[Analytical Perspectives]
[Special Analyses and Presentations]
[7. Federal Investment Spending and Capital Budgeting]
[From the U.S. Government Printing Office, www.gpo.gov]
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SPECIAL ANALYSES AND PRESENTATIONS
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ANALYTICAL PERSPECTIVES
7. FEDERAL INVESTMENT SPENDING AND CAPITAL BUDGETING
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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 has displayed estimates of
budget authority as well as outlays and extends these estimates four
years beyond the budget year, to 2008.
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 24, ``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 $312.5 billion in 2002.
They are estimated to increase to $342.1 billion in 2003 and are
projected to increase further to $355.5 billion in 2004. Major Federal
investment outlays will comprise an estimated 16 percent of total
Federal outlays in 2004 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 $163.7 billion in 2004. 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 $70.0 billion in 2003 to $75.1 billion in
2004. Almost all of these outlays, or an estimated $68.1 billion in
2004, 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)
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Estimate
2002 -------------------
Actual 2003 2004
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Federal Investment
Major public physical capital investment:
Direct Federal:
National defense............................................................. 68.3 70.0 75.1
Nondefense................................................................... 29.5 31.3 29.9
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Subtotal, direct major public physical capital investment.................. 97.9 101.2 105.0
Grants to State and local governments............................................. 58.7 59.2 58.6
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Subtotal, major public physical capital investment.............................. 156.5 160.5 163.7
Conduct of research and development:
National defense............................................................... 48.2 57.1 62.9
Nondefense..................................................................... 39.7 44.7 49.2
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Subtotal, conduct of research and development................................ 87.9 101.8 112.1
Conduct of education and training:
Grants to State and local governments.......................................... 39.2 46.2 48.3
Direct Federal................................................................. 28.8 33.7 31.4
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Subtotal, conduct of education and training.................................. 68.0 79.9 79.7
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Major Federal investment outlays.................................................. 312.5 342.1 355.5
MEMORANDUM
Major Federal investment outlays:
National defense............................................................... 116.6 127.0 138.0
Nondefense..................................................................... 195.9 215.1 217.5
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Total, major Federal investment outlays...................................... 312.5 342.1 355.5
Miscellaneous physical investments:
Commodity inventories.......................................................... 0.7 -0.2 -0.2
Other physical investment (direct)............................................. 4.0 4.0 3.9
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Total, miscellaneous physical investment..................................... 4.6 3.8 3.7
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Total, Federal investment outlays, including miscellaneous physical investment.... 317.1 345.9 359.2
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Outlays for direct physical investment for nondefense purposes are
estimated to be $29.9 billion in 2004. These outlays include $16.8
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, and the Tennessee Valley Authority; 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 $12.7 billion in 2004. 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 $0.5
billion in 2004. 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 $58.6 billion in 2004. Almost two-thirds of these
outlays, or $39.0 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 estimated to be $112.1 billion in 2004.
These outlays 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, an estimated $62.9 billion, 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
estimated to be $49.2 billion in 2004. These are largely for the
National Aeronautics and Space Administration, 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 $79.7 billion in 2004. These
outlays add to the stock 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 $48.3 billion
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in 2004, three-fifths of the total. They include education programs for
the disadvantaged and the disabled, 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 $31.4
billion in 2004. 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. Sales are
estimated to exceed purchases by $0.2 billion in 2004.
Outlays for other miscellaneous physical investment are estimated to
be $3.9 billion in 2004. 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 2008. 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.
Table 7-2. FEDERAL INVESTMENT BUDGET AUTHORITY AND OUTLAYS: DEFENSE AND NONDEFENSE PROGRAMS
(in millions of dollars)
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Estimate
Description 2002 -----------------------------------------------------------------------
Actual 2003 2004 2005 2006 2007 2008
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NATIONAL DEFENSE
Major public physical investment:
Construction and rehabilitation......... BA 7,836 7,655 6,545 11,810 16,558 19,095 17,106
O 5,688 6,532 7,012 7,055 10,410 13,887 16,562
Acquisition of major equipment.......... BA 62,901 71,603 74,589 78,758 85,877 96,197 105,404
O 62,675 63,453 68,103 71,949 78,429 87,833 96,237
Purchase or sale of land and structures. BA -20 -28 -29 -31 -32 -32 -32
O -21 -28 -29 -31 -32 -32 -32
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Subtotal, major public physical BA 70,717 79,230 81,105 90,537 102,403 115,260 122,478
investment.
O 68,342 69,957 75,086 78,973 88,807 101,688 112,767
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Conduct of research and development....... BA 52,573 61,185 66,877 72,275 69,664 70,112 72,563
O 48,238 57,061 62,898 68,217 66,899 67,906 70,546
Conduct of education and training BA 8 8 8 8 8 8 9
(civilian).
O 8 8 2 7 9 9 9
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Subtotal, national defense investment... BA 123,298 140,423 147,990 162,820 172,075 185,380 195,050
O 116,588 127,026 137,986 147,197 155,715 169,603 183,322
NONDEFENSE
Major public physical investment:
Construction and rehabilitation:
Highways.............................. BA 33,672 30,557 29,615 30,442 31,518 32,422 33,334
O 30,117 28,442 28,583 29,701 30,443 31,378 32,199
Mass transportation................... BA 9,492 6,915 6,926 7,064 7,208 7,370 7,553
O 7,341 6,851 7,093 6,918 6,809 6,749 7,398
Rail transportation................... BA 21 21 1 1 1 1 1
O 14 18 55 27 8 7 1
Air transportation.................... BA 3,187 3,428 3,418 3,418 3,419 3,419 3,420
O 2,874 3,269 3,325 3,400 3,462 3,471 3,468
Community development block grants.... BA 7,783 4,732 4,732 4,820 4,919 5,027 5,154
O 5,429 6,650 6,129 5,281 4,645 4,777 4,925
Other community and regional BA 2,174 1,649 1,270 1,324 1,351 1,382 1,416
development.
O 1,647 1,740 1,682 1,629 1,529 1,499 1,484
Pollution control and abatement....... BA 4,025 3,629 3,455 3,519 3,590 3,671 3,765
O 3,783 4,033 3,663 3,640 3,595 3,646 3,732
Water resources....................... BA 4,134 2,967 2,861 2,908 2,969 3,039 3,118
O 3,827 3,420 3,153 2,833 3,126 3,079 3,152
Housing assistance.................... BA 7,223 7,091 6,850 6,978 7,119 7,278 7,462
O 7,746 7,737 8,249 8,098 8,588 8,533 7,680
Energy................................ BA 1,458 1,172 1,180 696 1,127 884 839
O 1,460 1,173 1,182 710 1,149 905 868
Veterans hospitals and other health... BA 1,713 2,242 1,585 1,613 1,643 1,679 1,721
O 1,831 1,834 2,166 2,271 2,297 2,335 2,390
Postal Service........................ BA 213 1,053 983 1,114 847 1,442 1,021
O 365 574 836 909 934 1,060 1,163
GSA real property activities.......... BA 1,571 1,705 1,413 1,439 1,469 1,501 1,539
O 1,046 1,709 1,477 1,409 2,435 2,663 3,279
Other programs........................ BA 8,290 6,964 5,992 6,302 6,385 6,540 6,707
O 7,676 8,418 6,607 6,524 6,506 6,531 6,706
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Subtotal, construction and BA 84,956 74,125 70,281 71,638 73,565 75,655 77,050
rehabilitation.
