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

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


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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

[[Page 138]]

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

[[Page 139]]

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

[[Page 140]]

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


[[Page 141]]

                                     

               Part II: FEDERALLY FINANCED CAPITAL STOCKS

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

                      The Stock of Physical Capital

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

[[Page 142]]



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

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

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

              The Stock of Research and Development Capital

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

[[Page 143]]

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

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

                     The Stock of Education Capital

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

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

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

                       Note on Estimating Methods

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

[[Page 144]]

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

[[Page 145]]

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

                         Physical Capital Stocks

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

                 Research and Development Capital Stocks

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

[[Page 146]]

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

                        Education Capital Stocks

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

      Part III: ALTERNATIVE CAPITAL BUDGET AND CAPITAL EXPENDITURE 
                              PRESENTATIONS

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

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

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

                      Investment in Federal Capital

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

[[Page 147]]

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

A Capital Budget for Capital Assets

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

[[Page 148]]

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

  Table 7-9.  CAPITAL, OPERATING, AND UNIFIED BUDGETS: FEDERAL CAPITAL,
                              2003 \1\ \2\
                        (In billions of dollars)
------------------------------------------------------------------------
 
------------------------------------------------------------------------
 
                    Operating Budget
 
Receipts................................................       2,048
Expenses:
  Depreciation..........................................          82
  Other.................................................       2,028
                                                         ---------------
    Subtotal, expenses..................................       2,111
                                                         ---------------
  Surplus or deficit (-)................................         -63
 
                     Capital Budget
 
Income: depreciation....................................          82
Capital expenditures....................................         100
                                                         ---------------
  Surplus or deficit (-)................................         -18
 
                     Unified Budget
 
Receipts................................................       2,048
Outlays.................................................       2,128
                                                         ---------------
  Surplus or deficit (-)................................         -80
------------------------------------------------------------------------
\1\ Historical data to estimate the capital stocks and calculate
  depreciation are not readily available for Federal capital.
  Depreciation estimates were based on the assumption that outlays for
  Federal capital were a constant percentage of the larger categor
\2\ The details of this table do not add to the totals in every case due
  to rounding.

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

Budget Discipline and a Capital Budget

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

[[Page 149]]

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

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

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

[[Page 150]]

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

[[Page 151]]

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

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

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

                     Investment in National Capital

A Target for National Investment

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

  Table 7-10.  UNIFIED BUDGET WITH NATIONAL INVESTMENT COMPONENT, 2003
                        (In billions of dollars)
------------------------------------------------------------------------
 
------------------------------------------------------------------------
 
Receipts.................................................      2,048
Outlays:
  National investment....................................        187
  Other..................................................      1,942
                                                          --------------
   Subtotal, outlays.....................................      2,128
                                                          --------------
  Surplus or deficit (-).................................        -80
------------------------------------------------------------------------

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

[[Page 152]]

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

A Capital Budget for National Investment

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

 Table 7-11.  CAPITAL, OPERATING, AND UNIFIED BUDGETS: NATIONAL CAPITAL,
                               2003\1\ \2\
                        (In billions of dollars)
------------------------------------------------------------------------
 
------------------------------------------------------------------------
 
                    Operating Budget
 
Receipts................................................       2,016
Expenses:
  Depreciation \3\......................................          81
  Other.................................................       1,942
                                                         ---------------
    Subtotal, expenses..................................       2,023
                                                         ---------------
  Surplus or deficit (-)................................          -6
 
                     Capital Budget
 
Income:
  Depreciation \3\......................................          81
  Earmarked tax receipts \4\............................          32
                                                         ---------------
    Subtotal, income....................................         113
Capital expenditures....................................         187
                                                         ---------------
  Surplus or deficit (-)................................         -74
 
                     Unified Budget
 
Receipts................................................       2,048
Outlays.................................................       2,128
                                                         ---------------
    Surplus or deficit (-)..............................         -80
------------------------------------------------------------------------
\1\ For the purpose of this illustrative table only, education and
  training outlays are arbitrarily depreciated over 30 years by the
  straight-line method. This differs from the treatment of education and
  training elsewhere in this chapter and in Chapter 3. All depreciation
  estimtes are subject to the limitations explained in Part II of this
  chapter. Depreciation is measured in terms of current cost, not
  historical cost.
\2\ The details of this table do not add to the totals in every case due
  to rounding.
\3\ Excludes depreciation on capital financed by earmarked tax receipts
  allocated to the capital budget.
\4\ Consists of tax receipts of the highway and airport and airways
  trust funds, less trust fund outlays for operating expenditures. These
  are user charges earmarked for financing capital expenditures.

