Budget Trends: Federal Investment Outlays, Fiscal Years 1981-2002 (Letter
Report, 05/21/97, GAO/AIMD-97-88).

Pursuant to congressional requests, GAO provided information on federal
investment trends and estimates of future outlays for investments
through fiscal year 2002. GAO did not independently verify this
information but traced totals to published budget documents.

GAO noted that: (1) the share of total federal budget outlays and of
gross domestic product devoted to investment gradually declined from the
early 1980s through 1996; (2) according to the administration's policy
estimates, this decline will continue for 1997 through 2002; (3)
however, over the same time period, a slightly different picture emerges
when investment outlays are converted to constant 1992 dollars; (4)
investment spending in estimated constant dollar outlays increased
slightly from the 1980s to the mid-1990s, with a gradual decline through
2002; (5) investment by category (character class) in constant dollars
shows varying patterns; (6) physical capital remained relatively stable
from the 1980s through 1995, with slight declines in 1996 and in the
President's policy estimates for fiscal years 1997 through 2002; (7)
research and development shows increases from the 1980s through 1990 and
then drops off gradually; (8) in contrast, education and training has
shown a relatively steady increase from 1981 that is projected to
continue through 2002; (9) the pattern of investment from 1981 through
2002 in constant dollars varies across budget functions; (10) seven
functions contain about 96 percent of investment outlays; (11) two of
those functions, Education and Training and Health, show a general
increase over the period; (12) the General Science function shows an
increase to the mid-1990s and then levels off; (13) the National Defense
and Transportation functions show increases followed by declines in the
1990s and through 2002; and (14) investment spending in the Natural
Resources and Environment and Energy functions show a continued downward
trend from the 1980s through 2002.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-97-88
     TITLE:  Budget Trends: Federal Investment Outlays, Fiscal Years 
             1981-2002
      DATE:  05/21/97
   SUBJECT:  Future budget projections
             Economic growth
             Fiscal policies
             Macroeconomic analysis
             Investments
             Budget deficit
             Budget functions
             Deficit reduction
             Budget outlays

             
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Cover
================================================================ COVER


Report to Congressional Requesters

May 1997

BUDGET TRENDS - FEDERAL INVESTMENT
OUTLAYS, FISCAL YEARS 1981-2002

GAO/AIMD-97-88

Federal Investment Outlays

(935225)


Abbreviations
=============================================================== ABBREV

  BEA - Budget Enforcement Act
  GDP - gross domestic product
  NASA - National Aeronautics and Space Administration
  OMB - Office of Management and Budget
  R&D - research and development

Letter
=============================================================== LETTER


B-276283

May 21, 1997

The Honorable Frank R.  Lautenberg
Ranking Member
Committee on the Budget
United States Senate

The Honorable George E.  Brown, Jr.
Ranking Member
Committee on Science
House of Representatives

Over the past decade, concerns have been raised about declining
levels of federal and domestically financed investment and national
savings.  Continued efforts to reduce the federal government's
deficit could help increase national savings and expand domestic
capital available for private investment.  At the same time, reducing
the deficit places constraints on the government's discretionary
spending, which finances most federal investment.  Thus, as we and
others have noted, it is important to pay attention to the
composition of federal spending. 

As the constraints on discretionary spending have tightened with the
broad agreement to balance the budget by fiscal year 2002, recent
congressional initiatives have sought to promote long-term private
sector economic growth.  These have included the House Science
Committee's work on a proposal (H.Con.Res.  58) to incorporate an
investment component into the budget resolution and Senator Gramm's
proposal for a National Research Investment Act (S.  124) to increase
federal investment in basic science and medical research over the
next 10 years.  You have both expressed interest in the future of
spending for investment and indicated that better information on
recent investment trends would help decision-making.  This letter
responds to your requests for trend data and estimates of future
outlays for investments through fiscal year 2002. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

The share of total federal budget outlays and of gross domestic
product (GDP) devoted to investment\1 gradually declined from the
early 1980s through 1996.  According to the administration's policy
estimates, this decline will continue for 1997 through 2002.\2
However, over the same time period, a slightly different picture
emerges when investment outlays are converted to constant 1992
dollars.\3 Investment spending in estimated constant dollar outlays
increased slightly from the 1980s to the mid- 1990s, with a gradual
decline through 2002. 

