[Analytical Perspectives]
[Special Analyses and Presentations]
[7. Federal Investment Spending and Capital Budgeting]
[From the U.S. Government Publishing Office, www.gpo.gov]
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SPECIAL ANALYSES AND PRESENTATIONS
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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
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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
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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
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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.
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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.
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Table 7-2. FEDERAL INVESTMENT BUDGET AUTHORITY AND OUTLAYS: DEFENSE AND NONDEFENSE PROGRAMS
(in millions of dollars)
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Estimate
Description 2001 -----------------------------------------------------------------------
Actual 2002 2003 2004 2005 2006 2007
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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
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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
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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
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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
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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
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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
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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
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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
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Subtotal, other nondefense................................ 27.8 28.8 29.1 30.6 30.2 30.2
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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
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Total........................................................... 141.5 150.5 151.0 154.3 153.9 154.1
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\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.
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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.