927       1,968       2,013       2,061
           facilities.
                                                O                             1,237       1,593       1,591       1,702       1,776       1,821       1,865
          Federal Prison System...............  BA                              732         680         244         249         255         261         267
                                                O                               504         411         625         454         339         329         336
          GSA real property activities........  BA                            1,184       1,545       1,543       1,575       1,610       1,648       1,687
                                                O                               959       1,325       1,298       1,336       1,388       1,420       1,449
          Other construction..................  BA                            3,315       3,131       1,700       1,722       1,765       1,805       1,842
                                                O                             1,729       3,034       1,998       1,937       1,812       1,688       1,703
                                                                         -----------------------------------------------------------------------------------
            Subtotal, nondefense..............  BA                           19,626      20,333      17,546      17,489      18,646      18,331      19,107
                                                O                            17,181      19,410      17,699      17,657      18,149      17,991      18,320
                                                                         -----------------------------------------------------------------------------------
          Subtotal, construction and            BA                           27,789      30,415      25,962      26,992      29,386      33,563      37,323
           rehabilitation.
                                                O                            24,633      27,628      26,646      26,472      26,741      27,549      30,259
                                                                         -----------------------------------------------------------------------------------
      Acquisition of major equipment:
        National defense:
          Department of Defense...............  BA                           63,679      62,994      70,305      76,166      80,634      88,360     100,415
                                                O                            56,131      60,802      63,600      66,708      76,460      83,208      89,016
          Atomic energy defense activities....  BA                              110         109         109         111         113         116         118
                                                O                               106         105         108         116         120         123         125
                                                                         -----------------------------------------------------------------------------------
            Subtotal, national defense........  BA                           63,789      63,103      70,414      76,277      80,747      88,476     100,533
                                                O                            56,237      60,907      63,708      66,824      76,580      83,331      89,141
                                                                         -----------------------------------------------------------------------------------
        Nondefense:
          General science and basic research..  BA                              504         476         471         475         485         496         507
                                                O                               388         495         489         456         468         484         495
          Space flight, research, and           BA                              990         702         632         655         670         686         702
           supporting activities.
                                                O                             1,042         671         620         638         659         676         692
          Energy..............................  BA                              118         116         116         116         105         102         103

    [[Page 139]]

                                                O                               118         116         116         116         105         102         103
          Postal Service......................  BA                              299         493         900         994         675         675       1,123
                                                O                               675         694         612         787         796         736         839
          Air transportation..................  BA                            2,634       3,123       3,034       3,097       3,166       3,239       3,315
                                                O                             2,327       2,516       2,766       2,895       2,961       3,156       3,229
          Water transportation (Coast Guard)..  BA                              271         482         547         558         571         584         598
                                                O                               441         472         460         487         526         556         578
          Other transportation (railroads)....  BA                              520         621         521         532         544         556         570
                                                O                               553         854         571         562         544         556         570
          Social security.....................  BA                        ..........  ..........  ..........  ..........  ..........  ..........  ..........
                                                O                                80          64          47          49          52          56          59
          Hospital and medical care for         BA                              653         606         610         623         637         653         668
           veterans.
                                                O                               960         782         915         937         955         979       1,002
          Department of Justice...............  BA                              502       1,020       1,255       1,280       1,306       1,333       1,362
                                                O                               409         917       1,098       1,183       1,211       1,233       1,259
          Department of the Treasury..........  BA                            1,340       1,859       1,904       1,933       1,976       2,024       2,072
                                                O                             1,197       2,021       1,827       1,859       1,943       2,000       2,046
          GSA general supply fund.............  BA                              410         562         656         668         679         691         704
                                                O                               552         562         656         668         679         691         704
          Other...............................  BA                            1,290       1,457       1,550       1,540       1,574       1,611       1,649
                                                O                             1,138       1,279       1,498       1,582       1,610       1,664       1,703
                                                                         -----------------------------------------------------------------------------------
            Subtotal, nondefense..............  BA                            9,531      11,517      12,196      12,471      12,388      12,650      13,373
                                                O                             9,880      11,443      11,675      12,219      12,509      12,889      13,279
                                                                         -----------------------------------------------------------------------------------
          Subtotal, acquisition of major        BA                           73,320      74,620      82,610      88,748      93,135     101,126     113,906
           equipment.
                                                O                            66,117      72,350      75,383      79,043      89,089      96,220     102,420
                                                                         -----------------------------------------------------------------------------------
      Purchase or sale of land and structures:
        National defense......................  BA                              -14          -4         -14         -31         -31         -31         -31
                                                O                               -21          -9         -12         -31         -31         -31         -31
        International affairs.................  BA                               27           1           3           3           3           3           3
                                                O                                88           1           1           1           1           1           1
        Privatization of Elk Hills............  BA                        ..........  ..........  ..........  ..........       -323   ..........  ..........
                                                O                         ..........  ..........  ..........  ..........       -323   ..........  ..........
        Other.................................  BA                              720         588         216         529         540         552         568
                                                O                               616         613         376         626         612         611         620
                                                                         -----------------------------------------------------------------------------------
          Subtotal, purchase or sale of land    BA                              733         585         205         501         189         524         540
           and structures.
                                                O                               683         605         365         596         259         581         590
                                                                         -----------------------------------------------------------------------------------
        Subtotal, major public physical         BA                          101,842     105,620     108,777     116,241     122,710     135,213     151,769
         investment.
                                                O                            91,433     100,583     102,394     106,111     116,089     124,350     133,269
                                                                         -----------------------------------------------------------------------------------
    Conduct of research and development:
      National defense
        Defense military......................  BA                           46,702      53,721      59,354      62,533      66,191      64,442      63,516
                                                O                            45,454      50,213      56,311      57,744      61,657      63,065      62,884
        Atomic energy and other...............  BA                            3,011       4,134       3,629       3,694       3,763       3,837       3,911
                                                O                             2,990       4,133       3,628       3,723       3,796       3,866       3,941
                                                                         -----------------------------------------------------------------------------------
          Subtotal, national defense..........  BA                           49,713      57,855      62,983      66,227      69,954      68,279      67,427
                                                O                            48,444      54,346      59,939      61,467      65,453      66,931      66,825
                                                                         -----------------------------------------------------------------------------------
      Nondefense:
        International affairs.................  BA                              252         268         182         186         190         195         199
                                                O                               215         214         186         246         269         284         296
        General science, space and technology:
          NASA................................  BA                            6,432       6,339       7,228       7,953       8,130       8,320       8,517
                                                O                             6,060       6,085       6,847       7,546       7,966       8,193       8,406
          National Science Foundation.........  BA                            3,075       3,285       3,441       3,475       3,550       3,633       3,719
                                                O                             2,566       2,943       3,085       3,200       3,375       3,396       3,479
          Department of Energy................  BA                            2,391       2,422       2,486       2,538       2,595       2,655       2,718
                                                O                             2,287       2,425       2,486       2,530       2,583       2,642       2,704
                                                                         -----------------------------------------------------------------------------------
            Subtotal, general science, space    BA                           12,150      12,314      13,337      14,152      14,465      14,803      15,153
             and technology.
                                                O                            11,128      11,667      12,604      13,522      14,193      14,515      14,885
                                                                         -----------------------------------------------------------------------------------

    [[Page 140]]

      Energy..................................  BA                            1,445       1,685       1,533       1,674       1,724       1,790       1,827
                                                O                             1,336       1,635       1,596       1,637       1,682       1,747       1,777
      Transportation:
        Department of Transportation..........  BA                              558         648         488         478         507         518         531
                                                O                               410         593         589         550         507         518         529
        NASA..................................  BA                              973         918         817         793         811         830         849
                                                O                               906         498         791         780         808         822         838
                                                                         -----------------------------------------------------------------------------------
            Subtotal, transportation..........  BA                            2,976       3,251       2,838       2,945       3,042       3,138       3,207
                                                O                             2,652       2,726       2,976       2,967       2,997       3,087       3,144
                                                                         -----------------------------------------------------------------------------------
        Health:
          National Institutes of Health.......  BA                           20,993      23,860      27,504      27,992      28,613      29,279      29,964
                                                O                            17,905      21,257      24,051      26,809      28,246      28,870      29,570
          All other health....................  BA                            1,043       1,159       1,033       1,053       1,078       1,101       1,130
                                                O                               929       1,195       1,110       1,102       1,022       1,042       1,068
                                                                         -----------------------------------------------------------------------------------
            Subtotal, health..................  BA                           22,036      25,019      28,537      29,045      29,691      30,380      31,094
                                                O                            18,834      22,452      25,161      27,911      29,268      29,912      30,638
                                                                         -----------------------------------------------------------------------------------
      Agriculture.............................  BA                            1,389       1,437       1,445       1,472       1,489       1,524       1,558
                                                O                             1,281       1,384       1,393       1,470       1,501       1,562       1,600
      Natural resources and environment.......  BA                            2,122       2,183       2,087       2,129       2,174       2,225       2,278
                                                O                             1,749       1,897       1,888       1,860       1,887       1,933       1,960
      National Institute of Standards and       BA                              374         421         366         374         382         392         401
       Technology.
                                                O                               408         416         443         400         380         381         385
      Hospital and medical care for veterans..  BA                              746         794         844         862         880         901         923
                                                O                               857         943         994       1,018       1,042       1,067       1,093
      All other research and development......  BA                              993       1,031         923         933         952         967         983
                                                O                               662         999         981       1,004       1,026       1,037       1,058
                                                                         -----------------------------------------------------------------------------------
          Subtotal, nondefense................  BA                           42,786      46,450      50,377      51,912      53,075      54,330      55,597
                                                O                            37,571      42,484      46,440      50,152      52,294      53,494      54,763
                                                                         -----------------------------------------------------------------------------------
        Subtotal, conduct of research and       BA                           92,499     104,305     113,360     118,139     123,029     122,609     123,024
         development.
                                                O                            86,015      96,830     106,379     111,619     117,747     120,425     121,588
                                                                         -----------------------------------------------------------------------------------
    Conduct of education and training:
      Elementary, secondary, and vocational     BA                            2,470       1,806       1,215       1,240       1,267       1,296       1,327
       education.
                                                O                             1,667       1,973       2,036       1,805       1,758       1,787       1,829
      Higher education........................  BA                           17,591      20,172      18,805      18,353      18,855      19,367      19,883
                                                O                            16,842      17,772      18,635      17,819      18,114      18,587      19,093
      Research and general education aids.....  BA                            2,082       1,952       1,919       1,950       1,984       2,023       2,063
                                                O                             1,902       2,099       1,946       1,918       1,948       1,989       2,023
      Training and employment.................  BA                            1,465       1,511       1,539       1,531       1,566       1,603       1,641
                                                O                             1,338       1,437       1,487       1,395       1,327       1,325       1,352
      Health..................................  BA                            1,390       1,549       1,243       1,266       1,294       1,324       1,355
                                                O                             1,143       1,385       1,326       1,295       1,344       1,380       1,404
      Veterans education, training, and         BA                            2,635       2,804       2,939       3,427       3,592       3,764       3,923
       rehabilitation.
                                                O                             2,221       2,893       3,255       3,443       3,627       3,759       3,898
      General science and basic research......  BA                              802         928         952         892         912         933         955
                                                O                               575         905         927         943         928         926         943
      National defense........................  BA                                7           8           8           8           8           8           8
                                                O                                 7           8           8           8           8           8           8
      International affairs...................  BA                              369         248         258         263         269         276         282
                                                O                               311         285         291         284         290         274         280
      Other...................................  BA                              670         611         630         648         664         678         691
                                                O                               508         873         622         692         740         773         794
                                                                         -----------------------------------------------------------------------------------
        Subtotal, conduct of education and      BA                           29,481      31,589      29,508      29,578      30,411      31,272      32,128
         training.
                                                O                            26,514      29,630      30,533      29,602      30,084      30,808      31,624
                                                                         -----------------------------------------------------------------------------------
      Subtotal, direct Federal investment.....  BA                          223,822     241,514     251,645     263,958     276,150     289,094     306,921
                                                O                           203,962     227,043     239,306     247,332     263,920     275,583     286,481
                                                                         ===================================================================================
    Total, Federal investment.................  BA                          327,041     353,640     358,317     367,916     387,318     401,796     422,074
                                                O                           292,556     324,552     342,573     351,347     367,067     380,009     392,330
    --------------------------------------------------------------------------------------------------------------------------------------------------------

