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United States General Accounting Office (*A Q Report to Congressional Requesters =U)D CeEeT TRENDS Federal Investment Outlays, Fiscal Years 1981-2002 , “qIuNeFeOrRMsA TSIROEN OF SA ERVpICeEe - | rs’S ! 99 Noy 1997 e'Weel leare CA entre f2 or Me| dic+ amlt Cscc iencec)a TT ne eae jibe ke GAO/AIMD-97-88 GAO United States General Accounting Office Washington, D.C. 20548 Accounting and Information Management Division 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 o 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 privat 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. The share of total federal budget outlays and of gross domestic product Results in Brief (cpp) devoted to investment! gradually declined from the early 1980s through 1996. According to the administration's policy estimates, this 'GAO defines investment as federal spending, either direct or through grants, directly intended to enhance the private sector’s long-term productivity. 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However, over the same time period, a slightly different picture emerges when investment outlays are converted to constant 1992 dollars.’ 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‘ ) 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.’ 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. Background 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 “Estimated investment outlays for fiscal year 1998, using our definition and the President's polic estimates, total $148.6 billion, or 7.2 percent of total estimated federal outlays and 1.8 percent of GDP. 3Constant 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. ‘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. °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. 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Penieanen Looel os oasneg Be 9ab il aR DG 8 wel = 4p : ‘ ° ~a res - 7 = co a eats tnseericoe endl ives Korey serve lt peed: facshia Yhn ebne rheistlewibs , ‘an atalie a2 me ibe eco “ rations re Wi nema radar yr Se meen sot) pees a — ni saivail «xilanteiad wesiisiahd datas : Ss a. pores Pe a hget a 8 nidek Bay heh ia eee iy) ale i sa 5 Bae t Le Sees e-Di ete ere pel i u sy Lo oe Pat te ated Ahad e : - 7 , ot oe)n e } = .) : - et i La ai eer gt oh pepe tllls ard a a? <a are POPOL LIAO CBT. CO ERIM Mpa B-276283 decisions about how much spending overall should be devoted to programs having a direct bearing on long-term growth and productivity. We previously reported? 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. Objective, Scope, and 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 Methodology estimates for fiscal years 1997 through 2002. °Budget Issues: Incorporating an Investment Component in the Federal Budget (GAO/AIMD-94-40, November 9, 1993). 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