O 75,156 75,868 74,200 73,350 75,526 76,633 78,445
-----------------------------------------------------------------------------------
Acquisition of major equipment:
Air transportation.................... BA 4,872 2,986 2,927 2,982 3,042 3,109 3,188
O 2,638 4,365 3,465 3,144 2,937 3,227 3,301
Postal Service........................ BA 538 493 900 994 675 675 1,123
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O 651 512 642 704 683 719 786
Other................................. BA 8,075 7,736 8,446 8,433 8,631 8,818 9,079
O 8,054 8,086 8,639 8,741 9,014 9,252 9,512
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Subtotal, acquisition of major BA 13,485 11,215 12,273 12,409 12,348 12,602 13,390
equipment.
O 11,343 12,963 12,746 12,589 12,634 13,198 13,599
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Purchase or sale of land and structures. BA 628 497 352 19 340 338 339
O 761 631 498 130 609 637 720
Other physical assets (grants).......... BA 1,227 1,260 1,254 1,311 1,345 1,381 1,424
O 928 1,038 1,122 1,175 1,196 1,214 1,247
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Subtotal, major public physical BA 100,296 87,097 84,160 85,377 87,598 89,976 92,203
investment.
O 88,188 90,500 88,566 87,244 89,965 91,682 94,011
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Conduct of research and development:
General science, space and technology... BA 12,036 12,934 13,880 14,558 15,130 15,716 16,231
O 10,922 12,220 13,352 14,106 14,687 15,266 15,797
Energy.................................. BA 1,347 1,308 1,381 1,553 1,567 1,653 1,902
O 1,197 1,466 1,495 1,511 1,588 1,643 1,728
Transportation.......................... BA 1,835 1,804 1,857 1,814 1,844 1,863 1,869
O 1,577 1,804 1,960 1,898 1,843 1,875 1,886
Health.................................. BA 23,007 26,518 27,814 28,292 28,863 29,455 30,200
O 20,069 22,825 25,975 27,127 27,807 28,417 29,074
Natural resources and environment....... BA 2,053 2,191 2,187 2,225 2,271 2,323 2,382
O 1,856 1,717 1,861 1,907 1,942 1,904 1,952
All other research and development...... BA 4,396 4,274 4,221 4,437 4,543 4,676 4,805
O 4,052 4,668 4,567 4,669 4,555 4,657 4,799
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Subtotal, conduct of research and BA 44,674 49,029 51,340 52,879 54,218 55,686 57,389
development.
O 39,673 44,700 49,210 51,218 52,422 53,762 55,236
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Conduct of education and training:
Education, training, employment and
social services:
Elementary, secondary, and vocational BA 32,819 34,221 35,437 36,074 36,811 37,626 38,573
education.
O 25,601 31,877 34,341 35,201 36,088 36,874 37,722
Higher education...................... BA 20,145 22,587 22,238 20,727 20,584 20,741 21,148
O 18,404 22,968 20,551 19,946 19,761 19,887 20,189
Research and general education aids... BA 2,400 2,391 2,505 2,550 2,601 2,659 2,728
O 2,541 2,581 2,459 2,510 2,561 2,616 2,677
Training and employment............... BA 5,421 4,985 5,695 5,804 5,923 6,056 6,207
O 6,213 5,875 5,428 5,550 5,631 5,790 5,921
Social services....................... BA 9,940 10,048 10,089 10,285 10,499 10,729 11,000
O 9,518 10,065 10,014 10,205 10,411 10,625 10,876
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Subtotal, education, training, and BA 70,725 74,232 75,964 75,440 76,418 77,811 79,656
social services.
O 62,277 73,366 72,793 73,412 74,452 75,792 77,385
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Veterans education, training, and BA 2,619 2,716 2,999 3,388 3,512 3,621 3,737
rehabilitation.
O 2,396 3,005 3,245 3,417 3,503 3,586 3,726
Health.................................. BA 1,560 1,268 1,296 1,302 1,328 1,357 1,391
O 1,388 1,358 1,315 1,291 1,291 1,316 1,337
Other education and training............ BA 2,220 2,222 2,396 2,457 2,514 2,572 2,654
O 1,966 2,163 2,345 2,445 2,472 2,545 2,645
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Subtotal, conduct of education and BA 77,124 80,438 82,655 82,587 83,772 85,361 87,438
training.
O 68,027 79,892 79,698 80,565 81,718 83,239 85,093
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Subtotal, nondefense investment......... BA 222,094 216,564 218,155 220,843 225,588 231,023 237,030
O 195,888 215,092 217,474 219,027 224,105 228,683 234,340
===================================================================================
Total, Federal investment................. BA 345,392 356,987 366,145 383,663 397,663 416,403 432,080
O 312,476 342,118 355,460 366,224 379,820 398,286 417,662
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Table 7-3. FEDERAL INVESTMENT BUDGET AUTHORITY AND OUTLAYS: GRANT AND DIRECT FEDERAL PROGRAMS
(in millions of dollars)
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Estimate
Description 2002 -----------------------------------------------------------------------
Actual 2003 2004 2005 2006 2007 2008
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GRANTS TO STATE AND LOCAL GOVERNMENTS
Major public physical investments:
Construction and rehabilitation:
Transportation:
Highways............................ BA 33,672 30,557 29,615 30,442 31,518 32,422 33,334
O 30,115 28,438 28,582 29,701 30,443 31,378 32,199
Mass transportation................. BA 9,492 6,915 6,926 7,064 7,208 7,370 7,553
O 7,341 6,851 7,093 6,918 6,809 6,749 7,398
Rail transportation................. BA .......... .......... .......... .......... .......... .......... ..........
O 2 .......... 1 .......... .......... .......... ..........
Air transportation.................. BA 3,173 3,400 3,400 3,400 3,400 3,400 3,400
O 2,860 3,244 3,299 3,383 3,447 3,456 3,453
-----------------------------------------------------------------------------------
Subtotal, transportation.......... BA 46,337 40,872 39,941 40,906 42,126 43,192 44,287
O 40,318 38,533 38,975 40,002 40,699 41,583 43,050
-----------------------------------------------------------------------------------
Other construction and rehabilitation:
Pollution control and abatement..... BA 2,852 2,575 2,220 2,261 2,307 2,358 2,419
O 2,538 2,891 2,409 2,373 2,300 2,295 2,329
Other natural resources and BA 77 40 23 23 24 24 25
environment.
O 61 78 73 31 26 16 17
Community development block grants.. BA 7,783 4,732 4,732 4,820 4,919 5,027 5,154
O 5,429 6,650 6,129 5,281 4,645 4,777 4,925
Other community and regional BA 1,668 1,219 866 913 931 952 976
development.