    [[Page 141]]

                   Part II: FEDERALLY FINANCED CAPITAL STOCKS

      Federal investment spending creates a ``stock'' of capital that is
    available in the future for productive use. Each year, Federal
    investment outlays add to the stock of capital. At the same time,
    however, wear and tear and obsolescence reduce it. This section presents
    very rough measures over time of three different kinds of capital stocks
    financed by the Federal Government: public physical capital, research
    and development (R&D), and education.
      Federal spending for physical assets adds to the Nation's capital
    stock of tangible assets, such as roads, buildings, and aircraft
    carriers. These assets deliver a flow of services over their lifetime.
    The capital depreciates as the asset ages, wears out, is accidentally
    damaged, or becomes obsolete.
      Federal spending for the conduct of research, development, and
    education adds to an ``intangible'' asset, the Nation's stock of
    knowledge. Although financed by the Federal Government, the research and
    development or education can be performed by Federal or State government
    laboratories, universities and other nonprofit organizations, or private
    industry. Research and development covers a wide range of activities,
    from the investigation of subatomic particles to the exploration of
    outer space; it can be ``basic'' research without particular
    applications in mind, or it can have a highly specific practical use.
    Similarly, education includes a wide variety of programs, assisting
    people of all ages beginning with pre-school education and extending
    through graduate studies and adult education. Like physical assets, the
    capital stocks of R&D and education provide services over a number of
    years and depreciate as they become outdated.
      For this analysis, physical and R&D capital stocks are estimated using
    the perpetual inventory method. In this method, the estimates are based
    on the sum of net investment in prior years. Each year's Federal outlays
    are treated as gross investment, adding to the capital stock;
    depreciation reduces the capital stock. Gross investment less
    depreciation is net investment. A limitation of the perpetual inventory
    method is that investment spending may not accurately measure the value
    of the asset created. However, alternative methods for measuring asset
    value, such as direct surveys of current market worth or indirect
    estimation based on an expected rate of return, are especially difficult
    to apply to assets that do not have a private market, such as highways
    or weapons systems.
      In contrast to physical and R&D stocks, the estimate of the education
    stock is based on the replacement cost method. Data on the total years
    of education of the U.S. population are combined with data on the cost
    of education and the Federal share of education spending to yield the
    cost of replacing the Federal share of the Nation's stock of education.
      Additional detail about the methods used to estimate capital stocks
    appears in a methodological note at the end of this section. It should
    be stressed that these estimates are rough approximations, and provide a
    basis only for making broad generalizations. Errors may arise from
    uncertainty about the useful lives and depreciation rates of different
    types of assets, incomplete data for historical outlays, and imprecision
    in the deflators used to express costs in constant dollars.

                          The Stock of Physical Capital

      This section presents data on stocks of physical capital assets and
    estimates of the depreciation on these assets.
      Trends.--Table 7-4 shows the value of the net federally financed
    physical capital stock since 1960, in constant fiscal year 1996 dollars.
    The total stock grew at a 2.2 percent average annual rate from 1960 to
    2001, with periods of faster growth during the late 1960s and the 1980s.
    The stock amounted to $1,965 billion in 2001 and is estimated to
    increase to $2,066 billion by 2003. In 2001, the national defense
    capital stock accounted for $635 billion, or 32 percent of the total,
    and nondefense stocks for $1,331 billion, or 68 percent of the total.

    [[Page 142]]

                                                                      Table 7-4.  NET STOCK OF FEDERALLY FINANCED PHYSICAL CAPITAL
                                                                                      (In billions of 1996 dollars)
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                 Nondefense
                                                                                                      ----------------------------------------------------------------------------------------------
                                                                                                                     Direct Federal Capital             Capital Financed by Federal Grants
                                      Fiscal Year                                    Total   National             ----------------------------------------------------------------------------------
                                                                                              Defense     Total              Water                                     Community
                                                                                                       Nondefense   Total     and     Other    Total   Transportation     and      Natural    Other
                                                                                                                             Power                                      Regional  Resources
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    Five year intervals:
      1960........................................................................      806       572        234        98       61       36      136           82           25         20         9
      1965........................................................................      892       554        338       128       78       51      209          146           30         21        12
      1970........................................................................    1,044       589        455       155       94       61      301          213           44         25        19
      1975........................................................................    1,091       521        570       176      109       67      394          261           71         39        23
      1980........................................................................    1,216       484        732       206      130       76      526          317          112         73        25
      1985........................................................................    1,422       569        853       234      143       90      619          368          135         92        24
      1990........................................................................    1,696       721        975       269      154      114      706          429          147        105        26
    Annual data:
      1995........................................................................    1,832       712      1,119       311      164      146      809          496          156        115        43
      1996........................................................................    1,845       691      1,153       319      165      154      834          511          159        116        48
      1997........................................................................    1,858       672      1,186       327      165      162      859          526          162        118        53
      1998........................................................................    1,869       657      1,212       330      165      165      883          540          165        119        59
      1999........................................................................    1,890       644      1,246       338      166      173      908          556          168        120        65
      2000........................................................................    1,922       635      1,286       351      167      183      936          574          170        121        70
      2001........................................................................    1,965       635      1,331       364      170      194      967          595          173        123        76
      2002 est....................................................................    2,017       639      1,378       379      173      206      999          617          176        124        82
      2003 est....................................................................    2,066       645      1,421       392      175      217    1,029          637          179        126        87
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

      Real stocks of defense and nondefense capital show very different
    trends. Nondefense stocks have grown consistently since 1970, increasing
    from $455 billion in 1970 to $1,331 billion in 2001. With the
    investments proposed in the budget, nondefense stocks are estimated to
    grow to $1,421 billion in 2003. During the 1970s, the nondefense capital
    stock grew at an average annual rate of 4.9 percent. In the 1980s,
    however, the growth rate slowed to 2.9 percent annually, with growth
    continuing at about that rate since then.
      Real national defense stocks began in 1970 at a relatively high level,
    and declined steadily throughout the decade as depreciation from the
    Vietnam era exceeded new investment in military construction and weapons
    procurement. Starting in the early 1980s, a large defense buildup began
    to increase the stock of defense capital. By 1986, the defense stock had
    exceeded its earlier Vietnam-era peak. In recent years, depreciation on
    the increased stocks, together with a slower pace of defense physical
    capital investment allowed by the collapse of the Soviet Union and the
    closure or realignment of unneeded military bases, reduced the stock
    from its previous levels. The increased defense investment in this
    budget would reverse this decline.
      Another trend in the Federal physical capital stocks is the shift from
    direct Federal assets to grant-financed assets. In 1960, 42 percent of
    federally financed nondefense capital was owned by the Federal
    Government, and 58 percent was owned by State and local governments but
    financed by Federal grants. Expansion in Federal grants for highways and
    other State and local capital, coupled with slower growth in direct
    Federal investment for water resources, for example, shifted the
    composition of the stock substantially. In 2001, 27 percent of the
    nondefense stock was owned by the Federal Government and 73 percent by
    State and local governments.
      The growth in the stock of physical capital financed by grants has
    come in several areas. The growth in the stock for transportation is
    largely grants for highways, including the Interstate Highway System.
    The growth in community and regional development stocks occurred largely
    with the enactment of the community development block grant in the early
    1970s. The value of this capital stock has grown only slowly in the past
    few years. The growth in the natural resources area occurred primarily
    because of construction grants for sewage treatment facilities. The
    value of this federally financed stock has increased about 30 percent
    since the mid-1980s.
      Table 7-5 shows nondefense physical capital outlays both gross and net
    of depreciation since 1960. Total nondefense net investment has been
    consistently positive over the period covered by the table, indicating
    that new investment has exceeded depreciation on the existing stock. For
    some categories in the table, such as water and power programs, however,
    net investment has been negative in some years, indicating that new
    investment has not been sufficient to offset estimated depreciation. The
    net investment in this table is the change in the net nondefense
    physical capital stock displayed in Table 7-4.

                                              Table 7-5.  COMPOSITION OF GROSS AND NET FEDERAL AND FEDERALLY FINANCED NONDEFENSE PUBLIC PHYSICAL INVESTMENT
                                                                                      (In billions of 1996 dollars)
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                        Total nondefense               Direct Federal investment                            Investment financed by Federal grants
                                                           investment         ----------------------------------------------------------------------------------------------------------------------
                                                  ----------------------------                              Composition                                       Composition of net investment
                                                                                                              of net                                ------------------------------------------------
                     Fiscal Year                                                                            investment
                                                                               Gross  Depreciation   Net  -------------- Gross  Depreciation   Net   Transportation   Community     Natural
                                                   Gross  Depreciation   Net                               Water                                         (mainly         and       resources   Other
                                                                                                            and   Other                                 highways)      regional       and
                                                                                                           power                                                     development  environment
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    Five year intervals:
      1960.......................................   22.7        4.7      18.1    7.0        2.2       4.7    2.5    2.3   15.7        2.4      13.3        12.6           0.1         0.1        0.5
      1965.......................................   32.5        6.9      25.6   10.1        3.0       7.1    3.3    3.8   22.3        3.8      18.5        15.5           2.1         0.4        0.5
      1970.......................................   32.1        9.4      22.6    6.9        3.8       3.1    2.3    0.8   25.1        5.6      19.5        11.9           5.1         0.9        1.6
      1975.......................................   32.9       11.6      21.3    9.0        4.3       4.8    3.6    1.2   23.8        7.4      16.5         7.0           4.3         4.5        0.7
      1980.......................................   46.9       14.6      32.4   11.0        4.9       6.0    3.9    2.2   36.0        9.6      26.4        12.3           7.5         6.8       -0.2
      1985.......................................   45.4       17.8      27.7   13.7        6.4       7.4    2.6    4.8   31.7       11.4      20.3        13.0           4.1         3.2       -0.1
      1990.......................................   46.3       22.3      24.0   16.2        9.2       7.0    2.4    4.5   30.1       13.1      17.1        11.9           1.7         2.1        1.4
    Annual data:
      1995.......................................   59.9       26.3      33.5   19.5       11.4       8.2    1.8    6.3   40.3       15.0      25.4        15.2           2.8         2.0        5.4
      1996.......................................   61.1       27.3      33.8   20.7       11.8       8.9    0.9    8.0   40.3       15.4      24.9        14.9           3.0         1.6        5.5
      1997.......................................   60.9       28.2      32.7   20.0       12.3       7.7   -0.1    7.8   40.9       15.9      25.0        15.2           2.9         1.5        5.3
      1998.......................................   55.5       29.0      26.6   15.5       12.6       2.9     -*    2.9   40.0       16.4      23.7        14.1           2.7         1.1        5.8
      1999.......................................   63.5       29.8      33.7   21.3       12.9       8.4    0.7    7.8   42.2       16.8      25.3        16.1           2.7         1.2        5.3
      2000.......................................   71.1       30.9      40.2   25.7       13.5      12.2    1.6   10.6   45.4       17.4      28.1        18.1           2.7         1.6        5.7
      2001.......................................   76.3       32.2      44.1   27.7       14.3      13.3    2.7   10.7   48.6       17.9      30.7        21.0           2.8         1.5        5.4
      2002 est...................................   81.3       33.8      47.5   30.7       15.2      15.4    3.1   12.3   50.6       18.5      32.1        21.5           3.1         1.5        6.0
      2003 est...................................   78.2       35.3      42.9   28.5       16.1      12.3    1.9   10.4   49.7       19.1      30.6        19.9           3.4         1.6        5.6
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    * $50 million or less.

                  The Stock of Research and Development Capital

      This section presents data on the stock of research and development,
    taking into account adjustments for its depreciation.
      Trends.--As shown in Table 7-6, the R&D capital stock financed by
    Federal outlays is estimated to be $933 billion in 2001 in constant 1996
    dollars. Roughly

    [[Page 143]]

    half is the stock of basic research knowledge; the remainder is the
    stock of applied research and development.
      The nondefense stock accounted for about three-fifths of the total
    federally financed R&D stock in 2001. Although investment in defense R&D
    has exceeded that of nondefense R&D in every year since 1981, the
    nondefense R&D stock is actually the larger of the two, because of the
    different emphasis on basic research and applied research and
    development. Defense R&D spending is heavily concentrated in applied
    research and development, which depreciates much more quickly than basic
    research. The stock of applied research and development is assumed to
    depreciate at a ten percent geometric rate, while basic research is
    assumed not to depreciate at all.
      The defense R&D stock rose slowly during the 1970s, as gross outlays
    for R&D trended down in constant dollars and the stock created in the
    1960s depreciated. Increased defense R&D spending from 1980 through 1990
    led to a more rapid growth of the R&D stock. Subsequently, real defense
    R&D outlays tapered off, depreciation grew, and, as a result, the real
    net defense R&D stock stabilized at around $400 billion.
      The growth of the nondefense R&D stock slowed from the 1970s to the
    1980s, from an annual rate of 3.8 percent in the 1970s to a rate of 2.1
    percent in the 1980s. Gross investment in real terms fell during much of
    the 1980s, and about three-fourths of new outlays went to replacing
    depreciated R&D. Since 1988, however, nondefense R&D outlays have been
    on an upward trend while depreciation has edged down. As a result, the
    net nondefense R&D capital stock has grown more rapidly.