Investment by category (character class\4 ) in constant dollars shows
varying patterns.  Physical capital remained relatively stable from
the 1980s through 1995, with slight declines in 1996 and in the
President's policy estimates for fiscal years 1997 through 2002. 
Research and development shows increases from the 1980s through 1990
and then drops off gradually.  In contrast, education and training
has shown a relatively steady increase from 1981 that is projected to
continue through 2002. 

The pattern of investment from 1981 through 2002 in constant dollars
varies across budget functions.\5 Seven functions contain about 96
percent of investment outlays.  Two of those functions, Education and
Training (500) and Health (550), show a general increase over the
period.  The General Science function (250) shows an increase to the
mid-1990s and then levels off.  The National Defense (050) and
Transportation (400) functions show increases followed by declines in
the 1990s and through 2002.  Investment spending in the Natural
Resources and Environment (300) and Energy (270) functions show a
continued downward trend from the 1980s through 2002. 


--------------------
\1 GAO defines investment as federal spending, either direct or
through grants, directly intended to enhance the private sector's
long-term productivity. 

\2 Estimated investment outlays for fiscal year 1998, using our
definition and the President's policy estimates, total $148.6
billion, or 7.2 percent of total estimated federal outlays and 1.8
percent of GDP. 

\3 Constant dollars are dollar values adjusted for changes in the
average price level.  They represent the values that would exist if
prices had remained at the same average level as the base period. 

\4 Character classification is used to report investment activities
separately from non-investment in the President's budget submission. 
Data are classified as investment by agencies when they finance
activities yielding benefits largely in the future such as physical
assets, research and development, and education and training. 
Character classification also distinguishes between grants to state
and local governments and direct federal programs. 

\5 The functional classification is a system of classifying budget
resources to the national needs being addressed, such as defense and
health.  Each budget account is generally placed in the budget
function that best reflects its major purpose.  Functions may be
divided into subfunctions depending on the complexity of the national
need being addressed. 


   BACKGROUND
------------------------------------------------------------ Letter :2

The current budget structure does not highlight for decision-making
purposes the differences between spending for long-term investment
and current consumption because it treats all expenditures the same. 
Nor does the current budget process encourage the Congress to make
explicit decisions about how much spending overall should be devoted
to programs having a direct bearing on long-term growth and
productivity. 

We previously reported\6 that establishing investment targets within
a framework similar to that contained in the Budget Enforcement Act
(BEA) is the most promising way to incorporate an investment
component.  The Congress and the administration would reach agreement
on the appropriate level of investment spending within a given fiscal
policy path.  We suggested that the design of the BEA discretionary
caps could be changed to mandate a separate investment target (or
floor) to protect against infringement from other activities. 

In our 1993 report we concluded that despite the numerous possible
definitions of investment, the most appropriate definition would
include only federal spending, either direct or through grants,
specifically intended to enhance the private sector's long-term
productivity.  This definition includes spending on (1) some
intangible activities, such as research and development (R&D), (2)
human capital designed to increase worker productivity, particularly
education and training, and (3) physical assets to improve
infrastructure, such as highways, bridges, and air traffic control
systems. 

This definition would not include spending for physical capital
designed to achieve federal agency programmatic goals or improve the
government's operating efficiency--such as spending for federal land,
office buildings, and defense weapons systems--because such spending
does not directly enhance productivity in the private sector.  Some
budget subfunctions--such as international affairs, recreational
resources, and law enforcement and justice-- have been excluded from
this analysis because we believe the bulk of spending in these
subfunctions does not directly enhance productivity.  This definition
of investment was also used in our November 1993 report on
incorporating an investment component in the federal budget. 


--------------------
\6 Budget Issues:  Incorporating an Investment Component in the
Federal Budget (GAO/AIMD-94-40, November 9, 1993). 


   OBJECTIVE, SCOPE, AND
   METHODOLOGY
------------------------------------------------------------ Letter :3

The objective of this assignment was to determine the trend in the
federal budget's actual investment outlays from fiscal years 1981
through 1996 and estimates for fiscal years 1997 through 2002. 

As agreed with your offices, the analysis was done on a macro basis,
using aggregate data by investment category and budget function and
subfunction.  We did not analyze data at either the agency or account
level. 