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

       A Capital Budget and the Analysis of Saving and Investment

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

[[Page 153]]

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

                  Borrowing to Finance a Capital Budget

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

[[Page 154]]

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

           Part IV: SUPPLEMENTAL PHYSICAL CAPITAL INFORMATION

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

       Projections of Federal Outlays For Public Physical Capital

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

[[Page 155]]



                                 Table 7-12.  CURRENT SERVICES OUTLAY PROJECTIONS FOR FEDERAL PHYSICAL CAPITAL SPENDING
                                                                (In billions of dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                             Estimate
                                                                   2001  -------------------------------------------------------------------------------
                                                                  Actual   2002    2003    2004    2005    2006    2007    2008    2009    2010    2011
--------------------------------------------------------------------------------------------------------------------------------------------------------
Nondefense:
  Transportation-related categories:
    Roadways and bridges........................................    27.2    28.9    30.9    32.1    33.0    33.8    34.6    35.3    36.0    36.7    37.4
     Airports and airway facilities.............................     4.4     5.3     6.0     6.4     6.7     7.0     7.1     7.2     7.4     7.5     7.7
     Mass transportation systems................................     6.8     6.2     6.4     6.4     6.4     6.2     6.9     7.1     7.2     7.3     7.5
     Railroads..................................................     0.6     0.9     0.7     0.7     0.7     0.7     0.7     0.7     0.7     0.8     0.8
                                                                 ---------------------------------------------------------------------------------------
     Subtotal, transportation...................................    38.9    41.3    44.0    45.7    46.7    47.8    49.3    50.3    51.3    52.3    53.2
  Housing and buildings categories:.............................
     Federally assisted housing.................................     7.9     9.1     8.2     8.7     8.8     9.3     8.4     8.4     8.6     8.8     9.0
     Hospitals..................................................     1.8     1.9     2.0     2.1     2.2     2.3     2.3     2.4     2.4     2.5     2.6
     Public buildings \1\.......................................     3.8     5.6     5.8     6.4     6.1     6.2     6.3     6.4     6.5     6.7     6.8
                                                                 ---------------------------------------------------------------------------------------
     Subtotal, housing and buildings............................    13.5    16.5    15.9    17.1    17.1    17.8    17.0    17.2    17.6    18.0    18.4
 
  Other nondefense categories:
     Wastewater treatment and related facilities................     3.3     3.1     3.3     3.3     3.4     3.4     3.6     3.7     3.7     3.8     3.8
     Water resources projects...................................     4.8     4.9     4.7     4.7     4.9     5.1     5.1     5.2     5.3     5.5     5.6
     Space and communications facilities........................     6.1     4.9     5.3     5.6     5.7     5.7     6.1     6.2     6.5     6.8     6.5
     Energy programs............................................     1.6     2.1     1.9     1.9     1.9     2.0     2.0     2.0     2.0     2.1     2.1
     Community development programs.............................     5.6     6.1     7.0     8.4     8.3     8.2     8.3     8.4     8.5     8.7     8.9
     Other nondefense...........................................     7.3     9.3     9.2     9.8     9.8    10.4    10.6    10.9    11.1    11.4    11.7
                                                                 ---------------------------------------------------------------------------------------
     Subtotal, other nondefense.................................    28.7    30.5    31.5    33.8    34.0    34.7    35.6    36.4    37.3    38.2    38.5
                                                                 ---------------------------------------------------------------------------------------
     Subtotal, nondefense.......................................    81.2    88.3    91.4    96.6    97.8   100.3   101.9   104.0   106.1   108.5   110.1
 
National defense................................................    63.7    69.1    69.9    71.6    73.4    74.8    76.0    75.7    77.0    78.4    79.9
                                                                 ---------------------------------------------------------------------------------------
Total...........................................................   144.8   157.4   161.3   168.2   171.1   175.1   177.9   179.6   183.2   186.9   190.0 
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Excludes outlays for public buildings that are included in other categories in this table.


[[Page 156]]


             Table 7-13.  CURRENT SERVICES OUTLAY PROJECTIONS FOR FEDERAL PHYSICAL CAPITAL SPENDING
                                     (In billions of constant 1996 dollars)
----------------------------------------------------------------------------------------------------------------
                                                                                         Estimate
                                                                   2001  ---------------------------------------
                                                                  Actual   2002    2003    2004    2005    2006
----------------------------------------------------------------------------------------------------------------
Nondefense:
  Transportation-related categories:
     Roadways and bridges.......................................    24.8    25.8    26.9    27.3    27.3    27.3
    Airports and airway facilities..............................     4.2     5.0     5.4     5.7     5.8     6.0
     Mass transportation systems................................     6.2     5.5     5.6     5.5     5.3     5.0
    Railroads...................................................     0.6     0.9     0.7     0.7     0.6     0.6
                                                                 -----------------------------------------------
      Subtotal, transportation..................................    35.7    37.1    38.6    39.1    39.0    39.0
  Housing and buildings categories:
    Federally assisted housing..................................     7.3     8.2     7.1     7.4     7.3     7.6
    Hospitals...................................................     1.8     1.8     1.9     2.0     2.0     2.0
    Public buildings \1\........................................     3.7     5.4     5.5     5.9     5.7     5.6
                                                                 -----------------------------------------------
      Subtotal, housing and buildings...........................    12.8    15.4    14.5    15.3    15.0    15.2
 