                                            Table 7-6.  NET STOCK OF FEDERALLY FINANCED RESEARCH AND DEVELOPMENT \1\
                                                                  (In billions of 1996 dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                         National Defense                        Nondefense                         Total Federal
                                              --------------------------------------------------------------------------------------------------------------
                                                                         Applied                              Applied                              Applied
                   Fiscal Year                                Basic      Research                  Basic      Research                  Basic      Research
                                                  Total     Research       and         Total     Research       and         Total     Research       and
                                                                       Development                          Development                          Development
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Five year intervals:
      1970...................................         247          15          233         204          63          140         451          78          373
      1975...................................         262          19          242         249          92          157         511         112          399
      1980...................................         265          24          242         295         125          170         560         148          412
      1985...................................         304          29          276         321         165          156         626         194          432
      1990...................................         381          34          347         362         217          146         744         251          493
    Annual data:
      1995...................................         399          40          359         436         278          158         835         318          517
      1996...................................         401          42          360         448         290          158         850         332          518
      1997...................................         403          43          360         463         303          160         866         346          520
      1998...................................         403          44          360         478         317          162         882         360          522
      1999...................................         402          45          358         495         331          164         897         376          521
      2000...................................         398          46          353         512         347          164         910         393          517
      2001...................................         400          47          353         533         366          167         933         413          520
      2002 est...............................         405          48          357         558         386          172         963         434          529
      2003 est...............................         413          49          364         585         408          177         999         458          541
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\ Excludes stock of physical capital for research and development, which is included in Table 7-4.

                         The Stock of Education Capital

      This section presents estimates of the stock of education capital
    financed by the Federal government.
      As shown in Table 7-7, the federally financed education stock is
    estimated at $1,057 billion in 2001 in constant 1996 dollars, rising to
    $1,157 billion in 2003. The vast majority of the Nation's education
    stock is financed by State and local governments, and by students and
    their families themselves. This federally financed portion of the stock
    represents about 3 percent of the Nation's total education stock.\1\
    Nearly three-quarters is for elementary and secondary education, while
    the remaining one quarter is for higher education.
    ---------------------------------------------------------------------------
      \1\ For estimates of the total education stock, see table 3-4 in
    Chapter 3, ``Stewardship: Toward a Federal Balance Sheet.''

          Table 7-7.  NET STOCK OF FEDERALLY FINANCED EDUCATION CAPITAL
                          (In billions of 1996 dollars)
    ------------------------------------------------------------------------
                                                      Elementary
                                            Total         and        Higher
                Fiscal Year               Education    Secondary   Education
                                            Stock      Education
    ------------------------------------------------------------------------
    Five year intervals:
      1960.............................          67            48         19
      1965.............................          93            67         26
      1970.............................         213           167         46
      1975.............................         307           247         60
      1980.............................         434           338         96
      1985.............................         535           399        137
      1990.............................         703           519        184
    Annual data:
      1995.............................         792           575        218
      1996.............................         822           597        226
      1997.............................         856           621        235
      1998.............................         909           661        248
      1999.............................         968           707        261
      2000.............................       1,013           742        271
      2001.............................       1,057           769        288
      2002 est.........................       1,094           793        301
      2003 est.........................       1,157           839        318
    ------------------------------------------------------------------------

      Despite a slowdown in growth during the early 1980s, the stock grew at
    an average annual rate of 5.3 percent from 1970 to 2001, and the
    expansion of the education stock is projected to continue under this
    budget.

                           Note on Estimating Methods

      This note provides further technical detail about the estimation of
    the capital stock series presented in Tables 7-4 through 7-7.
      As stated previously, the capital stock estimates are very rough
    approximations. Sources of possible error include:
      Methodological issues.--The stocks of physical capital and research
    and development are estimated with the perpetual inventory method. A
    fundamental assumption of this method is that each dollar of investment
    spending adds a dollar to the value of the capital stock in the period
    in which the spending takes place. In reality,

    [[Page 144]]

    the value of the asset created could be more or less than the investment
    spending. As an extreme example, in cases where a project is canceled
    before completion, the spending on the project does not result in the
    creation of any asset. Even where asset value is equal to investment
    spending, there might be timing differences in spending and the creation
    of a capital asset. For example, payments for constructing an aircraft
    carrier might be made over a period of years, with the capital asset
    only created at the end of the period.
      The historical outlay series.--The historical outlay series for
    physical capital was based on budget records since 1940 and was extended
    back to 1915 using data from selected sources. There are no consistent
    outlay data on physical capital for this earlier period, and the
    estimates are approximations. In addition, the historical outlay series
    in the budget for physical capital extending back to 1940 may be
    incomplete. The historical outlay series for the conduct of research and
    development began in the early 1950s and required selected sources to be
    extended back to 1940. In addition, separate outlay data for basic
    research and applied R&D were not available for any years and had to be
    estimated from obligations and budget authority. For education, data for
    Federal outlays from the budget were combined with data for non-Federal
    spending from the institution or jurisdiction receiving Federal funds,
    which may introduce error because of differing fiscal

    [[Page 145]]

    years and confusion about whether the Federal Government was the
    original source of funding.
      Price adjustments.--The prices for the components of the Federal stock
    of physical, R&D, and education capital have increased through time, but
    the rates of increase are not accurately known. Estimates of costs in
    fiscal year 1996 prices were made through the application of price
    measures from the National Income and Product Accounts (NIPAs), but
    these should be considered only approximations of the costs of these
    assets in 1996 prices.
      Depreciation.--The useful lives of physical, R&D, and education
    capital, as well as the pattern by which they depreciate, are very
    uncertain. This is compounded by using depreciation rates for broad
    classes of assets, which do not apply uniformly to all the components of
    each group. As a result, the depreciation estimates should also be
    considered approximations. This limitation is especially important in
    capital financed by grants, where the specific asset financed with the
    grant is often subject to the discretion of the recipient jurisdiction.
      Research continues on the best methods to estimate these capital
    stocks. The estimates presented in the text could change as better
    information becomes available on the underlying investment data and as
    improved methods are developed for estimating the stocks based on those
    data.

                             Physical Capital Stocks

      For many years, current and constant-cost data on the stock of most
    forms of public and private physical capital--e.g., roads, factories,
    and housing--have been estimated annually by the Bureau of Economic
    Analysis (BEA) in the Department of Commerce. With two recent
    comprehensive revisions of the NIPAs in January 1996 and October 1999,
    government investment has taken increased prominence. Government
    investment in physical capital is now reported separately from
    government consumption expenditures, and government consumption
    expenditures include depreciation as a measure of the services provided
    by the existing capital stock. In addition, as part of the most recent
    revisions, a new NIPA table explicitly links investment and capital
    stocks by reporting the net stock of Government physical capital and
    decomposing the annual change in the stock into investment,
    depreciation, extraordinary changes such as disasters, and
    revaluation.\2\
    ---------------------------------------------------------------------------
      \2\ BEA most recently presented its capital stocks in ``Fixed Assets
    and Consumer Durable Goods for 1925-2000,'' Survey of Current Business,
    September 2001, pp. 27-38.
    ---------------------------------------------------------------------------
      The BEA data are not directly linked to the Federal budget, do not
    extend to the years covered by the budget, and do not separately
    identify the capital financed but not owned by the Federal Government.
    For these reasons, OMB prepares separate estimates for budgetary
    purposes, using techniques that roughly follow the BEA methods.
      Method of estimation.--The estimates were developed from the OMB
    historical data base for physical capital outlays and grants to State
    and local governments for physical capital. These are the same major
    public physical capital outlays presented in Part I. This data base
    extends back to 1940 and was supplemented by rough estimates for 1915-
    1939.
      The deflators used to convert historical outlays to constant 1996
    dollars were based on chained NIPA price indexes for Federal, State, and
    local consumption of durables and gross investment. For 1915 through
    1929, deflators were estimated from Census Bureau historical statistics
    on constant price public capital formation.
      The resulting capital stocks were aggregated into nine categories and
    depreciated using geometric rates roughly following those of BEA, which
    estimates depreciation using much more detailed categories.\3\ The
    geometric rates were 1.9 percent for water and power projects; 2.4
    percent for other direct nondefense construction and rehabilitation;
    20.3 percent for nondefense equipment; 14.0 percent for defense
    equipment; 2.1 percent for defense structures; 2.0 percent for
    transportation grants; 1.7 percent for community and regional
    development grants; 1.5 percent for natural resources and environment
    grants; and 1.8 percent for other nondefense grants.
    ---------------------------------------------------------------------------
      \3\ BEA presented its depreciation methods and rates in ``Improved
    Estimates of Fixed Reproducible Tangible Wealth, 1929-95,'' Survey of
    Current Business, May 1997, pp. 69-76. Changes in depreciation methods
    introduced with BEA's October 1999 comprehensive revisions were detailed
    in ``Fixed Assets and Consumer Durable Goods,'' Survey of Current
    Business, April 2000, pp. 17-30.
    ---------------------------------------------------------------------------

                     Research and Development Capital Stocks

      Method of estimation.--The estimates were developed from a data base
    for the conduct of research and development largely consistent with the
    data in the Historical Tables. Although there is no consistent time
    series on basic and applied R&D for defense and nondefense outlays back
    to 1940, it was possible to estimate the data using obligations and
    budget authority. The data are for the conduct of R&D only and exclude
    outlays for physical capital for research and development, because those
    are included in the estimates of physical capital. Nominal outlays were
    deflated by the chained price index for gross domestic product (GDP) in
    fiscal year 1996 dollars to obtain estimates of constant dollar R&D
    spending.
      The appropriate depreciation rate of intangible R&D capital is even
    more uncertain than that of physical capital. Empirical evidence is
    inconclusive. It was assumed that basic research capital does not
    depreciate and that applied research and development capital has a ten
    percent geometric depreciation rate. These are the same assumptions used
    in a study published by the Bureau of Labor Statistics estimating the
    R&D stock financed by private industry.\4\ More recent experimental work
    at BEA, extending estimates of tangible capital stocks to R&D, used
    slightly different assumptions. This work assumed straight-line
    depreciation for all R&D over a useful life of 18 years, which is
    roughly equivalent to a geometric depreciation rate of 11 percent. The
    slightly higher depreciation rate and its ex

    [[Page 146]]

    tension to basic research would result in smaller stocks than the method
    used here.\5\
    ---------------------------------------------------------------------------
      \4\ See U.S. Department of Labor, Bureau of Labor Statistics, The
    Impact of Research and Development on Productivity Growth, Bulletin
    2331, September 1989.
      \5\ See ``A Satellite Account for Research and Development,'' Survey
    of Current Business, November 1994, pp. 37-71.
    ---------------------------------------------------------------------------

                            Education Capital Stocks

      Method of estimation.--The estimates of the federally financed
    education capital stock in Table 7-7 were calculated by first estimating
    the Nation's total stock of education capital, based on the current
    replacement cost of the total years of education of the population,
    including opportunity costs. To derive the Federal share of this total
    stock, the Federal share of total educational expenditures was applied
    to the total amount. The percent in any year was estimated by averaging
    the prior years' share of Federal education outlays in total education
    costs. For more information, refer to the technical note in Chapter 3,
    ``Stewardship: Toward a Federal Balance Sheet.''
      The stock of capital estimated in Table 7-7 is based only on spending
    for education. Stocks created by other human capital investment outlays
    included in Table 7-1, such as job training and vocational
    rehabilitation, were not calculated because of the lack of historical
    data prior to 1962 and the absence of estimates of depreciation rates.