Outlay data used for this analysis were extracted from the automated
information system that the Office of Management and Budget (OMB)
used to prepare the President's annual budget request.  We did not
independently verify this information but traced totals to published
budget documents.  Reported actual outlay data (including offsetting
collections but excluding offsetting receipts) for fiscal years 1981
through 1996 were used for both investment and total federal outlays;
the President's estimates for his policy as shown in the 1998 budget
were used for fiscal years 1997 through 2002.  Annual GDP numbers and
GDP implicit price deflators used in calculating constant dollar
values for investment for fiscal years 1981 through 2002 were
obtained from the Historical Tables accompanying the President's 1998
budget. 


   OVERALL INVESTMENT TRENDS
------------------------------------------------------------ Letter :4

The President's policy estimates of what we have categorized as
investment spending for fiscal year 1998 amount to $148.6 billion, or
7.2 percent of total outlays and 1.8 percent of GDP, part of a
continuing downward trend.  Actual total federal outlays for
investment as a share of total outlays decreased from a high of 10.4
percent in 1981 to 7.8 percent in 1996.  While investment rose in
some years, the overall trend was down, as shown in figure 1. 
Investment outlays for fiscal years 1997 to 2002 are projected to
continue this downward trend by steadily declining from 7.4 percent
to 6.6 percent of total outlays. 

   Figure 1:  Investment as a
   Percent of Total Outlays,
   Fiscal Years 1981 Through 2002

   (See figure in printed
   edition.)

Investment's share of total outlays may be influenced as much by
increases in noninvestment outlays as by investment outlays
themselves.  Accordingly, to offer assurance that the investment
trend line was not primarily driven by increases in overall federal
outlays, we analyzed the outlays' share of GDP.  As shown in figure
2, we found that actual investment outlays as a percent of GDP
followed the same pattern as investment outlays as a percent of total
federal outlays.  From a high of 2.6 percent of GDP in 1981,
investment outlays fell to 1.9 percent of GDP in 1996.  While the
decline was not steady from year to year, the overall trend was
downward.  Future outlays are projected to remain steady at 1.8
percent of GDP for 1997 through 1999 and then steadily decline to 1.5
percent in 2002. 

   Figure 2:  Investment as a
   Percent of Gross Domestic
   Product, Fiscal Years 1981
   Through 2002

   (See figure in printed
   edition.)

Figure 3 shows nondefense outlays\7 for investment as a share of
total outlays.  They drop from 8.5 percent of total outlays in 1981
to a low of 5.3 percent in 1990, then rise to 6.3 percent in 1995 and
fall to 6.1 percent in 1996.  Future estimates show a continued
downward trend to 5.2 percent of total federal outlays in 2002.  As
shown in figure 4, nondefense outlays as a percent of GDP show the
same pattern. 

   Figure 3:  Nondefense
   Investment as a Percent of
   Total Outlays, Fiscal Years
   1981 Through 2002

   (See figure in printed
   edition.)

   Figure 4:  Nondefense
   Investment as a Percent of
   Gross Domestic Product, Fiscal
   Years 1981 Through 2002

   (See figure in printed
   edition.)

The spending pattern is different when analyzed in terms of constant
dollars.  As shown in figure 5, investment spending dropped from $124
billion in 1981 to $107 billion in 1982.  However, it increased
somewhat steadily to $137 billion in 1995.  Thereafter, estimates for
constant dollar investment outlays decline to an estimated $120
billion in 2002. 

   Figure 5:  Investment for
   Fiscal Years 1981 Through 2002
   in Constant 1992 Dollars

   (See figure in printed
   edition.)


--------------------
\7 Total federal investment outlays minus investment outlays in the
Defense function. 


   INVESTMENT BY CATEGORY
------------------------------------------------------------ Letter :5

Investment by category is a way of describing the three major types
of investment financed by the federal government--outlays for
physical assets, research and development, and education and
training.  These basic categories are determined by character class
designations federal agencies report in the budget.  They are
subdivided into more detailed categories, such as construction and
rehabilitation or equipment (physical assets); basic, applied, and
development (research and development); or direct federal programs or
grants to others (physical assets, research and development, and
education and training). 