O 1,268 1,345 1,273 1,211 1,110 1,074 1,055
Housing assistance.................. BA 7,188 7,057 6,816 6,943 7,084 7,242 7,425
O 7,720 7,704 8,216 8,063 8,557 8,502 7,647
Other construction.................. BA 225 216 218 222 226 230 235
O 319 925 367 325 315 318 323
-----------------------------------------------------------------------------------
Subtotal, other construction and BA 19,793 15,839 14,875 15,182 15,491 15,833 16,234
rehabilitation.
O 17,335 19,593 18,467 17,284 16,953 16,982 16,296
-----------------------------------------------------------------------------------
Subtotal, construction and BA 66,130 56,711 54,816 56,088 57,617 59,025 60,521
rehabilitation.
O 57,653 58,126 57,442 57,286 57,652 58,565 59,346
-----------------------------------------------------------------------------------
Other physical assets................... BA 1,345 1,337 1,291 1,348 1,383 1,420 1,464
O 1,008 1,103 1,189 1,222 1,238 1,252 1,287
-----------------------------------------------------------------------------------
Subtotal, major public physical BA 67,475 58,048 56,107 57,436 59,000 60,445 61,985
capital.
O 58,661 59,229 58,631 58,508 58,890 59,817 60,633
-----------------------------------------------------------------------------------
Conduct of research and development:
Agriculture............................. BA 259 256 275 281 285 292 300
O 248 255 259 264 272 272 278
Other................................... BA 576 631 599 573 585 558 574
O 306 377 496 510 525 535 545
-----------------------------------------------------------------------------------
Subtotal, conduct of research and BA 835 887 874 854 870 850 874
development.
O 554 632 755 774 797 807 823
-----------------------------------------------------------------------------------
Conduct of education and training:
Elementary, secondary, and vocational BA 30,926 33,014 34,133 34,739 35,450 36,236 37,148
education.
O 23,459 30,308 32,940 33,665 34,455 35,193 36,000
Higher education........................ BA 449 382 382 389 397 406 417
O 444 577 394 395 400 407 417
Research and general education aids..... BA 634 637 651 664 677 692 711
O 702 755 634 674 686 701 718
Training and employment................. BA 3,827 3,459 4,139 4,218 4,305 4,401 4,511
O 4,706 4,287 3,855 4,064 4,160 4,299 4,396
Social services......................... BA 9,567 9,697 9,725 9,914 10,122 10,345 10,607
O 9,183 9,539 9,676 9,861 10,061 10,269 10,512
Agriculture............................. BA 450 418 422 430 439 448 460
O 435 448 458 434 442 445 455
Other................................... BA 281 339 342 353 370 384 402
O 267 282 321 326 337 349 364
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Subtotal, conduct of education and BA 46,134 47,946 49,794 50,707 51,760 52,912 54,256
training.
O 39,196 46,196 48,278 49,419 50,541 51,663 52,862
-----------------------------------------------------------------------------------
Subtotal, grants for investment......... BA 114,444 106,881 106,775 108,997 111,630 114,207 117,115
O 98,411 106,057 107,664 108,701 110,228 112,287 114,318
DIRECT FEDERAL PROGRAMS
Major public physical investment:
Construction and rehabilitation:
National defense:
Military construction and family BA 7,112 6,865 5,727 10,865 15,452 17,969 15,966
housing.
O 4,981 5,874 6,222 6,131 9,331 12,752 15,410
Atomic energy defense activities and BA 724 790 818 945 1,106 1,126 1,140
other.
O 707 658 790 924 1,079 1,135 1,152
-----------------------------------------------------------------------------------
Subtotal, national defense........ BA 7,836 7,655 6,545 11,810 16,558 19,095 17,106
O 5,688 6,532 7,012 7,055 10,410 13,887 16,562
-----------------------------------------------------------------------------------
Nondefense:
International affairs............... BA 1,550 1,440 1,690 1,721 1,756 1,796 1,841
O 910 1,179 1,284 1,534 1,621 1,668 1,725
General science, space, and BA 2,384 2,098 2,423 2,453 2,507 2,574 2,639
technology.
O 2,595 2,290 2,411 2,451 2,530 2,563 2,628
Water resources projects............ BA 4,057 2,927 2,838 2,885 2,945 3,015 3,093
O 3,767 3,343 3,081 2,803 3,101 3,064 3,136
Other natural resources and BA 1,796 1,549 1,736 1,778 1,812 1,857 1,903
environment.
O 1,790 1,754 1,879 1,856 1,843 1,879 1,945
Energy.............................. BA 1,458 1,172 1,180 696 1,127 884 839
O 1,460 1,173 1,182 710 1,149 905 868
Postal Service...................... BA 213 1,053 983 1,114 847 1,442 1,021
O 365 574 836 909 934 1,060 1,163
Transportation...................... BA 312 282 268 273 232 237 243
O 239 392 353 308 266 278 285
Housing assistance.................. BA 35 34 34 35 35 36 37
O 26 33 33 35 31 31 33
Veterans hospitals and other health BA 1,613 2,142 1,483 1,509 1,537 1,571 1,610
facilities.
O 1,816 1,819 2,151 2,256 2,281 2,319 2,374
Federal Prison System............... BA 675 245 -188 .......... .......... .......... ..........
O 795 315 185 140 20 .......... ..........
GSA real property activities........ BA 1,571 1,705 1,413 1,439 1,469 1,501 1,539
O 1,046 1,709 1,477 1,409 2,435 2,663 3,279
Other construction.................. BA 3,162 2,767 1,605 1,647 1,681 1,717 1,764
O 2,694 3,161 1,886 1,653 1,663 1,638 1,663
-----------------------------------------------------------------------------------
Subtotal, nondefense.............. BA 18,826 17,414 15,465 15,550 15,948 16,630 16,529
O 17,503 17,742 16,758 16,064 17,874 18,068 19,099
-----------------------------------------------------------------------------------
Subtotal, construction and BA 26,662 25,069 22,010 27,360 32,506 35,725 33,635
rehabilitation.
O 23,191 24,274 23,770 23,119 28,284 31,955 35,661
-----------------------------------------------------------------------------------
Acquisition of major equipment:
National defense:
Department of Defense............... BA 62,795 71,464 74,478 78,644 85,760 96,077 105,280
O 62,572 63,337 67,982 71,821 78,298 87,698 96,098
Atomic energy defense activities.... BA 106 139 111 114 117 120 124
O 103 116 121 128 131 135 139
-----------------------------------------------------------------------------------
Subtotal, national defense........ BA 62,901 71,603 74,589 78,758 85,877 96,197 105,404
O 62,675 63,453 68,103 71,949 78,429 87,833 96,237
-----------------------------------------------------------------------------------
Nondefense:
General science and basic research.. BA 492 479 581 619 618 615 636
O 490 528 528 561 607 621 623
Space flight, research, and BA 704 679 940 994 1,040 1,087 1,125
supporting activities.