          Part III: ALTERNATIVE CAPITAL BUDGET AND CAPITAL EXPENDITURE
                                  PRESENTATIONS

      A capital budget would separate Federal expenditures into two
    categories: spending for investment and all other spending. In this
    sense, Part I of the present chapter provides a capital budget for the
    Federal Government, distinguishing outlays that yield long-term benefits
    from all others. But alternative capital budget presentations have also
    been suggested, and a capital budget process may take many different
    forms. This section is intended to show the implications of budgeting
    for capital separately or changing the basis for measuring capital
    investment in the budget. An Administration proposal being developed for
    capital acquisition funds is discussed in chapter 1 of this volume,
    ``Budget and Performance Integration.'' It would neither budget for
    capital separately nor change the basis for measuring capital investment
    in the budget.
      The Federal budget mainly finances investment for two quite different
    types of reasons. It invests in capital--such as office buildings,
    computers, and weapons systems--that primarily contributes to its
    ability to provide governmental services to the public; some of these
    services, in turn, are designed to increase economic growth. And it
    invests in capital--such as highways, education, and research--that
    contributes more directly to the economic growth of the Nation. Most of
    the capital in the second category, unlike the first, is not owned or
    controlled by the Federal Government. In the discussion that follows,
    the first is called ``Federal capital'' and the second is called
    ``national capital.'' Table 7-8 compares total Federal investment as
    defined in Part I of this chapter with investment in Federal capital and
    in national capital. Some Federal investment is not classified as either
    Federal or national capital, and a relatively small part is included in
    both categories.

                             Table 7-8.  ALTERNATIVE DEFINITIONS OF INVESTMENT OUTLAYS, 2003
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                           Investment Outlays
                                                                                  ----------------------------------
                                                                                    All types
                                                                                    of capital   Federal    National
                                                                                       \1\       capital    capital
    ----------------------------------------------------------------------------------------------------------------
    Construction and rehabilitation:
      Grants:
        Transportation...........................................................      37,407   .........     37,407
        Natural resources and environment........................................       2,966   .........      2,966
        Community and regional development.......................................       7,377   .........      1,238
        Housing assistance.......................................................       7,673   .........  .........
        Other grants.............................................................         530   .........        425
      Direct Federal:
        National defense.........................................................       8,947       8,947  .........
        General science, space, and technology...................................       2,254       2,239      2,254
        Natural resources and environment........................................       6,119       4,933      5,583
        Energy...................................................................       1,272       1,272      1,272
        Transportation...........................................................         412         359        412
        Veterans and other health facilities.....................................       1,591       1,591      1,591
        Postal Service...........................................................       1,039       1,039      1,039
        GSA real property activities.............................................       1,298       1,298  .........
        Other construction.......................................................       3,714       3,360      1,300
                                                                                  ----------------------------------
          Total construction and rehabilitation..................................      82,599      25,038     55,487
    Acquisition of major equipment (direct):
      National defense...........................................................      63,708      63,708  .........
      Postal Service.............................................................         612         612        612
      Air transportation.........................................................       2,766       2,766      2,766
      Other......................................................................       8,297       7,466      4,198
                                                                                  ----------------------------------
       Total major equipment.....................................................      75,383      74,552      7,576
    Purchase or sale of land and structures......................................         365         365  .........
    Other physical assets (grants)...............................................       1,209   .........         95
                                                                                  ----------------------------------
      Total physical investment..................................................     159,556      99,955     63,158
    Research and development:
      Defense....................................................................      59,939   .........      1,277
      Nondefense.................................................................      47,009   .........     46,668
                                                                                  ----------------------------------
       Total research and development............................................     106,948   .........     47,945
    Education and training.......................................................      76,069   .........     75,436
                                                                                  ==================================
    Total investment outlays.....................................................     342,573      99,955    186,539
    ----------------------------------------------------------------------------------------------------------------
    \1\ Total outlays for ``all types of capital`` are equal to the total for ``major Federal investment outlays''
      in Table 7-1. Some capital is not classified as either Federal or national capital, and a relatively small
      part is included in both categories.

      Capital budgets and other changes in Federal budgeting have been
    suggested from time to time for the Government's investment in both
    Federal and national capital. The proposals differ widely in coverage,
    depending on the rationale for the suggestion. Some would include all
    the investment shown in Table 7-1, or more, whereas others would be
    narrower in various ways. These proposals also differ in other respects,
    such as whether the basis for measuring capital investment in the budget
    is altered, whether investment would be financed by borrowing, and
    whether the non-investment budget would necessarily be balanced. Some of
    these proposals are discussed below and illustrated by alternative
    capital budget and other capital expenditure presentations, although the
    discussion does not address matters of implementation such as the effect
    on the Budget Enforcement Act. The planning process for capital assets,
    which is a different subject, is discussed in a separate publication,
    the Capital Programming Guide.\6\
    ---------------------------------------------------------------------------
      \6\ Office of Management and Budget, Capital Programming Guide (July
    1997).
    ---------------------------------------------------------------------------

                          Investment in Federal Capital

      The goal of investment in Federal capital is to deliver the right
    amount of Government services as efficiently and effectively as
    possible. The Congress allocates resources to Federal agencies to
    accomplish a wide variety of programmatic goals. Because these goals are
    diverse and most are not measured in dollars, they are difficult to
    compare with each other. Policy judgments must be made as to their
    relative importance.
      Once amounts have been allocated for one of these goals, however,
    analysis may be able to assist in choosing the most efficient and
    effective means of delivering service. This is the context in which
    decisions are made on the amount of investment in Federal capital. For
    example, budget proposals for the Department of Justice must consider
    whether to increase the number of FBI agents, the amount of justice
    assistance grants to State and local governments, or the number of
    Federal prisons in order to accomplish the department's objectives. The
    optimal amount of investment in Federal capital to meet a goal derives
    from these decisions; the optimal amount of total investment to meet all
    of the Government's goals derives from these decisions and from the
    policy decisions about how much to allocate for each goal. There is no
    efficient target for total investment in Federal capital as such either
    for a single agency or for the Government as a whole.

    [[Page 147]]

      The universe of Federal capital encompasses all federally owned
    capital assets. It excludes Federal grants to States for infrastructure,
    such as highways, and it excludes intangible investment, such as
    education and research. Investment in Federal capital in 2003 is
    estimated to be $100.0 billion, or 29 percent of the total Federal
    investment outlays shown in Table 7-1. Of the investment in Federal
    capital, 73 percent is for defense and 27 percent for nondefense
    purposes.

    A Capital Budget for Capital Assets

      Discussion of a capital budget has often centered on Federal capital--
    buildings, other construction, equipment, and software that support the
    delivery of Federal services. This includes capital commonly available
    from the commercial sector, such as office buildings, computers,
    military family housing, veterans hospitals, research and development
    facilities, and associated equipment; it also includes special purpose
    capital such as weapons systems, military bases, the space station, and
    dams. This definition excludes capital that the Federal Government has
    financed but does not own.
      Some capital budget proposals would partition the unified budget into
    a capital budget, an operating budget, and a total budget. Table 7-9
    illustrates such a capital budget for capital assets as defined above.
    It is accompanied by an operating budget and a total budget. The
    operating budget consists of all expenditures except those included in
    the capital budget, plus depreciation on the stock of assets of the type
    purchased through the capital budget. The capital budget consists of
    expenditures for capital assets and, on the income side of the account,
    depreciation. The total budget is the present unified budget, largely
    based on cash for its measure of transactions, which records all outlays
    and receipts of the Federal Government. It con

    [[Page 148]]

    solidates the operating and capital budgets by adding them together and
    netting out depreciation as an intragovernmental transaction. The
    operating budget has a smaller deficit than the unified budget by a
    modest amount, by $17 billion, because capital expenditures are larger
    than depreciation by $18 billion. (The difference between these two
    amounts is due to rounding.) This reflects both the small Federal
    investment in new capital assets relative to the budget as a whole ($100
    billion) and the largely offsetting effect of depreciation on the
    existing stock ($82 billion). The figures in Table 7-9 and the
    subsequent tables of this section are rough estimates, intended only to
    be illustrative and to provide a basis for broad generalizations.

      Table 7-9.  CAPITAL, OPERATING, AND UNIFIED BUDGETS: FEDERAL CAPITAL,
                                  2003 \1\ \2\
                            (In billions of dollars)
    ------------------------------------------------------------------------

    ------------------------------------------------------------------------

                        Operating Budget

    Receipts................................................       2,048
    Expenses:
      Depreciation..........................................          82
      Other.................................................       2,028
                                                             ---------------
        Subtotal, expenses..................................       2,111
                                                             ---------------
      Surplus or deficit (-)................................         -63

                         Capital Budget

    Income: depreciation....................................          82
    Capital expenditures....................................         100
                                                             ---------------
      Surplus or deficit (-)................................         -18

                         Unified Budget

    Receipts................................................       2,048
    Outlays.................................................       2,128
                                                             ---------------
      Surplus or deficit (-)................................         -80
    ------------------------------------------------------------------------
    \1\ Historical data to estimate the capital stocks and calculate
      depreciation are not readily available for Federal capital.
      Depreciation estimates were based on the assumption that outlays for
      Federal capital were a constant percentage of the larger categor
    \2\ The details of this table do not add to the totals in every case due
      to rounding.

      Some proposals for a capital budget would exclude defense capital
    (other than military family housing). These exclusions--weapons systems,
    military bases, and so forth--would comprise three-fourths of the
    expenditures shown in the capital budget of Table 7-9. For 2003, this
    exclusion would make little difference to the operating budget surplus.
    If defense capital was excluded, the operating budget would have a
    deficit that was $12 billion less than the unified budget surplus
    instead of $17 billion less as shown above for the complete coverage of
    Federal capital. Capital expenditures for defense in 2003 are estimated
    to be $6 billion more than depreciation, whereas capital expenditures
    for nondefense purposes (plus military family housing) are estimated to
    be $12 billion more.

    Budget Discipline and a Capital Budget

      Many proposals for a capital budget, though not all, would effectively
    dispense with the unified budget and make expenditure decisions on
    capital asset acquisitions in terms of the operating budget instead.
    When an agency proposed to purchase a capital asset, the operating
    budget would include only the estimated depreciation. For example,
    suppose that an agency proposed to buy a $50 million building at the
    beginning of the year with an estimated life of 25 years and with
    depreciation calculated by the straightline method. Operating expense in
    the budget year would increase by $2 million, or only 4 percent of the
    asset cost. The same amount of depreciation would be recorded as an
    increase in operating expense for each year of the asset's life.\7\ If
    the asset was constructed or built to order, no depreciation would be
    recorded until the work was completed and the asset put into service.
    This could be several years after the initial expenditure, in which case
    the budget would record no expense at all in the budget year or several
    years thereafter.
    ---------------------------------------------------------------------------
      \7\ The amount of depreciation that typically would be recorded as an
    expense in the budget year for an already existing asset is overstated
    by this illustration. Most assets are purchased after the beginning of
    the year, in which case less than a full year's depreciation would
    normally be recorded.
    ---------------------------------------------------------------------------
      Recording the annual depreciation in the operating budget each year
    would provide little control over the decision about whether to invest
    in the first place. Most Federal investments are sunk costs and as a
    practical matter cannot be recovered by selling or renting the asset. At
    the same time, there is a significant risk that the need for a capital
    asset may change over a period of years, because either the need is not
    permanent, it is initially misjudged, or other needs become more
    important. Since the cost is sunk, however, control cannot be exercised
    later on by comparing the annual benefit of the asset services with
    depreciation and interest and then selling the asset if its annual
    services are not worth this expense. Control can only be exercised up
    front when the Government commits itself to the full sunk cost. By
    spreading the real cost of the project over time, however, use of the
    operating budget for expenditure decisions would make the budgetary cost
    of the capital asset appear very cheap when decisions were being made
    that compared it to alternative expenditures--as noted above, it could
    even be zero if the asset was made to order. As a result, there would be
    an incentive to purchase capital assets with little regard for need, and
    also with little regard for the least-cost method of acquisition.
      A budget is a financial plan for allocating resources--deciding how
    much the Federal Government should spend in total, program by program,
    and for the parts of each program. The budgetary system provides a
    process for proposing policies, making decisions, implementing them, and
    reporting the results. The budget needs to measure costs accurately so
    that decision makers can compare the cost of a program with its benefit,
    the cost of one program with another, and the cost of alternative
    methods of reaching a specified goal. These costs need to be fully
    included in the budget up front, when the spending decision is made, so
    that executive and congressional decision makers have the information
    and the incentive to take the total costs into account in setting
    priorities.