  Other nondefense categories:
     Wastewater treatment and related facilities................     3.0     2.8     2.8     2.8     2.8     2.8
     Water resources projects...................................     4.8     4.8     4.5     4.5     4.5     4.6
     Space and communications facilities........................     6.1     4.8     5.0     5.3     5.2     5.2
     Energy programs............................................     1.5     2.0     1.9     1.8     1.8     1.8
     Community development programs.............................     5.1     5.5     6.1     7.2     6.9     6.6
    Other nondefense............................................     7.2     8.9     8.7     9.1     8.9     9.2
                                                                 -----------------------------------------------
      Subtotal, other nondefense................................    27.8    28.8    29.1    30.6    30.2    30.2
                                                                 -----------------------------------------------
    Subtotal, nondefense........................................    76.3    81.3    82.2    85.0    84.2    84.4
 
National defense................................................    65.2    69.2    68.8    69.2    69.7    69.8
 
                                                                 -----------------------------------------------
Total...........................................................   141.5   150.5   151.0   154.3   153.9  154.1
----------------------------------------------------------------------------------------------------------------
\1\ Excludes outlays for public buildings that are included in other categories in this table.

                Public Civilian Capital Needs Assessments

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

[[Page 157]]



                         Significant Factors Affecting Infrastructure Needs Assessments
 
                                                    Highways
 
1. Projected annual average growth in travel to the year 2017.  2.16 percent
2. Annual cost to maintain 1997 physical conditions on          $50.8 billion (1997 dollars)
 highways.....................................................
3. Annual cost to maintain 1997 physical conditions on bridges  $5.8 billion (1997 dollars)
 
                                         Airports and Airway Facilities
 
1. Airports in the National Plan of Integrated Airport Systems  528
 with scheduled passenger traffic.............................
2. Air traffic control towers.................................  451
3. Airport development eligible under airport improvement       $29.7 billion ($9.4 billion for capacity) (1992
 program for period 1993-1997.................................   dollars)
 
                                           Mass Transportation Systems
 
1. Yearly cost to maintain condition and performance of rail    $7.7 billion (1997 dollars)
 facilities over a period of 20 years.........................
2. Yearly cost to replace and maintain the urban, rural, and    $3.1 billion (1997 dollars)
 special services bus fleet and facilities....................
 
                                              Wastewater Treatment
 
1. Total remaining needs of sewage treatment facilities.......  $128 billion (1996 dollars)
2. Total Federal expenditures under the Clean Water Act of      $79 billion
 1972 through 2001.
3. The population served by centralized treatment facilities:   99 percent
 percentage that benefits from at least secondary sewage
 treatment systems............................................
4. States and territories served by State Revolving Funds.....  51
 
                                                     Housing
 
1. Total unsubsidized very low income renter households with
 worst case needs (4.9 million*)
  A. In severely substandard units............................  0.5 million
  B. With a rent burden greater than 50 percent...............  4.6 million
 
* The total is less than the sum because some renter families
 have both problems.
 
                               Indian Health Service (IHS) Health Care Facilities
 
1. IHS hospital occupancy rates (2000)........................  39.9 percent
2. Average length of stay, IHS hospitals (days) (2001)........  4.1
3. Hospital admissions (2001).................................  63,560
4. Outpatient visits (2001)...................................  7,772,926
5. Eligible population (2001).................................  1,540,129
 
                              Department of Veterans Affairs (VA) Hospitals (2002)
1. Medical Centers............................................  172
2. Outpatient clinics.........................................  852
3. Domiciliaries..............................................  43
4. Vet centers................................................  206
5. Nursing homes..............................................  137
 
                                                 Water Resources
 
   Water resources projects include navigation (deepwater ports and inland waterways); flood and storm damage
protection; irrigation; hydropower; municipal and industrial water supply; recreation; fish and wildlife
mitigation, enhancement, and restoration; and soil conservation.
  Potential water resources investment needs typically consist of the set of projects that pass both a benefit-
cost test for economic feasibility and a test for environmental acceptability. In the case of fish and wildlife
mitigation or restoration projects, the set of eligible projects includes those that pass a cost-effectiveness
test.
 

                                     

                 Investment Needs Assessment References

General

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

 Surface Transportation

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

[[Page 158]]

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.