O 653 651 833 991 1,057 1,108 1,155
Energy.............................. BA 116 116 117 117 118 118 118
O 116 116 117 117 118 118 118
Postal Service...................... BA 538 493 900 994 675 675 1,123
O 651 512 642 704 683 719 786
[[Page 150]]
Air transportation.................. BA 4,872 2,986 2,927 2,982 3,042 3,109 3,188
O 2,638 4,365 3,465 3,144 2,937 3,227 3,301
Water transportation (Coast Guard).. BA 428 511 565 576 587 600 615
O 316 480 448 428 481 507 533
Other transportation (railroads).... BA 826 521 900 917 935 956 980
O 1,067 595 900 917 935 956 980
Hospital and medical care for BA 665 642 410 418 426 436 447
veterans.
O 1,253 1,156 921 940 959 981 1,006
Department of Justice............... BA 897 879 876 890 909 929 953
O 752 818 865 896 873 893 914
Department of the Treasury.......... BA 636 600 656 516 526 537 551
O 517 652 672 504 520 531 544
GSA general supply fund............. BA 709 676 711 732 762 771 815
O 657 676 711 732 762 771 815
Other............................... BA 2,484 2,556 2,653 2,617 2,672 2,730 2,799
O 2,153 2,349 2,577 2,608 2,660 2,728 2,784
-----------------------------------------------------------------------------------
Subtotal, nondefense.............. BA 13,367 11,138 12,236 12,372 12,310 12,563 13,350
O 11,263 12,898 12,679 12,542 12,592 13,160 13,559
-----------------------------------------------------------------------------------
Subtotal, acquisition of major BA 76,268 82,741 86,825 91,130 98,187 108,760 118,754
equipment.
O 73,938 76,351 80,782 84,491 91,021 100,993 109,796
-----------------------------------------------------------------------------------
Purchase or sale of land and structures:
National defense...................... BA -20 -28 -29 -31 -32 -32 -32
O -21 -28 -29 -31 -32 -32 -32
International affairs................. BA .......... 1 .......... .......... .......... .......... ..........
O .......... 1 1 1 1 1 1
Privatization of Elk Hills............ BA .......... .......... .......... -323 .......... .......... ..........
O .......... .......... .......... -323 .......... .......... ..........
Other................................. BA 628 496 352 342 340 338 339
O 761 630 497 452 608 636 719
-----------------------------------------------------------------------------------
Subtotal, purchase or sale of land BA 608 469 323 -12 308 306 307
and structures.
O 740 603 469 99 577 605 688
-----------------------------------------------------------------------------------
Subtotal, major public physical BA 103,538 108,279 109,158 118,478 131,001 144,791 152,696
investment.
O 97,869 101,228 105,021 107,709 119,882 133,553 146,145
-----------------------------------------------------------------------------------
Conduct of research and development:
National defense:
Defense military...................... BA 49,190 57,383 62,604 67,832 65,089 65,377 67,720
O 44,903 53,396 58,680 63,715 62,227 63,076 65,586
Atomic energy and other............... BA 3,383 3,802 4,273 4,443 4,575 4,735 4,843
O 3,335 3,665 4,218 4,502 4,672 4,830 4,960
-----------------------------------------------------------------------------------
Subtotal, national defense.......... BA 52,573 61,185 66,877 72,275 69,664 70,112 72,563
O 48,238 57,061 62,898 68,217 66,899 67,906 70,546
-----------------------------------------------------------------------------------
Nondefense:
International affairs................. BA 279 297 306 312 319 324 335
O 250 245 343 340 339 346 353
General science, space and technology:
NASA................................ BA 6,312 7,023 7,550 8,104 8,545 8,988 9,329
O 5,816 6,523 7,349 7,837 8,265 8,648 9,040
National Science Foundation......... BA 3,275 3,427 3,709 3,784 3,861 3,945 4,047
O 2,803 3,221 3,398 3,612 3,713 3,851 3,924
Department of Energy................ BA 2,444 2,461 2,511 2,558 2,610 2,667 2,735
O 2,298 2,461 2,511 2,551 2,601 2,656 2,720
Other general science, space and BA 5 23 110 112 114 116 120
technology.
O 5 15 94 106 108 111 113
-----------------------------------------------------------------------------------
Subtotal, general science, space BA 12,315 13,231 14,186 14,870 15,449 16,040 16,566
and technology.
O 11,172 12,465 13,695 14,446 15,026 15,612 16,150
-----------------------------------------------------------------------------------
Energy.................................. BA 1,347 1,308 1,381 1,553 1,567 1,653 1,902
O 1,197 1,466 1,495 1,511 1,588 1,643 1,728
[[Page 151]]
Transportation:
Department of Transportation.......... BA 626 471 533 544 558 573 588
O 502 502 559 531 497 517 530
NASA.................................. BA 997 976 993 932 939 934 916
O 956 976 976 971 939 938 924
-----------------------------------------------------------------------------------
Subtotal, transportation............ BA 2,970 2,755 2,907 3,029 3,064 3,160 3,406
O 2,655 2,944 3,030 3,013 3,024 3,098 3,182
-----------------------------------------------------------------------------------
Health:
National Institutes of Health......... BA 22,117 25,585 26,872 27,371 27,924 28,537 29,258
O 19,374 22,067 25,172 26,309 26,965 27,561 28,202
All other health...................... BA 695 661 678 690 704 720 739
O 612 644 658 664 676 691 706
-----------------------------------------------------------------------------------
Subtotal, health.................... BA 22,812 26,246 27,550 28,061 28,628 29,257 29,997
O 19,986 22,711 25,830 26,973 27,641 28,252 28,908
-----------------------------------------------------------------------------------
Agriculture............................. BA 1,327 1,297 1,293 1,455 1,502 1,569 1,606
O 1,260 1,361 1,330 1,355 1,374 1,432 1,494
Natural resources and environment....... BA 1,836 1,976 2,000 2,035 2,077 2,124 2,178
O 1,755 1,616 1,761 1,804 1,837 1,796 1,842
National Institute of Standards and BA 422 360 318 323 330 338 345
Technology.
O 396 426 455 402 352 358 364
Hospital and medical care for veterans.. BA 1,124 1,186 1,230 1,252 1,278 1,306 1,340
O 1,107 1,176 1,222 1,353 1,271 1,299 1,330
All other research and development...... BA 1,033 1,091 982 1,000 1,020 1,042 1,077
O 788 1,369 1,132 1,098 1,100 1,108 1,143
-----------------------------------------------------------------------------------
Subtotal, nondefense................ BA 43,839 48,142 50,466 52,025 53,348 54,836 56,515
O 39,119 44,068 48,455 50,444 51,625 52,955 54,413
-----------------------------------------------------------------------------------
Subtotal, conduct of research and BA 96,412 109,327 117,343 124,300 123,012 124,948 129,078
development.
O 87,357 101,129 111,353 118,661 118,524 120,861 124,959
-----------------------------------------------------------------------------------
Conduct of education and training:
Elementary, secondary, and vocational BA 1,893 1,207 1,304 1,335 1,361 1,390 1,425
education.