    [[Page 149]]

      The present budget does this for investment. It records investment on
    a cash basis, and it requires Congress to vote budget authority before
    an agency can obligate the Government to make an outlay. By these means,
    it causes the total cost to be compared up front in a rough and ready
    way with the total expected future net benefits. Since the budget
    measures only cost, the benefits with which these costs are compared,
    based on policy makers' judgment, must be presented in supplementary
    materials. Such a comparison of total cost with benefits is consistent
    with the formal method of cost-benefit analysis of capital projects in
    government, in which the full cost of a capital asset as the cash is
    paid out is compared with the full stream of future benefits (all in
    terms of present values).\8\
    ---------------------------------------------------------------------------
      \8\ A For example, see Edward M. Gramlich, A Guide to Benefit-Cost
    Analysis (2nd ed.; Englewood Cliffs: Prentice Hall, 1990), chap. 6; or
    Joseph E. Stiglitz, Economics of the Public Sector (2nd ed.; New York:
    Norton, 1988), chap. 10. This theory is applied in formal OMB
    instructions to Federal agencies in OMB Circular No. A-94, Guidelines
    and Discount Rates for Benefit-Cost Analysis of Federal Programs
    (October 29, 1992). General Accounting Office, Discount Rate Policy,
    GAO/OCE-17.1.1 (May 1991), discusses the appropriate discount rate for
    such analysis but not the foundation of the analysis itself, which is
    implicitly assumed.
    ---------------------------------------------------------------------------
      This comparison is also consistent with common business practice, in
    which most capital budgeting decisions are made by comparing cash flows.
    The cash outflow for the full purchase price is compared with expected
    future cash inflows, either through a relatively sophisticated technique
    of discounted cash flows--such as net present value or internal rate of
    return--or through cruder methods such as payback periods.\9\ Regardless
    of the specific technique adopted, it usually requires comparing future
    returns with the entire cost of the asset up front--not spread over time
    through annual depreciation.\10\
    ---------------------------------------------------------------------------
      \9\ For a full textbook analysis of capital budgeting techniques in
    business, see Harold Bierman, Jr., and Seymour Smidt, The Capital
    Budgeting Decision (8th ed.; Saddle River, N.J.: Prentice-Hall, 1993).
    Shorter analyses from the standpoints of corporate finance and cost
    accounting may be found, for example, in Richard A. Brealey and Stewart
    C. Myers, Principles of Corporate Finance (5th ed.; New York: McGraw-
    Hill, 1996), chap. 2, 5, and 6; Charles T. Horngren et al., Cost
    Accounting (9th ed.; Upper Saddle River, N.J.: Prentice-Hall, 1997),
    chap. 22 and 23; Jerold L. Zimmerman, Accounting for Decision Making and
    Control (Chicago: Irwin, 1995), chap. 3; and Surendra S. Singhvi,
    ``Capital-Investment Budgeting Process'' and ``Capital-Expenditure
    Evaluation Methods,'' chap. 19 and 20 in Robert Rachlin, ed., Handbook
    of Budgeting (4th ed.; New York: Wiley, 1999).
      \10\ Two surveys of business practice conducted a few years ago found
    that such techniques are predominant. See Thomas Klammer et al.,
    ``Capital Budgeting Practices--A Survey of Corporate Use,'' Journal of
    Management and Accounting Research, vol. 3 (Fall 1991), pp. 113-30; and
    Glenn H. Petry and James Sprow, ``The Theory and Practice of Finance in
    the 1990s,'' The Quarterly Review of Economics and Finance, vol. 33
    (Winter 1993), pp. 359-82. Petry and Sprow also found that discounted
    cash flow techniques are recommended by the most widely used textbooks
    in managerial finance.

    ---------------------------------------------------------------------------
    Practice Outside the Federal Government

      The proponents of making investment decisions on the basis of an
    operating budget with depreciation have sometimes claimed that this is
    the common practice outside the Federal Government. However, while the
    practice of others may differ from the Federal budget and the terms
    ``capital budget'' and ``capital budgeting'' are often used, these terms
    do not normally mean that capital asset acquisitions are decided on the
    basis of annual depreciation cost. The use of these terms in business
    and State government also does not mean that businesses and States
    finance all their investment by borrowing. Nor does it mean that under a
    capital budget the extent of borrowing by the Federal Government to
    finance investment would be limited by the same forces that constrain
    business and State borrowing for investment.
      Private business firms call their investment decision making process
    ``capital budgeting,'' and they record the resulting planned
    expenditures in a ``capital budget.'' However, decisions are normally
    based on up-front comparisons of the cash outflows needed to make the
    investment with the resulting cash inflows expected in the future, as
    explained above, and the capital budget records the period-by-period
    cash outflows proposed for capital projects.\11\ This supports the
    business's goal of deciding upon and controlling the use of its
    resources to earn income.
    ---------------------------------------------------------------------------
      \11\ A business capital budget is depicted in Glenn A. Welsch et al.,
    Budgeting: Profit Planning and Control (5th ed.; Englewood Cliffs:
    Prentice Hall, 1988), pp. 396-99.
    ---------------------------------------------------------------------------
      The cash-based focus of business budgeting for capital is in contrast
    to business financial statements--the income statement and balance
    sheet--which use accrual accounting for a different purpose, namely, to
    record how well the business is meeting its objective of earning profit
    and accumulating wealth for its owners. For this purpose, the income
    statement shows the profit in a year from earning revenue net of the
    expenses incurred. These expenses include depreciation, which is an
    allocation of the costs of capital assets over their estimated useful
    lives. With similar objectives in mind, the Federal Accounting Standards
    Advisory Board has adopted the use of depreciation on general property,
    plant, and equipment owned by the Federal Government as a measure of
    expense in financial statements and cost accounting for Federal
    agencies.\12\
    ---------------------------------------------------------------------------
      \12\ Statement of Federal Financial Accounting Standards No. 6,
    Accounting for Property, Plant, and Equipment, pp. 5-14 and 34-35. (The
    Federal Accounting Standards Advisory Board was established by the
    Office of Management and Budget, Department of Treasury, and General
    Accounting Office to develop accounting standards and concepts for the
    Federal government. The American Institute of Certified Public
    Accountants has designated it as the body to establish generally
    accepted accounting principles (GAAP) for Federal government entities.)
    Depreciation is not used as a measure of expense for heritage assets, or
    for weapons systems and other national defense property, plant, and
    equipment. Depreciation also is not used as a measure of expense for
    physical property financed by the Federal Government but owned by State
    and local governments, or for investment that the Federal Government
    finances in human capital and research and development.
    ---------------------------------------------------------------------------
      Businesses finance investment from net income, cash on hand, and other
    sources as well as borrowing. When they borrow to finance investment,
    they are constrained in ways that Federal borrowing is not. The amount
    that a business borrows is limited by its own profit motive and the
    market's assessment of its capacity to repay. The greater a business's
    indebtedness, other things equal, the more risky is any additional
    borrowing and the higher is the cost of funds it must pay. Since the
    profit motive ensures that a business will not want to borrow unless the
    expected return is at least as high as the cost of funds, the amount of
    investment that a business will want to finance is limited; it has an
    incentive to borrow only for projects where the expected return is as
    high or higher than the cost of funds. Furthermore, if the risk is great
    enough, a business may not be able to find a lender.
      No such constraint limits the Federal Government--either in the total
    amount of its borrowing for investment, or in its choice of which assets
    to buy--because of its sovereign power to tax and the wide economic base
    that it taxes. It can tax to pay for investment;

    [[Page 150]]

    and, if it borrows, its power to tax ensures that the credit market will
    judge U.S. Treasury securities free from any risk of default even if it
    borrows ``excessively'' or for projects that do not seem worthwhile. The
    only constraint is policy decisions about the budget.
      Most States also have a ``capital budget,'' but the operating budget
    is not like the operating budget envisaged by proponents of making
    Federal investment decisions on the basis of depreciation. State capital
    budgets differ widely in many respects but generally relate some of the
    State's purchases of capital assets to borrowing and other earmarked
    means of financing. For the debt-financed portion of investment, the
    interest and repayment of principal are usually recorded as expenditures
    in the operating budget. For the portion of investment purchased in the
    capital budget but financed by Federal grants or State taxes, which may
    be substantial, State operating budgets do not record any amount. No
    State operating budget is charged for depreciation.\13\
    ---------------------------------------------------------------------------
      \13\ The characteristics of State capital budgets were examined in a
    survey of State budget officers for all 50 States in 1986. See Lawrence
    W. Hush and Kathleen Peroff, ``The Variety of State Capital Budgets: A
    Survey,'' Public Budgeting and Finance (Summer 1988), pp. 67-79. More
    detailed results are available in an unpublished OMB document, ``State
    Capital Budgets'' (July 7, 1987). Two GAO reports examined State capital
    budgets and reached similar conclusions on the issues in question. See
    Budget Issues: Capital Budgeting Practices in the States, GAO/AFMD-86-
    63FS (July 1986), and Budget Issues: State Practices for Financing
    Capital Projects, GAO/AFMD-89-64 (July 1989). For further information
    about state capital budgeting, see National Association of State Budget
    Officers, Capital Budgeting in the States (November 1999).
    ---------------------------------------------------------------------------
      States did not traditionally record depreciation expense in the
    financial accounting statements for governmental funds. They recorded
    depreciation expense only in their proprietary (commercial-type) funds
    and in those trust funds where net income, expense, or capital
    maintenance was measured.\14\ Under new financial accounting standards,
    however, depreciation on most capital assets will be recognized as an
    expense in government-wide financial statements. This requirement is now
    being phased-in and is effective for larger governments for fiscal years
    beginning after June 2001.\15\
    ---------------------------------------------------------------------------
      \14\Governmental Accounting Standards Board (GASB), Codification of
    Governmental Accounting and Financial Reporting Standards as of June 30,
    2000, sections 1100.107 and 1400.114-1400.118.
      \15\ Governmental Accounting Standards Board, Statement No. 34, Basic
    Financial Statements--and Management's Discussion and Analysis--for
    State and Local Governments (June 1999), paragraphs 18-29 and 44-45. For
    discussion of the basis for conclusions of these new standards, see
    paragraphs 330-43.
    ---------------------------------------------------------------------------
      State borrowing to finance investment, like business borrowing, is
    subject to limitations that do not apply to Federal borrowing. Like
    business borrowing, it is constrained by the credit market's assessment
    of the State's capacity to repay, which is reflected in the credit
    ratings of its bonds. Rating agencies place significant weight on the
    amount of debt outstanding compared to the economic output generated by
    the State. Furthermore, borrowing is usually designated for specified
    investments, and it is almost always subject to constitutional limits or
    referendum requirements.
      Other developed nations tend to show a more systematic breakdown
    between investment and operating expenditures within their budgets than
    does the United States, even while they record capital expenditures on a
    cash basis within the same budget totals. The French budget, for
    example, has traditionally been divided into separate titles of which
    some are for current expenditures and others for capital expenditures. A
    study of European countries several years ago found only four at that
    time which had a real difference between a current budget and a capital
    budget (Greece, Ireland, Luxembourg, and Portugal).\16\
    ---------------------------------------------------------------------------
      \16\ M. Peter van der Hoek, ``Fund Accounting and Capital Budgeting:
    European Experience,'' Public Budgeting and Financial Management, vol. 8
    (Spring 1996), pp. 39-40.
    ---------------------------------------------------------------------------
      In addition, three developed countries have recently adopted accrual
    budgets that include the use of depreciation in place of capital
    expenditures. These countries, however, require appropriations for the
    full cost or current cash disbursements as an additional control under
    some or all circumstances. New Zealand, the first country to shift to an
    accrual budget, requires the equivalent of appropriations for the full
    cost up front before a department can make net additions to its capital
    assets or before the government can acquire certain capital assets such
    as state highways. It also requires Cabinet approval for purchases above
    a threshold amount. Australia, which adopted an accrual budget as of its
    1999-2000 budget, requires an appropriation for departments that do not
    have adequate reserves to purchase assets. The United Kingdom budgeted
    on an accrual basis starting with its 2001-02 fiscal year. However,
    Parliamentary approval is needed for both the ``resource budget,'' which
    includes depreciation, and the departmental cash requirement, which
    includes the cash payments made for capital assets.
      Canada publishes its budget on a modified accrual basis and intends to
    shift to full accruals, including the depreciation of capital assets.
    However, it distinguishes between its budget and its ``estimates.'' The
    budget sets forth the overall fiscal framework, while the ``estimates''
    comprise the detailed departmental appropriations. The estimates are on
    a modified cash basis, different from the budget, that does not make use
    of depreciation. This would be an additional control in the context of a
    full accrual budget.
      A country with an accrual budget may calculate its measure of fiscal
    position on other bases as well. The Australian budget has several
    measures of fiscal position. The primary fiscal measure, the fiscal
    balance, is close to a cash basis and includes the purchase of property,
    plant, and equipment rather than depreciation.\17\
    ---------------------------------------------------------------------------
      \17\ The practices and plans of New Zealand, Australia, United
    Kingdom, and Canada are discussed in GAO, Accrual Budgeting: Experiences
    of Other Nations and Implications for the United States, GAO/AIMD-00-57
    (February 2000).
    ---------------------------------------------------------------------------
      On the other hand, some countries--including Sweden, Denmark, Finland,
    and the Netherlands--formerly had separate capital budgets but abandoned
    them a number of years ago.\18\ The Netherlands and Sweden, though, are
    either planning to adopt accruals for their