      PHYSICAL ASSETS
---------------------------------------------------------- Letter :5.1

This category includes federal spending on physical assets intended
to promote long-term private sector economic growth.  It includes
such major items as federal-aid highways, airport facilities and
equipment, and Department of Energy and National Aeronautics and
Space Administration (NASA) research facilities.  It excludes
spending for physical assets whose principal use is in agency
missions, such as federal office buildings and weapons systems.  In
constant dollars, actual investment in physical assets has remained
relatively stable over the term of our analyses--ranging only from
highs of about $36 billion in 1981, 1986, and 1995 to a low of $29
billion estimated for 2002 (see figure 6). 

   Figure 6:  Investment in
   Physical Assets for Fiscal
   Years 1981 Through 2002 in
   Constant 1992 Dollars

   (See figure in printed
   edition.)


      RESEARCH AND DEVELOPMENT
---------------------------------------------------------- Letter :5.2

This category includes the R&D activities of the Department of
Defense (excluding applied research), NASA, National Institutes of
Health, Department of Energy, and others.  As shown in figure 7,
outlays for R&D in constant dollars increased from $48 billion in
1981 to $63 billion in 1990, then decreased to $58 billion in 1996. 
This gradual decline continues with the estimates declining to $50
billion in 2002. 

   Figure 7:  Investment in
   Research and Development for
   Fiscal Years 1981 Through 2002
   in Constant 1992 Dollars

   (See figure in printed
   edition.)


      EDUCATION AND TRAINING
---------------------------------------------------------- Letter :5.3

This category includes items such as the Department of Labor's
training and employment services, the Department of Veterans Affairs'
readjustment benefits, and the Department of Education's student
financial assistance.  As shown in figure 8, education and training
constant dollar outlays are generally expected to rise during the
outyears, a slightly different trend from those of physical assets
and R&D.  After a sharp decline from 1981, outlays remained
relatively flat at $29 billion to $31 billion through 1990 before
beginning a rising trend, expected to reach the $40 billion to $42
billion level from 1998 through 2002. 

   Figure 8:  Investment in
   Education and Training for
   Fiscal Years 1981 Through 2002
   in Constant 1992 Dollars

   (See figure in printed
   edition.)


   INVESTMENT BY BUDGET FUNCTION
------------------------------------------------------------ Letter :6

Budget functions are groupings of budgetary resources according to
the national needs being addressed without regard to agency or
organizational distinctions or the category (character class) of
resources used. 

Investment outlays in seven budget functions comprise about 96
percent of all investment outlays, with the top four comprising
almost 80 percent of total investment.  In descending order of
constant dollar investment outlays, the functions are (1) Education,
Training, Employment, and Social Services, (2) National Defense, (3)
Transportation, (4) Health (principally R&D at the National
Institutes of Health), (5) General Science, Space, and Technology,
(6) Natural Resources and Environment, and (7) Energy.  While there
may be year-to-year variations in outlays, these seven functions can
be placed into three groups based on their general spending
trends--increased, mixed, and declining. 


      INCREASED SPENDING
---------------------------------------------------------- Letter :6.1

The Education, Training, Employment, and Social Services function
contains such investment items as the Department of Labor's training
and employment services; the Department of Health and Human Service's
children and families services programs; and the Department of
Education's student financial assistance, special education, family
education loans, and education for the disadvantaged programs.  The
overall constant dollar outlay trend for this function\8 (500) is
upward, as shown in figure 9.  A sharp decline from $34 billion to
$26 billion between 1981 and 1982 was followed by generally
increasing outlays up to $40 billion in 1995.  Outlays are projected
to decline in 1997 before climbing back to the $39 billion to $40
billion level for 1999 through 2002. 

   Figure 9:  Investment Outlays
   for the Education, Training,
   Employment, and Social Services
   Function in Constant 1992
   Dollars, Fiscal Years 1981
   Through 2002

   (See figure in printed
   edition.)

Constant dollar investment outlays in the Health function (550),
which are largely R&D carried out by the National Institutes of
Health, show a general rise from 1981 through 2002.  Although outlays
fell from about $7 billion in 1981 to $6 billion in 1984, they rose
fairly consistently to an estimated $12 billion in 1998 before
starting a gradual decline to an estimated $11 billion in 2002.  (See
figure 10.)

   Figure 10:  Investment Outlays
   for the Health Function in
   Constant 1992 Dollars, Fiscal
   Years 1981 Through 2002

   (See figure in printed
   edition.)