O 2,142 1,569 1,401 1,536 1,633 1,681 1,722
Higher education........................ BA 19,696 22,205 21,856 20,338 20,187 20,335 20,731
O 17,960 22,391 20,157 19,551 19,361 19,480 19,772
Research and general education aids..... BA 1,766 1,754 1,854 1,886 1,924 1,967 2,017
O 1,839 1,826 1,825 1,836 1,875 1,915 1,959
Training and employment................. BA 1,594 1,526 1,556 1,586 1,618 1,655 1,696
O 1,507 1,588 1,573 1,486 1,471 1,491 1,525
Health.................................. BA 1,540 1,248 1,276 1,282 1,307 1,336 1,369
O 1,368 1,338 1,295 1,272 1,272 1,297 1,317
Veterans education, training, and BA 2,619 2,716 2,999 3,388 3,512 3,621 3,737
rehabilitation.
O 2,396 3,005 3,245 3,417 3,503 3,586 3,726
General science and basic research...... BA 887 938 914 931 950 971 996
O 666 867 901 905 922 941 958
National defense........................ BA 8 8 8 8 8 8 9
O 8 8 2 7 9 9 9
International affairs................... BA 389 256 361 367 376 384 393
O 372 289 333 377 372 379 388
Other................................... BA 606 642 741 767 777 790 818
O 581 823 690 766 768 806 864
-----------------------------------------------------------------------------------
Subtotal, conduct of education and BA 30,998 32,500 32,869 31,888 32,020 32,457 33,191
training.
O 28,839 33,704 31,422 31,153 31,186 31,585 32,240
-----------------------------------------------------------------------------------
Subtotal, direct Federal investment..... BA 230,948 250,106 259,370 274,666 286,033 302,196 314,965
O 214,065 236,061 247,796 257,523 269,592 285,999 303,344
===================================================================================
Total, Federal investment................. BA 345,392 356,987 366,145 383,663 397,663 416,403 432,080
O 312,476 342,118 355,460 366,224 379,820 398,286 417,662
--------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 152]]
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 this 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 and development adds to
an ``intangible'' asset, the Nation's stock of knowledge. Spending for
education adds to the stock of human capital by providing skills that
help make people more productive. Although financed by the Federal
Government, the research and development or education can be carried out
by Federal or State government laboratories, universities and other
nonprofit organizations, local governments, 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. 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.
The estimates of the capital stock are equal to the sum of net
investment in the current and prior years. A limitation of the perpetual
inventory method is that the original investment spending may not
accurately measure the current value of the asset created, even after
adjusting for inflation, because the value of existing capital changes
over time due to changing market conditions. 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
current 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 of 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
2002, with periods of faster growth during the late 1960s and the 1980s.
The stock amounted to $2,016 billion in 2002 and is estimated to
increase to $2,119 billion by 2004. In 2002, the national defense
capital stock accounted for $638 billion, or 32 percent of the total,
and nondefense stocks for $1,378 billion, or 68 percent of the total.
[[Page 153]]
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
1995........................................................................ 1,832 712 1,119 311 164 146 809 496 156 115 43
Annual data:
2000........................................................................ 1,922 635 1,286 351 167 183 936 574 170 121 70
2001........................................................................ 1,963 632 1,330 364 170 194 966 595 173 123 76
2002........................................................................ 2,016 638 1,378 378 172 206 1,001 619 176 124 81
2003 est.................................................................... 2,068 643 1,426 392 173 219 1,033 640 180 126 88
2004 est.................................................................... 2,119 651 1,468 404 174 230 1,064 661 183 127 93
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
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 $1,378 billion in 2002. With the
investments proposed in the budget, nondefense stocks are estimated to
grow to $1,468 billion in 2004. 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
investment in 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 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, increasing the
stock from an estimated $638 billion in 2002 to $651 billion in 2004.
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 2002, 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
following 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, 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.
[[Page 154]]
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
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
Annual data:
2000....................................... 71.0 30.9 40.2 25.7 13.5 12.2 1.6 10.6 45.4 17.4 28.0 18.1 2.7 1.6 5.7
2001....................................... 76.0 32.2 43.8 27.5 14.3 13.2 2.6 10.6 48.5 17.9 30.6 20.9 2.8 1.5 5.4
2002....................................... 82.0 33.7 48.2 29.3 15.2 14.1 1.9 12.2 52.7 18.5 34.1 24.0 3.0 1.3 5.8
2003 est................................... 82.8 35.5 47.3 30.6 16.3 14.3 1.1 13.2 52.1 19.2 33.0 21.2 4.0 1.6 6.1
2004 est................................... 79.4 37.0 42.3 28.9 17.2 11.6 0.8 10.8 50.5 19.8 30.7 20.4 3.3 1.2 5.8
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
The Stock of Research and Development Capital
This section presents data on the stock of research and development
capital, 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 $951 billion in 2002 in constant 1996
dollars. Roughly 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 2002. 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. Renewed
spending for defense R&D in this budget is projected to increase the
stock to $413 billion in 2004.
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.
[[Page 155]]
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
1995................................... 395 38 357 406 254 152 801 291 509
Annual data:
2000................................... 398 46 353 512 347 164 910 393 517
2001................................... 396 48 349 531 365 167 927 412 515
2002................................... 397 50 347 554 383 171 951 432 518
2003 est............................... 404 52 352 580 403 177 984 455 529
2004 est............................... 413 54 360 610 425 185 1,023 478 545
--------------------------------------------------------------------------------------------------------------------------------------------------------
\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 $1,120 billion in 2002 in constant 1996 dollars, rising to
$1,248 billion in 2004. 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.''
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............................. 704 519 184
1995............................. 802 582 220
Annual data:
2000............................. 1,040 759 281
2001............................. 1,075 776 300
2002............................. 1,120 803 317
2003 est......................... 1,187 848 339
2004 est......................... 1,248 891 358
------------------------------------------------------------------------
Despite a slowdown in growth during the early 1980s, the federally
financed education stock grew at an average annual rate of 5.3 percent
from 1970 to 2002, and the expansion of the 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:
[[Page 156]]
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, and adds a dollar, less depreciation
and adjusted for inflation, to the stock in future years. In reality,
the initial 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 may not result
in the creation of any asset at all. Moreover, even if the initial asset
value is equal to investment spending, the value could rise or fall in
real terms over time due to changing market conditions.
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 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 1925-2001,'' Survey of Current Business,
September 2002, pp. 23-37.
---------------------------------------------------------------------------
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 used by 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 re
[[Page 157]]
sources 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
outlay data in 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 extension 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.''
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 in the future;
some of these services, in turn, are designed to increase growth in the
rest of the economy. And it invests in capital--such as highways,
education, and research--that contributes more directly to the economic
growth of the private sector. 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.
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.
[[Page 158]]
Some of the considerations in this section also apply to the budgetary
treatment of leases and to providing appropriations for the full cost of
useful segments of capital projects before they are begun. 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).