    [[Page 151]]

    budget generally or are actively considering whether to do so.
    ---------------------------------------------------------------------------
      \18\ Denmark had accrual budgets generally, not just for capital
    assets, but abandoned that practice a number of years ago. The budgets
    in Sweden, Great Britain, Germany, and France as of the middle 1980s are
    described in GAO, Budget Issues: Budgeting Practices in West Germany,
    France, Sweden, and Great Britain, GAO/AFMD-87-8FS (November 1986).
    Sweden had separate capital and operating budgets from 1937 to 1981,
    together with a total consolidated budget from 1956 onwards. The reasons
    for abandoning the capital budget are discussed briefly in the GAO
    report and more extensively by a government commission established to
    recommend changes in the Swedish budget system. One reason was that
    borrowing was no longer based on the distinction between current and
    capital budgets. See Sweden, Ministry of Finance, Proposal for a Reform
    of the Swedish Budget System: A Summary of the Report of the Budget
    Commission Published by the Ministry of Finance (Stockholm, 1974),
    chapter 10.
    ---------------------------------------------------------------------------
      Many developing countries operate a dual budget system comprising a
    regular or recurrent budget and a capital or development budget. The
    World Bank staff has concluded that:
                ``The dual budget may well be the single most important
              culprit in the failure to link planning, policy and budgeting,
              and poor budgetary outcomes. The dual budget is misconceived
              because it is based on a false premise that capital
              expenditure by government is more productive than current
              expenditure. Separating development and recurrent budgets
              usually leads to the development budget having a lower hurdle
              for entry. The result is that everyone seeks to redefine their
              expenditure as capital so it can be included in the
              development budget. Budget realities are left to the recurrent
              budget to deal with, and there is no pretension that
              expenditure proposals relate to policy priorities.''\19\
    ---------------------------------------------------------------------------
      \19\ The World Bank, Public Expenditure Management Handbook
    (Washington, D.C.: The World Bank, 1998), Box 3.11, page 53.

    ---------------------------------------------------------------------------
    Conclusions

      It is for reasons such as these that the General Accounting Office
    issued a report in 1993 that criticized budgeting for capital in terms
    of depreciation. Although the criticisms were in the context of what is
    termed ``national capital'' in this chapter, they apply equally to
    ``Federal capital.''
                ``Depreciation is not a practical alternative for the
              Congress and the administration to use in making decisions on
              the appropriate level of spending intended to enhance the
              nation's long-term economic growth for several reasons.
              Currently, the law requires agencies to have budget authority
              before they can obligate or spend funds. Unless the full
              amount of budget authority is appropriated up front, the
              ability to control decisions when total resources are
              committed to a particular use is reduced. Appropriating only
              annual depreciation, which is only a fraction of the total
              cost of an investment, raises this control issue.''\20\
    ---------------------------------------------------------------------------
      \20\ GAO, Budget Issues: Incorporating an Investment Component in the
    Federal Budget, GAO/AIMD-94-40 (November 1993), p. 11. GAO had made the
    same recommendation in earlier reports but with less extensive analysis.
    ---------------------------------------------------------------------------
      After further study of the role of depreciation in budgeting for
    national capital, GAO reiterated that conclusion in another study in
    1995.\21\ ``The greatest disadvantage . . . was that depreciation would
    result in a loss of budgetary control under an obligation-based
    budgeting system.''\22\ Although that study also focused primarily on
    what is termed ``national capital'' in this chapter, its analysis
    applies equally to ``Federal capital.'' In 1996 GAO expressly extended
    its conclusions to Federal capital as well. ``If depreciation were
    recorded in the federal budget in place of cash requirements for capital
    spending, this would undermine Congress' ability to control expenditures
    because only a small fraction of an asset's cost would be included in
    the year when a decision was made to acquire it.''\23\
    ---------------------------------------------------------------------------
      \21\ GAO, Budget Issues: The Role of Depreciation in Budgeting for
    Certain Federal Investments, GAO/AIMD-95-34 (February 1995), pp. 1 and
    19-20.
      \22\ Ibid., p. 17. Also see pp. 1-2 and 16-19.
      \23\ GAO, Budget Issues: Budgeting for Federal Capital, GAO/AIMD-97-5
    (November 1996), p. 28. Also see p. 4.
    ---------------------------------------------------------------------------

                         Investment in National Capital

    A Target for National Investment

      The Federal Government's investment in national capital has a much
    broader and more varied form than its investment in Federal capital. The
    Government's goal is to support and accelerate sustainable economic
    growth for the Nation as a whole and in some instances for specific
    regions or groups of people. The Government's investment concerns for
    the Nation are two-fold:
        The effect of its own investment in national capital on the
              output and income that the economy can produce.
        The effect of Federal taxation, borrowing, and other
              policies on private investment.
      In its 1993 report, Incorporating an Investment Component in the
    Federal Budget, the General Accounting Office (GAO) recommended
    establishing an investment component within the unified budget--but not
    a separate capital budget or the use of depreciation--for this type of
    investment.\24\ GAO defined this investment as ``federal spending,
    either direct or through grants, that is directly intended to enhance
    the private sector's long-term productivity.''\25\ To increase
    investment--both public and private--GAO recommended establishing
    targets for the level of Federal investment.\26\ Such a target for
    investment in national capital would focus attention on policies for
    growth, encourage a conscious decision about the overall level of
    growth-enhancing investment, and make it easier to set spending
    priorities in terms of policy goals for aggregate formation of national
    capital. GAO reiterated its recommendation in another report in
    1995.\27\
    ---------------------------------------------------------------------------
      \24\ Incorporating an Investment Component in the Federal Budget, pp.
    1-2, 9-10, and 15.
      \25\ Ibid., pp. 1 and 5.
      \26\ Ibid., pp. 2 and 13-16.
      \27\ The Role of Depreciation in Budgeting for Certain Federal
    Investments, pp. 2 and 19-20.

      Table 7-10.  UNIFIED BUDGET WITH NATIONAL INVESTMENT COMPONENT, 2003
                            (In billions of dollars)
    ------------------------------------------------------------------------

    ------------------------------------------------------------------------

    Receipts.................................................      2,048
    Outlays:
      National investment....................................        187
      Other..................................................      1,942
                                                              --------------
       Subtotal, outlays.....................................      2,128
                                                              --------------
      Surplus or deficit (-).................................        -80
    ------------------------------------------------------------------------

      Table 7-10 illustrates the unified budget reorganized as GAO
    recommends to have a separate component for investment in national
    capital. This component is roughly estimated to be $187 billion in 2003.
    It includes infrastructure outlays financed by Federal grants to State
    and local governments, such as highways and

    [[Page 152]]

    sewer projects, as well as direct Federal purchases of infrastructure,
    such as electric power generation equipment. It also includes intangible
    investment for nondefense research and development, for basic research
    financed through defense, and for education and training. Much of this
    expenditure consists of grants and credit assistance to State and local
    governments, nonprofit organizations, or individuals. Only 11 percent of
    national investment consists of assets to be owned by the Federal
    Government. Military investment and some other capital assets as defined
    previously are excluded, because that investment does not primarily
    enhance economic growth.

    A Capital Budget for National Investment

      Table 7-11 roughly illustrates what a capital budget and operating
    budget would look like under this definition of investment--although it
    must be emphasized that this is not GAO's recommendation. Some
    proponents of a capital budget would make spending decisions within the
    framework of such a capital budget and operating budget. But the
    limitations that apply to the use of depreciation in deciding on
    investment decisions for Federal capital apply even more strongly in
    deciding on investment decisions for national capital. Most national
    capital is neither owned nor controlled by the Federal Government. Such
    investments are sunk costs completely and can be controlled only by
    decisions made up front when the Government commits itself to the
    expenditure.\28\
    ---------------------------------------------------------------------------
      \28\ GAO's conclusions about the loss of budgetary control that were
    quoted at the end of the section on Federal capital came from studies
    that predominantly considered ``national capital.''

     Table 7-11.  CAPITAL, OPERATING, AND UNIFIED BUDGETS: NATIONAL CAPITAL,
                                   2003\1\ \2\
                            (In billions of dollars)
    ------------------------------------------------------------------------

    ------------------------------------------------------------------------

                        Operating Budget

    Receipts................................................       2,016
    Expenses:
      Depreciation \3\......................................          81
      Other.................................................       1,942
                                                             ---------------
        Subtotal, expenses..................................       2,023
                                                             ---------------
      Surplus or deficit (-)................................          -6

                         Capital Budget

    Income:
      Depreciation \3\......................................          81
      Earmarked tax receipts \4\............................          32
                                                             ---------------
        Subtotal, income....................................         113
    Capital expenditures....................................         187
                                                             ---------------
      Surplus or deficit (-)................................         -74

                         Unified Budget

    Receipts................................................       2,048
    Outlays.................................................       2,128
                                                             ---------------
        Surplus or deficit (-)..............................         -80
    ------------------------------------------------------------------------
    \1\ For the purpose of this illustrative table only, education and
      training outlays are arbitrarily depreciated over 30 years by the
      straight-line method. This differs from the treatment of education and
      training elsewhere in this chapter and in Chapter 3. All depreciation
      estimtes are subject to the limitations explained in Part II of this
      chapter. Depreciation is measured in terms of current cost, not
      historical cost.
    \2\ The details of this table do not add to the totals in every case due
      to rounding.
    \3\ Excludes depreciation on capital financed by earmarked tax receipts
      allocated to the capital budget.
    \4\ Consists of tax receipts of the highway and airport and airways
      trust funds, less trust fund outlays for operating expenditures. These
      are user charges earmarked for financing capital expenditures.

