[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

[[Page 143]]

 
          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)
----------------------------------------------------------------------------------------------------------------
                                                                                                   Estimate
                                                                                       2002  -------------------
                                                                                     Actual     2003      2004
----------------------------------------------------------------------------------------------------------------
                                Federal Investment

Major public physical capital investment:
   Direct Federal:
     National defense.............................................................      68.3      70.0      75.1
     Nondefense...................................................................      29.5      31.3      29.9
                                                                                   -----------------------------
       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
                                                                                   -----------------------------
  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
                                                                                   -----------------------------
     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
                                                                                   -----------------------------
     Subtotal, conduct of education and training..................................      68.0      79.9      79.7
                                                                                   -----------------------------
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
                                                                                   -----------------------------
     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
                                                                                   -----------------------------
     Total, miscellaneous physical investment.....................................       4.6       3.8       3.7
                                                                                   -----------------------------
Total, Federal investment outlays, including miscellaneous physical investment....     317.1     345.9     359.2
----------------------------------------------------------------------------------------------------------------

  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)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                 Estimate
                Description                                              2002    -----------------------------------------------------------------------
                                                                        Actual       2003        2004        2005        2006        2007        2008
--------------------------------------------------------------------------------------------------------------------------------------------------------
             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
                                                                     -----------------------------------------------------------------------------------
    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
                                                                     -----------------------------------------------------------------------------------
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
                                                                     -----------------------------------------------------------------------------------
  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
                                                                     -----------------------------------------------------------------------------------
      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
                                                                     -----------------------------------------------------------------------------------
      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
                                                                     -----------------------------------------------------------------------------------
  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
                                                                     -----------------------------------------------------------------------------------
    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
                                                                     -----------------------------------------------------------------------------------
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
                                                                     -----------------------------------------------------------------------------------
    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
                                                                     -----------------------------------------------------------------------------------
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
                                                                     -----------------------------------------------------------------------------------
      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
                                                                     -----------------------------------------------------------------------------------
  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
                                                                     -----------------------------------------------------------------------------------
    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
                                                                     -----------------------------------------------------------------------------------
  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
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 148]]


                              Table 7-3. FEDERAL INVESTMENT BUDGET AUTHORITY AND OUTLAYS: GRANT AND DIRECT FEDERAL PROGRAMS
                                                                (in millions of dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                 Estimate
                Description                                              2002    -----------------------------------------------------------------------
                                                                        Actual       2003        2004        2005        2006        2007        2008
--------------------------------------------------------------------------------------------------------------------------------------------------------
   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
                                                                     -----------------------------------------------------------------------------------


[[Page 149]]


    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
----------------------------------------------------------------------------------------------------------------
\1\ Excludes outlays for public buildings that are included in other categories in this table.

                Public Civilian Capital Needs Assessments

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

[[Page 168]]



                         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.

[[Page 169]]

 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.