Table 7-8. ALTERNATIVE DEFINITIONS OF INVESTMENT OUTLAYS, 2004
(In millions of dollars)
----------------------------------------------------------------------------------------------------------------
Investment Outlays
----------------------------------
All types
of capital Federal National
\1\ capital capital
----------------------------------------------------------------------------------------------------------------
Construction and rehabilitation:
Grants:
Transportation........................................................... 38,975 ......... 38,975
Natural resources and environment........................................ 2,482 ......... 2,482
Community and regional development....................................... 7,402 ......... 1,066
Housing assistance....................................................... 8,216 ......... .........
Other grants............................................................. 367 ......... 283
Direct Federal:
National defense......................................................... 7,012 7,012 .........
General science, space, and technology................................... 2,411 2,399 2,411
Natural resources and environment........................................ 4,960 3,772 4,471
Energy................................................................... 1,182 1,182 1,182
Transportation........................................................... 353 299 353
Veterans and other health facilities..................................... 2,151 2,151 2,151
Postal Service........................................................... 836 836 836
GSA real property activities............................................. 1,477 1,477 .........
Other construction....................................................... 3,388 3,050 1,229
----------------------------------
Total construction and rehabilitation.................................. 81,212 22,178 55,439
Acquisition of major equipment (direct):
National defense........................................................... 68,103 68,103 .........
Postal Service............................................................. 642 642 642
Air transportation......................................................... 3,465 3,465 3,465
Other...................................................................... 8,572 7,385 4,823
----------------------------------
Total major equipment..................................................... 80,782 79,595 8,930
Purchase or sale of land and structures...................................... 469 469 .........
Other physical assets (grants)............................................... 1,189 ......... 67
----------------------------------
Total physical investment.................................................. 163,652 102,242 64,436
Research and development:
Defense.................................................................... 62,898 ......... 1,365
Nondefense................................................................. 49,210 ......... 48,722
----------------------------------
Total research and development............................................ 112,108 ......... 50,087
Education and training....................................................... 79,700 ......... 78,985
==================================
Total investment outlays..................................................... 355,460 102,242 193,508
----------------------------------------------------------------------------------------------------------------
\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.
Investment in Federal Capital
The goal of investment in Federal capital is to deliver the intended
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. 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,
[[Page 159]]
goal by goal, 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.
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 2004 is
estimated to be $102.2 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, 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 consolidates 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, $19 billion, because
capital expenditures are larger than depreciation by $19 billion. This
reflects both the small Federal investment in new capital assets
relative to the budget as a whole ($102 billion out of $2,229 billion)
and the largely offsetting effect of depreciation on the existing stock
($83 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,
2004 \1\
(In billions of dollars)
------------------------------------------------------------------------
------------------------------------------------------------------------
Operating Budget
Receipts................................................ 1,922
Expenses:
Depreciation.......................................... 83
Other................................................. 2,127
---------------
Subtotal, expenses.................................. 2,210
---------------
Surplus or deficit (-)................................ -288
Capital Budget
Income: depreciation.................................... 83
Capital expenditures.................................... 102
---------------
Surplus or deficit (-)................................ -19
Unified Budget
Receipts................................................ 1,922
Outlays................................................. 2,229
---------------
Surplus or deficit (-)................................ -307
------------------------------------------------------------------------
\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 categories in
which such outlays were classified. They are also subject to the
limitations explained in Part II of this chapter. Depreciation is
measured in terms of current cost, not historical cost.
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 2004, 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 $11 billion less than the unified budget deficit
instead of $19 billion less as shown above for the complete coverage of
Federal capital. Capital expenditures for defense in 2004 are estimated
to be $8 billion more than depreciation, whereas capital expenditures
for nondefense purposes (plus military family housing) are estimated to
be $11 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 that already existed; and suppose
the building had an estimated life of 25 years 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\ In many cases,
however, such as constructing an aircraft carrier or rebuilding a dam,
an asset is constructed or manufac
[[Page 160]]
tured to order. In these cases, 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 typically recorded as an expense in the
budget year for purchasing an asset that already exists 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 set, 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, the Government
would have 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 for setting
priorities.
The present budget provides policymakers the necessary information
regarding 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 a cash 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 costs 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\ 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 (3rd ed.; New York:
Norton, 1999), chap. 11. 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).
---------------------------------------------------------------------------
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 net 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 several 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 net 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 in
[[Page 161]]
come 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 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 (SFFAS) No.
6, Accounting for Property, Plant, and Equipment, pp. 5-14 and 34-35;
and the proposed SFFAS No. 23, Eliminating the Category National Defense
Property, Plant, and Equipment. (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 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 the Federal government 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 will
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; 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 is recognized as an expense
in government-wide financial statements. This requirement is now being
phased-in and will be effective for all state governments for fiscal
years beginning after June 2003.\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. Infrastructure assets must be reported on the balance
sheet but do not have to be depreciated if they are part of a network
and the State or locality can document that they are being preserved.
---------------------------------------------------------------------------
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
[[Page 162]]
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 plans to
shift to full accruals, including the depreciation of capital assets.
However, it uses the term ``budget'' differently from the United States.
The ``budget'' sets forth the overall fiscal framework, while the
``estimates'' comprise the detailed departmental appropriations. The
estimates are prepared on a modified cash basis, which records many
transactions differently from the budget. The estimates record
investment on a cash basis and do not make use of depreciation. This is
a major control over resource allocation that would remain when a full
accrual budget is adopted.
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 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. Sweden had
separate capital and operating budgets from 1937 to 1981, together with
a total consolidated budget from 1956 onwards. One reason for abandoning
the capital budget was that borrowing was no longer based on the
distinction between current and capital budgets. See GAO, Budget Issues:
Budgeting Practices in West Germany, France, Sweden, and Great Britain,
GAO/AFMD-87-8FS (November 1986); and, for a more extensive discussion of
the reasons to abandon a capital budget, 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. The Netherlands distinguished
between a current account and a capital budget between 1927 and 1976.
See Aad Bac, ``Government Budgeting and Accounting Reform in the
Netherlands,'' in OECD Journal on Budgeting, vol. 2, Supplement 1, page
278.
---------------------------------------------------------------------------
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
The General Accounting Office issued a report in 1993 that criticized
budgeting for capital in terms of depreciation. This report affirmed the
concerns regarding capital budgeting expressed here. Although the GAO's
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
[[Page 163]]
goal is to support and accelerate sustainable economic growth for the
private sector 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, 2004 \1\
(In billions of dollars)
------------------------------------------------------------------------
------------------------------------------------------------------------
Receipts................................................. 1,922
Outlays:
National investment.................................... 194
Other.................................................. 2,036
--------------
Subtotal, outlays..................................... 2,229
--------------
Surplus or deficit (-)................................. -307
------------------------------------------------------------------------
\1\ The details of this table do not add to the totals in every case due
to rounding.
Table 7-10 illustrates the unified budget reorganized as GAO
recommended to have a separate component for investment in national
capital. This component is roughly estimated to be $194 billion in 2004.
It includes infrastructure outlays financed by Federal grants to State
and local governments, such as highways and 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 the
economic growth of the private sector.