      In addition to these basic limitations, the definition of investment
    is more malleable for national capital than Federal capital. Many
    programs promise long-term intangible benefits to the Nation, and
    depreciation rates are much more difficult to determine for intangible
    investment such as research and education than they are for physical
    investment such as highways and office buildings. These and other
    definitional questions are hard to resolve. The answers could
    significantly affect budget decisions, because they would determine
    whether the budget would record all or only a small part of the cost of
    a decision when policy makers were comparing the budgetary cost of a
    project with their judgment of its benefits. The process of reaching an
    answer with a capital budget would open the door to manipulation,
    because there would be an incentive to make the operating expenses and
    deficit look smaller by classifying outlays as investment and using low
    depreciation rates. This would ``justify'' more spending by the program
    or the Government overall.\29\
    ---------------------------------------------------------------------------
      \29\These problems are also pointed out in GAO, Incorporating an
    Investment Component in the Federal Budget, pp. 11-12. They are
    discussed more extensively with respect to highway grants, research and
    development, and human capital in GAO, The Role of Depreciation in
    Budgeting for Certain Federal Investments, pp. 11-14. GAO found no
    government that budgets for the depreciation of human capital or
    research and development (except that New Zealand budgets for the
    depreciation of research and development if it results in a product that
    is intended to be used or marketed).
    ---------------------------------------------------------------------------

           A Capital Budget and the Analysis of Saving and Investment

      Data from the Federal budget may be classified in many different ways,
    including analyses of the Government's direct effects on saving and
    investment. As Parts I and II of this chapter have shown, the unified
    budget provides data that can be used to calculate Federal investment
    outlays and federally financed capital stocks. However, the budget
    totals themselves do not make this distinction. In particular, the
    budget surplus or deficit does not measure the Government's contribution
    to the nation's net saving (i.e., saving net of depreciation). A capital
    budget, it is sometimes contended, is needed for this purpose.
      This purpose, however, is fulfilled by the Federal sector of the
    national income and product accounts (NIPA) for Government purchases of
    structures, equipment, and software. The NIPA Federal sector measures
    the impact of Federal current receipts, current expenditures, and the
    current surplus or deficit on the national economy. It is part of an
    integrated set of measures of aggregate U.S. economic activity that is
    prepared by the Bureau of Economic Analysis in the Department of
    Commerce in order to measure gross domestic product (GDP), the income
    generated in its production, and many other variables used in
    macroeconomic analysis. The NIPA Federal sector for recent periods is
    published monthly in the Survey of Current Business with separate
    releases for historical data. Estimates for the President's proposed
    budget through the budget year

    [[Page 153]]

    are normally published in the budget documents. The NIPA translation of
    the budget, rather than the budget itself, is ordinarily used by
    economists to analyze the effect of Government fiscal policy on the
    aggregate economy.\30\
    ---------------------------------------------------------------------------
      \30\ See chapter 17 of this volume, ``National Income and Product
    Accounts,'' for the NIPA current account of the Federal Government based
    on the budget actuals and estimates for 2001-03, and for a discussion of
    the NIPA Federal sector and its relationship to the budget.
    ---------------------------------------------------------------------------
      The NIPA Federal sector distinguishes between government purchases of
    goods and services for consumption and investment.\31\ It is a current
    account or an operating account for the Federal Government and
    accordingly shows current receipts and current expenditures. It excludes
    expenditures for structures, equipment, and software owned by the
    Federal Government; it includes depreciation on the federally owned
    stock of structures, equipment, and software as a proxy for the services
    of capital assets consumed in production and thus as part of the Federal
    Government's current expenditures. It applies this treatment to a
    comprehensive definition of federally owned structures, equipment, and
    software, both defense and nondefense, similar to the definition of
    Federal capital in this chapter.\32\
    ---------------------------------------------------------------------------
      \31\ This distinction is also made in the national accounts of most
    other countries and in the System of National Accounts (SNA), which is
    guidance prepared by the United Nations and other international
    organizations. Definitions of investment vary. For example, the SNA does
    not include the purchase of military equipment as investment.
      \32\ The treatment of investment (except for the recent recognition of
    software) in the NIPA Federal sector is explained in Survey of Current
    Business, ``Preview of the Comprehensive Revision of the National Income
    and Product Accounts: Recognition of Government Investment and
    Incorporation of a New Methodology for Calculating Depreciation''
    (September 1995), pp. 33-39. As is the case of private sector
    investment, government investment does not include expenditures on
    research and development or on education and training. Government
    purchases of structures, equipment, and software remain a part of gross
    domestic product (GDP) as a separate component. The NIPA State and local
    government account is defined in the same way and includes depreciation
    on structures, equipment, and software owned by State and local
    governments that were financed by Federal grants as well as by their own
    resources. Depreciation is not displayed as a separate line item in the
    summary tables of the government account: depreciation on general
    government capital assets is included as part of government
    ``consumption expenditures''; and depreciation on the capital assets of
    government enterprises is subtracted in calculating the ``current
    surplus of government enterprises.''
    ---------------------------------------------------------------------------
      The NIPA ``current surplus or deficit'' of the Federal Government thus
    measures the Government's direct contribution to the Nation's net saving
    (given the definition of investment that is employed). The 2001 Federal
    Government current account surplus was reduced $1.3 billion by including
    depreciation rather than gross investment, because depreciation of
    federally owned structures, equipment, and software was more than gross
    investment. The 2003 Federal current account surplus is estimated to be
    increased $2.5 billion.\33\ A capital budget is not needed to capture
    this effect.
    ---------------------------------------------------------------------------
      \33\ See actuals and estimates for 2001-03 in Table 17-2 of chapter 17
    of this volume, ``National Income and Product Accounts.''
    ---------------------------------------------------------------------------

                      Borrowing to Finance a Capital Budget

      A further issue traditionally raised by a capital budget is the
    financing of capital expenditures. Some have argued that the Government
    ought to balance the operating budget and borrow to finance the capital
    budget--capital expenditures less depreciation. The rationale is that if
    the Government borrows for net investment and the rate of return exceeds
    the interest rate, the additional debt does not add a burden onto future
    generations. Instead, the burden of paying interest on the debt and
    repaying its principal is spread over the generations that will benefit
    from the investment. The additional debt is ``justified'' by the
    additional assets.
      As this argument has traditionally been framed, it might appear as
    though it did not always apply. The Government has had a large surplus
    for several years, which was mostly used to repay Federal debt held by
    the public; and although a deficit is estimated in 2002 and 2003,
    largely due to the recession and the response to the terrorist attacks,
    the budget estimates a return to surplus in 2005. When the Government
    has a surplus, additional expenditure is generally financed by repaying
    less debt rather than borrowing more. However, the argument about
    borrowing for investment is fundamentally about the proper target for
    Federal debt and whether that target should be higher if the Government
    has net investment. If the Government has deficits financed by selling
    debt, should it borrow more than otherwise because of its net
    investment? Or if the Government has surpluses used to repay debt,
    should it repay less than otherwise because of its net investment? This
    section follows the traditional way of discussing the issue by referring
    to ``borrowing to finance net investment.'' However, for the present
    analysis, ``borrowing more'' is equivalent to ``repaying less debt.''
      This argument about financing capital expenditures is at best a
    justification to borrow to finance net investment, after depreciation is
    subtracted from gross outlays, not to borrow to finance gross
    investment. To the extent that capital is used up during the year, there
    are no additional assets to justify additional debt. If the Government
    borrows to finance gross investment, the additional debt exceeds the
    additional capital assets. The Government is thus adding onto the amount
    of future debt service without providing the additional capital that
    would produce the additional income needed to service that debt.
      This justification, furthermore, requires that depreciation be
    measured in terms of the current replacement cost, not the historical
    cost. Current cost depreciation is needed in order to measure all
    activities in the budget on a consistent basis, since other outlays and
    receipts are automatically measured in the prices of the current year.
    Current cost depreciation is also needed to obtain a valid measure of
    net investment. This requires that the addition to the capital stock
    from new purchases and the subtraction from depreciation on existing
    assets both be measured in the prices of the same year. When prices
    change, historical cost depreciation does not measure the extent to
    which the capital stock is used up each year.
      As a broad generalization, Tables 7-9 and 7-11 suggest that this
    rationale would currently justify some change in borrowing (or debt
    repayment) under the two capital budgets roughly illustrated in this
    chapter, but for Federal capital the change would not be much. For
    Federal capital, Table 7-9 indicates that current cost depreciation is
    less than gross investment for Federal capital--the capital budget
    deficit is $18 billion. The rationale of borrowing to finance net
    investment would

    [[Page 154]]

    justify the Federal Government borrowing this amount ($18 billion) and
    no more to finance its investment in Federal capital. For national
    capital, Table 7-11 indicates that current cost depreciation (plus the
    excise taxes earmarked to finance capital expenditures for highways and
    airports and airways \34\) is less than gross investment--the capital
    budget deficit is $74 billion. The rationale of borrowing to finance net
    investment would justify the Federal Government borrowing this amount
    ($74 billion) and no more to finance its investment in national
    capital.\35\
    ---------------------------------------------------------------------------
      \34\ The capital budget deficit would be about $17 billion larger if
    current cost depreciation were used instead of earmarked excise taxes
    for investment in highways and airports and airways.
      \35\ This discussion abstracts from non-budgetary transactions that
    affect Federal borrowing requirements, such as changes in the Treasury
    operating cash balance and the net financing disbursements of the direct
    loan and guaranteed loan financing accounts. See chapter 13 of this
    volume, ``Federal Borrowing and Debt,'' and the explanation of Table 13-
    2.
    ---------------------------------------------------------------------------
      Even with depreciation calculated in current cost, the rationale for
    borrowing to finance net investment is not persuasive. The Federal
    Government, unlike a business or household, is responsible not only for
    its own affairs but also for the general welfare of the Nation. To
    maintain and accelerate national economic growth and development, the
    Government needs to encourage private investment as well as its own
    national investment. A high level of net national saving is needed to
    meet the demographic and other challenges expected in the decades ahead.
      To the extent that the Government finances its own investment in a way
    that results in lower private investment, the net increase of total
    investment in the economy is less than the increase from the additional
    Federal capital outlays alone. The net increase in total investment is
    significantly less if the Federal investment is financed by borrowing
    than if it is financed by taxation, because borrowing primarily draws
    upon the saving available for private (and State and local government)
    investment whereas much of taxation instead comes out of private
    consumption. Therefore, the net effect of Federal investment on economic
    growth would be reduced if it were financed by borrowing. This would be
    the result even if the rate of return on Federal investment was higher
    than the rate of return on private investment. For example, if a Federal
    investment that yielded a 15 percent rate of return crowded out private
    investment that yielded 10 percent, the net social return would still be
    positive but it would only be 5 percent.\36\
    ---------------------------------------------------------------------------
      \36\ GAO considered deficit financing of investment but did not
    recommend it. See Incorporating an Investment Component in the Federal
    Budget, pp. 12-13.
    ---------------------------------------------------------------------------
      The present budget estimates a deficit this year largely due to the
    recession and the response to the terrorist attacks, but it also
    estimates a return to surplus in 2005. This will prevent the Government
    from crowding out private investment once the economy is stronger. A
    capital budget is not a justification to relax the budget discipline
    that will contribute to this goal.

               Part IV: SUPPLEMENTAL PHYSICAL CAPITAL INFORMATION

      The Federal Capital Investment Program Information Act of 1984 (Title
    II of Public Law 98-501; hereafter referred to as the Act) requires that
    the budget include projections of Federal physical capital spending and
    information regarding recent assessments of public civilian physical
    capital needs. This section is submitted to fulfill that requirement.
      This part is organized in two major sections. The first section
    projects Federal outlays for public physical capital and the second
    section presents information regarding public civilian physical capital
    needs.

           Projections of Federal Outlays For Public Physical Capital

      Federal public physical capital spending is defined here to be the
    same as the ``major public physical capital investment'' category in
    Part I of this chapter. It covers spending for construction and
    rehabilitation, acquisition of major equipment, and other physical
    assets. This section excludes outlays for human capital, such as the
    conduct of education and training, and outlays for the conduct of
    research and development.
      The projections are done generally on a current services basis, which
    means they are based on 2002 enacted appropriations and adjusted for
    inflation in later years. The current services concept is discussed in
    Chapter 15, ``Current Services Estimates.''
      Federal public physical capital spending was $144.8 billion in 2001
    and is projected to increase to $190.0 billion by 2011 on a current
    services basis. The largest components are for national defense and for
    roadways and bridges, which together accounted for more than three-
    fifths of Federal public physical capital spending in 2001.
      Table 7-12 shows projected current services outlays for Federal
    physical capital by the major categories specified in the Act. Total
    Federal outlays for transportation-related physical capital were $38.9
    billion in 2001, and current services outlays are estimated to increase
    to $53.2 billion by 2011. Outlays for nondefense housing and buildings
    were $13.5 billion in 2001 and are estimated to be $18.4 billion in
    2011. Physical capital outlays for other nondefense categories were
    $28.7 billion in 2001 and are projected to be $38.5 billion by 2011. For
    national defense, this spending was $63.7 billion in 2001 and is
    estimated on a current services basis to be $79.9 billion in 2011.
      Table 7-13 shows current services projections on a constant dollar
    basis, using fiscal year 1996 as the base year.