--------------------
\8 The functional totals for education and training are lower than
the category (character class) of investment called education and
training.  This is because some education and training in federal
agencies is classified in functional reporting as part of the agency
mission (for example, the National Defense function) rather than the
education and training function. 


      MIXED TRENDS
---------------------------------------------------------- Letter :6.2

As shown in figure 11, the General Science, Space, and Technology
function (250), which includes National Science Foundation and NASA
research, dropped sharply in constant dollar outlays from $10 billion
in 1981 to $5 billion in 1983.  Outlays then continued a fairly
steady increase to $11 billion in 1995.  In 1996, outlays and
estimated future outlays begin to gradually decline through 2002,
when they are projected to be about $9 billion. 

   Figure 11:  Investment Outlays
   for the General Science, Space,
   and Technology Function in
   Constant 1992 Dollars, Fiscal
   Years 1981 Through 2002

   (See figure in printed
   edition.)

Investment outlays for the National Defense function (050), which
includes basic and developmental military R&D, increased in constant
dollars from $22 billion in 1981 to $40 billion in 1986, then
stabilized at that level through 1990.  After 1990, defense outlays
declined rather steadily to $31 billion in 1995.  After a small
increase in 1996 to $33 billion, estimates through 2002 show a
gradual decline to $26 billion.  (See figure 12.)

   Figure 12:  Investment Outlays
   for the National Defense
   Function in Constant 1992
   Dollars, Fiscal Years 1981
   Through 2002

   (See figure in printed
   edition.)

Under our definition of investment, this function does not include
military construction, weapons procurement, and defense applied
research.  Basic and developmental research are included because of
possible adaptation to civilian use, particularly in the aviation
industry.  Others may have a different opinion on what defense items
to include as investment.  For example, OMB includes only defense
basic research in its national capital\9

presentation. 

Outlays for the Transportation function (400) include federal-aid
highways spending from the transportation trust fund, federal transit
formula grants, and facilities and equipment outlays from the airport
and airway trust fund.  In constant dollars, the outlays have peaks
and valleys but the trend has been generally slightly upward. 
Outlays reached a high of $27 billion in 1996.  However, as
illustrated in figure 13, estimates for 1997 and beyond show a
downward trend to $23 billion in 2002. 

   Figure 13:  Investment Outlays
   for the Transportation Function
   in Constant 1992 Dollars,
   Fiscal Years 1981 Through 2002

   (See figure in printed
   edition.)


--------------------
\9 Except for its exclusion of defense developmental R&D, OMB's
national capital presentation closely approximates our definition of
investment. 


      DOWNWARD TRENDS
---------------------------------------------------------- Letter :6.3

Investment outlays in the Natural Resources and Environment function
(300), which includes items such as Environmental Protection Agency
activities, show a continuous downward trend from 1981 through 2002. 
As seen in figure 14, constant dollar outlays of $11 billion in 1981
decreased to $6 billion in 1996 with a few intervening small
upswings.  Estimates for 1997 through 2002 show a continuing decline
to about $5 billion. 

   Figure 14:  Investment Outlays
   for the Natural Resources and
   Environment Function in
   Constant 1992 Dollars, Fiscal
   Years 1981 Through 2002

   (See figure in printed
   edition.)

Investment outlays in the Energy function (270), which includes
Tennessee Valley Authority and Department of Energy activities, show
a downward trend similar to the natural resources function.  As seen
in figure 15, constant dollar outlays were almost $10 billion in 1981
but dropped to under $5 billion in 1996.  Despite upward spikes in
outlays in 1985, 1992, and 1995, the overall trend was still
downward.  Estimated outlays for 1997 to 2002 show a continued
decline to $3 billion. 

   Figure 15:  Investment Outlays
   for the Energy Function in
   Constant 1992 Dollars, Fiscal
   Years 1981 Through 2002

   (See figure in printed
   edition.)


---------------------------------------------------------- Letter :6.4

We are sending copies of this report to the Chairman of the Senate
Budget Committee, the Chairman of the House Science Committee, and
the Chairman and Ranking Minority Member of the House Budget
Committee.  Copies will also be sent to others on request. 

Please contact me at (202) 512-9142 if you or your staffs have any
questions concerning this letter.  Christine Bonham, Assistant
Director, and Robert Sexton and John Mingus, Senior Evaluators, were
the major contributors to this report. 

Susan J.  Irving
Associate Director, Budget Issues

*** End of document. ***