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 was 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,
2004\1\ \2\
(In billions of dollars)
------------------------------------------------------------------------
------------------------------------------------------------------------
Operating Budget
Receipts................................................ 1,884
Expenses:
Depreciation \3\...................................... 84
Other................................................. 2,036
---------------
Subtotal, expenses.................................. 2,120
---------------
Surplus or deficit (-)................................ -235
Capital Budget
Income:
Depreciation \3\...................................... 84
Earmarked tax receipts \4\............................ 38
---------------
Subtotal, income.................................... 121
Capital expenditures.................................... 194
---------------
Surplus or deficit (-)................................ -72
Unified Budget
Receipts................................................ 1,922
Outlays................................................. 2,229
---------------
Surplus or deficit (-).............................. -307
------------------------------------------------------------------------
\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
estimates 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
[[Page 164]]
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 subsector of the
national income and product accounts (NIPA) for Government purchases of
structures, equipment, and software. The NIPA Federal subsector 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 to measure gross domestic product (GDP), the income generated
in its production, and many other variables used in macroeconomic
analysis. The NIPA Federal subsector 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 are normally published in a chapter of 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 2002-04, and for a discussion of
the NIPA Federal subsector and its relationship to the budget. The
Federal subsector is part of the NIPA government sector, the other
subsector being all state and local governments treated as a
consolidated entity.
---------------------------------------------------------------------------
The NIPA Federal subsector 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. The account
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 subsector 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 Federal
Government current account surplus was reduced by small amounts several
years in the past decade by including depreciation rather than gross
investment, because depreciation of federally owned structures,
equipment, and software was more than gross investment. During 2002-04,
however, gross investment is more than depreciation by growing amounts.
The 2004 Federal current account surplus is estimated to be increased
$9.5 billion by using depreciation.\33\ A capital budget is not needed
to capture this effect.
---------------------------------------------------------------------------
\33\ See actuals and estimates for 2002-04 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.\34\
---------------------------------------------------------------------------
\34\ As this argument has traditionally been framed, it might appear
as though it did not apply when the Government has a surplus. When the
Government has a surplus, as in 1998-2001, 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? For the present analysis, ``borrowing more'' is equivalent
to ``repaying less debt.''
---------------------------------------------------------------------------
[[Page 165]]
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. Net investment is the change in the capital stock. To
measure it correctly, the addition to the capital stock from new
purchases and the subtraction from depreciation on existing assets must
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 borrowing under the two capital
budgets roughly illustrated in this chapter, but for Federal capital the
borrowing justified in this way would not be great. For Federal capital,
Table 7-9 indicates that gross investment is more than current cost
depreciation--the capital budget deficit is $19 billion. The rationale
of borrowing to finance net investment would justify the Federal
Government borrowing this amount ($19 billion) and no more to finance
its investment in Federal capital. For national capital, Table 7-11
indicates that gross investment is more than current cost depreciation
(plus the excise taxes earmarked to finance capital expenditures for
highways and airports and airways\35\)--the capital budget deficit is
$72 billion. The rationale of borrowing to finance net investment would
justify the Federal Government borrowing this amount ($72 billion) and
no more to finance its investment in national capital.\36\
---------------------------------------------------------------------------
\35\ The capital budget deficit would be about $23 billion larger if
current cost depreciation were used instead of earmarked excise taxes
for investment in highways and airports and airways.
\36\ 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 at 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
investment. A high level of net national saving is needed to meet the
demographic and other challenges expected in the decades ahead.\37\
---------------------------------------------------------------------------
\37\ GAO considered deficit financing of investment but did not
recommend it. See Incorporating an Investment Component in the Federal
Budget, pp. 12-13.
---------------------------------------------------------------------------
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 generally based on 2003 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 $156.5 billion in 2002
and is projected to increase to $191.5 billion by 2012 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 2002.
[[Page 166]]
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 $44.1
billion in 2002, and current services outlays are estimated to increase
to $51.7 billion by 2012. Outlays for nondefense housing and buildings
were $16.5 billion in 2002 and are estimated to be $20.7 billion in
2012. Physical capital outlays for other nondefense categories were
$27.6 billion in 2002 and are projected to be $32.0 billion by 2012. For
national defense, this spending was $68.3 billion in 2002 and is
estimated on a current services basis to be $87.1 billion in 2012.
Table 7-13 shows current services projections on a constant dollar
basis, using fiscal year 1996 as the base year.
Table 7-12. CURRENT SERVICES OUTLAY PROJECTIONS FOR FEDERAL PHYSICAL CAPITAL SPENDING
(In billions of dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Estimate
2002 ---------------------------------------------------------------------------------
Actual 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
--------------------------------------------------------------------------------------------------------------------------------------------------------
Nondefense:
Transportation-related categories:
Roadways and bridges..................................... 30.1 28.5 28.6 29.7 30.4 31.3 32.1 32.8 33.0 33.3 34.2
Airports and airway facilities........................... 5.5 7.6 7.6 7.3 7.3 7.7 7.8 7.9 8.1 8.2 8.4
Mass transportation systems.............................. 7.3 6.9 7.1 6.9 6.8 6.8 7.4 7.6 7.6 7.7 7.9
Railroads................................................ 1.1 0.6 1.1 1.1 1.1 1.1 1.1 1.2 1.2 1.2 1.2
-----------------------------------------------------------------------------------------
Subtotal, transportation............................... 44.1 43.6 44.4 45.0 45.6 46.9 48.5 49.5 49.8 50.5 51.7
Housing and buildings categories:
Federally assisted housing 9.1 9.3 8.7 8.6 9.1 9.1 8.4 8.6 8.8 9.0 8.7
Hospitals................................................ 2.4 2.4 2.4 2.5 2.5 2.6 2.7 2.7 2.8 2.9 3.0
Public buildings \1\..................................... 5.0 6.4 6.2 6.3 7.6 7.8 8.6 8.7 8.8 8.8 8.9
-----------------------------------------------------------------------------------------
Subtotal, housing and buildings........................ 16.5 18.0 17.4 17.4 19.2 19.5 19.6 20.0 20.3 20.7 20.7
Other nondefense categories:
Wastewater treatment and related facilities.............. 3.0 3.3 3.3 3.4 3.4 3.6 3.6 3.7 3.7 3.7 3.8
Water resources projects................................. 3.8 3.6 4.0 3.8 4.1 4.1 4.2 4.3 4.5 4.6 4.7
Space and communications facilities...................... 4.8 4.5 4.9 5.1 5.1 5.3 5.5 5.7 5.9 5.9 5.9
Energy programs.......................................... 1.6 1.3 1.3 1.2 1.3 1.3 1.0 0.9 0.9 0.9 1.0
Community development programs........................... 6.1 7.5 7.1 6.4 5.8 5.9 6.1 6.2 6.2 6.3 6.4
Other nondefense......................................... 8.3 9.0 8.7 8.0 8.9 9.1 9.3 9.5 9.7 10.0 10.2
-----------------------------------------------------------------------------------------
Subtotal, other nondefense............................. 27.6 29.0 29.2 27.9 28.7 29.3 29.8 30.4 31.0 31.4 32.0
-----------------------------------------------------------------------------------------
Subtotal, nondefense..................................... 88.2 90.6 91.0 90.3 93.5 95.7 97.9 99.8 101.1 102.6 104.4
National defense.............................................. 68.3 70.0 74.3 77.6 78.8 80.9 82.6 82.3 84.0 85.5 87.1
-----------------------------------------------------------------------------------------
Total......................................................... 156.5 160.6 165.3 167.9 172.2 176.6 180.5 182.1 185.1 188.1 191.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Excludes outlays for public buildings that are included in other categories in this table.