    [[Page 155]]

                                     Table 7-12.  CURRENT SERVICES OUTLAY PROJECTIONS FOR FEDERAL PHYSICAL CAPITAL SPENDING
                                                                    (In billions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                 Estimate
                                                                       2001  -------------------------------------------------------------------------------
                                                                      Actual   2002    2003    2004    2005    2006    2007    2008    2009    2010    2011
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Nondefense:
      Transportation-related categories:
        Roadways and bridges........................................    27.2    28.9    30.9    32.1    33.0    33.8    34.6    35.3    36.0    36.7    37.4
         Airports and airway facilities.............................     4.4     5.3     6.0     6.4     6.7     7.0     7.1     7.2     7.4     7.5     7.7
         Mass transportation systems................................     6.8     6.2     6.4     6.4     6.4     6.2     6.9     7.1     7.2     7.3     7.5
         Railroads..................................................     0.6     0.9     0.7     0.7     0.7     0.7     0.7     0.7     0.7     0.8     0.8
                                                                     ---------------------------------------------------------------------------------------
         Subtotal, transportation...................................    38.9    41.3    44.0    45.7    46.7    47.8    49.3    50.3    51.3    52.3    53.2
      Housing and buildings categories:.............................
         Federally assisted housing.................................     7.9     9.1     8.2     8.7     8.8     9.3     8.4     8.4     8.6     8.8     9.0
         Hospitals..................................................     1.8     1.9     2.0     2.1     2.2     2.3     2.3     2.4     2.4     2.5     2.6
         Public buildings \1\.......................................     3.8     5.6     5.8     6.4     6.1     6.2     6.3     6.4     6.5     6.7     6.8
                                                                     ---------------------------------------------------------------------------------------
         Subtotal, housing and buildings............................    13.5    16.5    15.9    17.1    17.1    17.8    17.0    17.2    17.6    18.0    18.4

      Other nondefense categories:
         Wastewater treatment and related facilities................     3.3     3.1     3.3     3.3     3.4     3.4     3.6     3.7     3.7     3.8     3.8
         Water resources projects...................................     4.8     4.9     4.7     4.7     4.9     5.1     5.1     5.2     5.3     5.5     5.6
         Space and communications facilities........................     6.1     4.9     5.3     5.6     5.7     5.7     6.1     6.2     6.5     6.8     6.5
         Energy programs............................................     1.6     2.1     1.9     1.9     1.9     2.0     2.0     2.0     2.0     2.1     2.1
         Community development programs.............................     5.6     6.1     7.0     8.4     8.3     8.2     8.3     8.4     8.5     8.7     8.9
         Other nondefense...........................................     7.3     9.3     9.2     9.8     9.8    10.4    10.6    10.9    11.1    11.4    11.7
                                                                     ---------------------------------------------------------------------------------------
         Subtotal, other nondefense.................................    28.7    30.5    31.5    33.8    34.0    34.7    35.6    36.4    37.3    38.2    38.5
                                                                     ---------------------------------------------------------------------------------------
         Subtotal, nondefense.......................................    81.2    88.3    91.4    96.6    97.8   100.3   101.9   104.0   106.1   108.5   110.1

    National defense................................................    63.7    69.1    69.9    71.6    73.4    74.8    76.0    75.7    77.0    78.4    79.9
                                                                     ---------------------------------------------------------------------------------------
    Total...........................................................   144.8   157.4   161.3   168.2   171.1   175.1   177.9   179.6   183.2   186.9   190.0
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\ Excludes outlays for public buildings that are included in other categories in this table.

    [[Page 156]]

                 Table 7-13.  CURRENT SERVICES OUTLAY PROJECTIONS FOR FEDERAL PHYSICAL CAPITAL SPENDING
                                         (In billions of constant 1996 dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                             Estimate
                                                                       2001  ---------------------------------------
                                                                      Actual   2002    2003    2004    2005    2006
    ----------------------------------------------------------------------------------------------------------------
    Nondefense:
      Transportation-related categories:
         Roadways and bridges.......................................    24.8    25.8    26.9    27.3    27.3    27.3
        Airports and airway facilities..............................     4.2     5.0     5.4     5.7     5.8     6.0
         Mass transportation systems................................     6.2     5.5     5.6     5.5     5.3     5.0
        Railroads...................................................     0.6     0.9     0.7     0.7     0.6     0.6
                                                                     -----------------------------------------------
          Subtotal, transportation..................................    35.7    37.1    38.6    39.1    39.0    39.0
      Housing and buildings categories:
        Federally assisted housing..................................     7.3     8.2     7.1     7.4     7.3     7.6
        Hospitals...................................................     1.8     1.8     1.9     2.0     2.0     2.0
        Public buildings \1\........................................     3.7     5.4     5.5     5.9     5.7     5.6
                                                                     -----------------------------------------------
          Subtotal, housing and buildings...........................    12.8    15.4    14.5    15.3    15.0    15.2

      Other nondefense categories:
         Wastewater treatment and related facilities................     3.0     2.8     2.8     2.8     2.8     2.8
         Water resources projects...................................     4.8     4.8     4.5     4.5     4.5     4.6
         Space and communications facilities........................     6.1     4.8     5.0     5.3     5.2     5.2
         Energy programs............................................     1.5     2.0     1.9     1.8     1.8     1.8
         Community development programs.............................     5.1     5.5     6.1     7.2     6.9     6.6
        Other nondefense............................................     7.2     8.9     8.7     9.1     8.9     9.2
                                                                     -----------------------------------------------
          Subtotal, other nondefense................................    27.8    28.8    29.1    30.6    30.2    30.2
                                                                     -----------------------------------------------
        Subtotal, nondefense........................................    76.3    81.3    82.2    85.0    84.2    84.4

    National defense................................................    65.2    69.2    68.8    69.2    69.7    69.8

                                                                     -----------------------------------------------
    Total...........................................................   141.5   150.5   151.0   154.3   153.9  154.1
    ----------------------------------------------------------------------------------------------------------------
    \1\ Excludes outlays for public buildings that are included in other categories in this table.

                    Public Civilian Capital Needs Assessments

      The Act requires information regarding the state of major Federal
    infrastructure programs, including highways and bridges, airports and
    airway facilities, mass transit, railroads, federally assisted housing,
    hospitals, water resources projects, and space and communications
    investments. Funding levels, long-term projections, policy issues, needs
    assessments, and critiques, are required for each category.
      Capital needs assessments change little from year to year, in part due
    to the long-term nature of the facilities themselves, and in part due to
    the consistency of the analytical techniques used to develop the
    assessments and the comparatively steady but slow changes in underlying
    demographics. As a result, the practice has arisen in reports in
    previous years to refer to earlier discussions, where the relevant
    information had been carefully presented and changes had been minimal.
      The needs assessment material in reports of earlier years is
    incorporated this year largely by reference to earlier editions and by
    reference to other needs assessments. The needs analyses, their major
    components, and their critical evaluations have been fully covered in
    past Supplements, such as the 1990 Supplement to Special Analysis D.
      It should be noted that the needs assessment data referenced here have
    not been determined on the basis of cost-benefit analysis. Rather, the
    data reflect the level of investment necessary to meet a predefined
    standard (such as maintenance of existing highway conditions). The
    estimates do not address whether the benefits of each investment would
    actually be greater than its cost or whether there are more cost-
    effective alternatives to capital investment, such as initiatives to
    reduce demand or use existing assets more efficiently. Before investing
    in physical capital, it is necessary to compare the cost of each project
    with its estimated benefits, within the overall constraints on Federal
    spending.

    [[Page 157]]

                             Significant Factors Affecting Infrastructure Needs Assessments

                                                        Highways

    1. Projected annual average growth in travel to the year 2017.  2.16 percent
    2. Annual cost to maintain 1997 physical conditions on          $50.8 billion (1997 dollars)
     highways.....................................................
    3. Annual cost to maintain 1997 physical conditions on bridges  $5.8 billion (1997 dollars)

                                             Airports and Airway Facilities

    1. Airports in the National Plan of Integrated Airport Systems  528
     with scheduled passenger traffic.............................
    2. Air traffic control towers.................................  451
    3. Airport development eligible under airport improvement       $29.7 billion ($9.4 billion for capacity) (1992
     program for period 1993-1997.................................   dollars)

                                               Mass Transportation Systems

    1. Yearly cost to maintain condition and performance of rail    $7.7 billion (1997 dollars)
     facilities over a period of 20 years.........................
    2. Yearly cost to replace and maintain the urban, rural, and    $3.1 billion (1997 dollars)
     special services bus fleet and facilities....................

                                                  Wastewater Treatment

    1. Total remaining needs of sewage treatment facilities.......  $128 billion (1996 dollars)
    2. Total Federal expenditures under the Clean Water Act of      $79 billion
     1972 through 2001.
    3. The population served by centralized treatment facilities:   99 percent
     percentage that benefits from at least secondary sewage
     treatment systems............................................
    4. States and territories served by State Revolving Funds.....  51

                                                         Housing

    1. Total unsubsidized very low income renter households with
     worst case needs (4.9 million*)
      A. In severely substandard units............................  0.5 million
      B. With a rent burden greater than 50 percent...............  4.6 million

    * The total is less than the sum because some renter families
     have both problems.

                                   Indian Health Service (IHS) Health Care Facilities

    1. IHS hospital occupancy rates (2000)........................  39.9 percent
    2. Average length of stay, IHS hospitals (days) (2001)........  4.1
    3. Hospital admissions (2001).................................  63,560
    4. Outpatient visits (2001)...................................  7,772,926
    5. Eligible population (2001).................................  1,540,129

                                  Department of Veterans Affairs (VA) Hospitals (2002)
    1. Medical Centers............................................  172
    2. Outpatient clinics.........................................  852
    3. Domiciliaries..............................................  43
    4. Vet centers................................................  206
    5. Nursing homes..............................................  137

                                                     Water Resources

       Water resources projects include navigation (deepwater ports and inland waterways); flood and storm damage
    protection; irrigation; hydropower; municipal and industrial water supply; recreation; fish and wildlife
    mitigation, enhancement, and restoration; and soil conservation.
      Potential water resources investment needs typically consist of the set of projects that pass both a benefit-
    cost test for economic feasibility and a test for environmental acceptability. In the case of fish and wildlife
    mitigation or restoration projects, the set of eligible projects includes those that pass a cost-effectiveness
    test.

                     Investment Needs Assessment References

    General

      U.S. Advisory Commission on Intergovernmental Relations (ACIR). High
    Performance Public Works: A New Federal Infrastructure Investment
    Strategy for America, Washington, D.C., 1993.
      U.S. Advisory Commission on Intergovernmental Relations (ACIR). Toward
    a Federal Infrastructure Strategy: Issues and Options, A-120,
    Washington, D.C., 1992.
      U.S. Army Corps of Engineers, Living Within Constraints: An Emerging
    Vision for High Performance Public Works. Concluding Report of the
    Federal Infrastructure Strategy Programs. Institute for Water Resources,
    Alexandria, VA, 1995
      U.S. Army Corps of Engineers, A Consolidated Performance Report on the
    Nation's Public Works: An Update. Report of the Federal Infrastructure
    Strategy Program. Institute for Water Resources, Alexandria, VA, 1995.

     Surface Transportation

      Department of Transportation. 1999 Status of the Nation's Surface
    Transportation System: Conditions and

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    Performance: Report to Congress. 2000. This report discusses roads,
    bridges, and mass transit.

     Airports and Airways Facilities

      Federal Aviation Administration. National Airspace Systems Capital
    Investment Plan: 2003-2007, February 2002.

     Federally Assisted Housing

      U.S. Department of Housing and Urban Development, Office of Policy
    Planning and Development, Tabulations of 1993 American Housing Survey.

     Indian Health Care Facilities

      Indian Health Service. Priority System for Health Facility
    Construction (Document Number 0820B or 2046T). September 19, 1981.
      FY 2001 Indian Health Service and Tribal Hospital Inpatient
    Statistics.
      Office of Audit, Office of Inspector General, U.S. Department of
    Health and Human Services. Review of Health Facilities Construction
    Program. Indian Health Service Proposed Replacement Hospital at
    Shiprock, New Mexico (CIN A-09-88-00008). June, 1989.
      Office of Technology Assessment. Indian Health Care (OTA 09H 09290).
    April, 1986.

     Wastewater Treatment

      Environmental Protection Agency, Office of Water. 1996 Needs Survey
    Report to Congress. (EPA 832-R-87-003).

     Water Resources

      National Council on Public Works Improvement. The Nation's Public
    Works, Washington, D.C., May, 1987. See ``Defining the Issues--Needs
    Studies,'' Chapter II; Report on Water Resources, Shilling et al., and
    Report on Water Supply, Miller Associates.
      Frederick, Kenneth D., Balancing Water Demands with Supplies: The Role
    of Demand Management in a World of Increasing Scarcity, Report for the
    International Bank of Reconstruction and Development, Washington, D.C.
    1992.