[[Page 167]]
Table 7-13. CURRENT SERVICES OUTLAY PROJECTIONS FOR FEDERAL PHYSICAL CAPITAL SPENDING
(In billions of constant 1996 dollars)
----------------------------------------------------------------------------------------------------------------
Estimate
2002 ---------------------------------------
Actual 2003 2004 2005 2006 2007
----------------------------------------------------------------------------------------------------------------
Nondefense:
Transportation-related categories:
Roadways and bridges....................................... 27.1 25.1 24.6 25.0 25.0 25.2
Airports and airway facilities............................. 5.2 7.1 7.0 6.6 6.4 6.6
Mass transportation systems................................ 6.6 6.0 6.1 5.8 5.6 5.4
Railroads.................................................. 1.1 0.6 1.1 1.1 1.0 1.0
-----------------------------------------------
Subtotal, transportation................................. 40.0 38.9 38.8 38.5 38.1 38.3
Housing and buildings categories:
Federally assisted housing................................. 8.3 8.3 7.6 7.3 7.5 7.4
Hospitals.................................................. 2.4 2.3 2.3 2.4 2.4 2.4
Public buildings\1\........................................ 4.9 6.2 5.9 5.9 7.0 7.1
-----------------------------------------------
Subtotal, housing and buildings.......................... 15.6 16.8 15.8 15.6 16.9 16.9
Other nondefense categories:
Wastewater treatment and related facilities................ 2.7 2.9 2.8 2.8 2.8 2.9
Water resources projects................................... 3.8 3.5 3.8 3.6 3.9 3.8
Space and communications facilities........................ 4.7 4.4 4.7 4.8 4.8 4.9
Energy programs............................................ 1.6 1.3 1.2 1.1 1.2 1.2
Community development programs............................. 5.5 6.6 6.1 5.4 4.8 4.8
Other nondefense........................................... 8.1 8.6 8.2 7.4 8.1 8.2
-----------------------------------------------
Subtotal, other nondefense............................... 26.4 27.2 27.0 25.3 25.6 25.7
-----------------------------------------------
Subtotal, nondefense....................................... 82.0 82.9 81.5 79.3 80.6 80.8
National defense................................................ 70.7 71.5 74.8 77.0 76.9 77.7
-----------------------------------------------
Total........................................................... 152.7 154.4 156.4 156.3 157.5 158.5
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\1\ Excludes outlays for public buildings that are included in other categories in this table.
Public Civilian Capital Needs Assessments
The Act requires information regarding the state of major Federal
infrastructure programs, including highways and bridges, airports and
airway facilities, mass transit, railroads, federally assisted housing,
hospitals, water resources projects, and space and communications
investments. Funding levels, long-term projections, policy issues, needs
assessments, and critiques, are required for each category.
Capital needs assessments change little from year to year, in part due
to the long-term nature of the facilities themselves, and in part due to
the consistency of the analytical techniques used to develop the
assessments and the comparatively steady but slow changes in underlying
demographics. As a result, the practice has arisen in reports in
previous years to refer to earlier discussions, where the relevant
information had been carefully presented and changes had been minimal.
The needs assessment material in reports of earlier years is
incorporated this year largely by reference to earlier editions and by
reference to other needs assessments. The needs analyses, their major
components, and their critical evaluations have been fully covered in
past Supplements, such as the 1990 Supplement to Special Analysis D.
It should be noted that the needs assessment data referenced here have
not been determined on the basis of cost-benefit analysis. Rather, the
data reflect the level of investment necessary to meet a predefined
standard (such as maintenance of existing highway conditions). The
estimates do not address whether the benefits of each investment would
actually be greater than its cost or whether there are more cost-
effective alternatives to capital investment, such as initiatives to
reduce demand or use existing assets more efficiently. Before investing
in physical capital, it is necessary to compare the cost of each project
with its estimated benefits, within the overall constraints on Federal
spending.
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Significant Factors Affecting Infrastructure Needs Assessments
Highways
1. Projected annual average growth in travel to the year 2020. 2.08 percent
2. Annual Federal, state, and local cost to maintain 2000 $68.6 billion (2000 dollars)
conditions and performance on highways.......................
3. Annual Federal, state, and local cost to maintain 2000 $7.3 billion (2000 dollars)
conditions and performance on bridges........................
Airports and Airway Facilities
1. Airports in the National Plan of Integrated Airport Systems 546
with scheduled passenger traffic.............................
2. Air traffic control towers................................. 659
3. Airport development eligible under airport improvement $46.2 billion (2001 dollars)
program for period 2001-2005.................................
Mass Transportation Systems
1. Yearly cost to maintain condition and performance of rail $9.7 billion (2000 dollars)
facilities over a period of 20 years.........................
2. Yearly cost to replace and maintain the urban, rural, and $5.2 billion (2000 dollars)
special services bus fleet and facilities....................
Wastewater Treatment
1. Total remaining needs of sewage treatment facilities....... $128 billion (1996 dollars)
2. Estimated level of remaining need not covered by State and $21 billion (2001 dollars)
local receipts and spending for clean water infrastructure
assuming 3 percent annual growth.............................
3. Total Federal expenditures under the Clean Water Act of $80 billion
1972 through 2001.
4. The population served by centralized treatment facilities: 99 percent
percentage that benefits from at least secondary sewage
treatment systems............................................
5. 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 (2002)........................ 37.3 percent
2. Average length of stay, IHS hospitals (days) (2002)........ 3.9
3. Hospital admissions (2002)................................. 60,311
4. Outpatient visits (2002)................................... 8,159,116
5. Eligible population (2002)................................. 1,568,510
Department of Veterans Affairs (VA) Hospitals (2003)
1. Medical Centers............................................ 163
2. Outpatient clinics......................................... 848
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.
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Surface Transportation
Department of Transportation. 2002 Status of the Nation's Surface
Transportation System: Conditions and Performance: Report to Congress.
2003. This report discusses roads, bridges, and mass transit.
Airports and Airways Facilities
Federal Aviation Administration. National Plan of Integrated Airport
Systems, August 2002.
Federally Assisted Housing
U.S. Department of Housing and Urban Development, Office of Policy
Planning and Development, Tabulations of 1999 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).
Environmental Protection Agency, Office of Water, The Clean Water and
Drinking Water Infrastructure Gap Analysis (EPA-816-R-02-020), September
2002.
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.