Brown Investment Budget :: March 25, 1997

Investment Budget Initiative

proposed by the Honorable

GEORGE E. BROWN, JR.

Ranking Democratic Member
Committee on Science
U.S. House of Representatives
March 25, 1997

The 104th Congress was a crucial turning point in addressing the Federal deficit. The White House, the Republican majority, and the Democratic minority have all committed to achieving a fully balanced budget by the year 2002. While this will remain a political imperative, there is not yet a coherent or unifying policy to guide this process. Past proposals Congress has considered range from artful accounting exercises to ideological social blueprints. None have fully addressed the underlying imperative to create an economy that can sustain growth after the year 2002.

During the 105th Congress, an alternative budget resolution will be offered that will establish moderate budgetary growth and sustained investments in capital expenditures that are associated with future productivity. The Investment Budget will also eliminate the deficit by the year 2002 by proposing certain changes in entitlement programs, and curbing the growth of other non-investment discretionary programs. In addition, the Investment Budget will postpone any proposed tax cuts until the budget is balanced.

The proposed Investment Budget sets specific targets for growth in investments, such as research and development, physical infrastructure, and education and training. The overall goal for research and development spending is aimed at keeping pace with the growth in the Gross Domestic Product and reversing the declining trend evident in other budget proposals.

The goal for physical infrastructure funding is to achieve productivity gains over the near term by improving surface, water, and air transportation systems and enhancing their efficiency. This is accomplished by increasing discretionary spending to a level that can be efficiently sustained by the existing trust fund revenues.

The third critical element relates to human resources. Aggressive education and training programs will ensure that all Americans can participate in and benefit from these productivity gains. The goal is to narrow the income gap and to enable a workforce that can be integrated into the overall growth in the economy that technology and transportation investments will bring.

Consumption vs. Investment

In the President?fs Fiscal Year 1998 budget request, the funding level for Federal investments represents 2.7% of the Gross Domestic Product (GDP).¹ This is the lowest level of funding for Federal investments since definitional records have been kept. Although the balance between defense and civil investments has been restored over the past several years, the overall level has declined steadily.

The case for investments rests on the long recognized strong relationship with economic growth. Growth in the GDP is generally due to the growth in the labor force (which is entirely dependent on demographics) and growth in the productivity index, the output produced per unit of input. The latter is strongly influenced by investments in technology, capital infrastructure and human resources. That is, productivity depends directly on the availability of private capital stock, workforce skill and training, and the rate at which technology is improved and applied in the workplace.

The corollary to this is that economic growth and economic opportunity are complementary.² Economic growth will make resources broadly available to widen opportunity and increase employment. The slowdown in productivity beginning in the 1970s was accompanied both by slower growing family real incomes and by a widening of the income gap.

In order to renew and sustain productivity increases over the next decade, the emerging consensus among economists is that policies should be pursued that increase higher national savings, encourage more open and efficient markets, and shift public spending away from consumption and towards productive investment.³ It is this latter policy goal that is the focus of the Investment Budget. It should be emphasized, however, that a budget resolution alone cannot address the full scope of the productivity problem. Additional public policies will be called for over the coming decade that complement this in other areas such as overall fiscal control, international trade, and incentives for private capital formation.⁴

Why Investing is Difficult

A long-recognized structural defect in the Congressional decisionmaking process has been the failure to distinguish between capital investments and consumption.⁵ There are several factors that account for this. First, the President?fs budget does not specifically identify investments in a manner that can be addressed in the Congressional budget process.

Although there is typically a cross-cutting analysis of investments accompanying the President?fs budget submission, these programs are imbedded in larger budgetary aggregates and often merge investments that are associated with growth with other programs aimed only at increasing administrative efficiency.⁶ Thus, although a decision can be made concerning a specific project during the appropriations process, investments as a whole are diffused throughout the appropriations committees and their significance is obscured. Aggregate support for investments is the result of a myriad of tradeoffs rather than any planned target.

Second, the present structure of the Congressional budget process for allocating discretionary resources is strongly influenced by the Cold War concern for maintaining a strong defense. Thus, Congress has acted to construct a budgetary "firewall" between defense and non-defense discretionary expenditures. The decisionmaking process then takes place in two separate vacuums. Funding to continue combat-ready Reserve units is pitted against weapons modernization, funding to advance new cutting-edge technologies is pitted against new prisons, the space program is pitted against veterans, and so on.

The Investment Budget, on the other hand, is aimed at restructuring the budget process to directly distinguish between investments and consumption in the decisionmaking process. This will provide a more meaningful contemporary context to the decisionmaking process that will be needed in the coming decades. The "firewall" that previously existed between defense and non-defense spending will be transformed into a division between investments and non-investments. Under this process, specific multi-year targets for investments will be set that can sustain and enhance productivity. The allocation process made under Section 602 of the Budget Act will be oriented around investments and non-investments rather than defense and non-defense.

Investment Budget vs. Capital Budget

An alternative approach that has received ample consideration in the past is the development of a "capital" budget. Under this approach, only the depreciation on capital investments would be counted for the purpose of balancing the budget. In theory, this would provide greater flexibility in financing long-term investments. Borrowing for such capital investments would be allowed, but borrowing for non-investments would be discouraged to the extent that this would result in a deficit.

Although this approach would, in principle, provide a valid way to nurture the investments needed for future economic growth, the General Accounting Office (GAO) has pointed out the practical difficulties in adequately assessing the depreciation on many investments.⁷ That is, depreciation for bridges and highways is relatively straightforward; the depreciation on R&D and education and training becomes an overly arbitrary exercise. Thus, at best, the capital budget concept is applicable to only a narrow class of investments.

The Investment Budget represents an alternative to capital budgeting that can be more easily implemented within the present unified budget concept. The Investment Budget is intended to identify specific targets for investments over the next five years and to insulate these from incursions by consumption spending.

Federal Investments Included in the Investment Budget

Although the Office of Management and Budget lists a large number of programs as investments, many of these are not usually associated with economic productivity, but instead relate to the efficiency of delivering Federal goods and services. For the purposes of the Investment Budget, only the subset of these that can be rationally related to economic productivity has been used. The Investment Budget identifies $910 billion in public investments over the five year period ending in 2002. This exceeds the President?fs request for these investments by over $70 billion.

These investments fall into three categories:

First, all Federal research and development has been included. These expenditures are intended to enhance long-term productivity and should maintain a specific relationship with the overall economic growth rate they are intended to support. More than half of U.S. productivity has been associated with technological innovation.⁸

Second, capital infrastructure investments in transportation and public works has been included. For the most part these are envisioned to stimulate productivity over the short term and will have a direct impact on commerce and the quality of life. Generally, these investments improve market access and the efficiency of markets.

Third, funding for education and training has been included in order to sustain a productive workforce and in order to ensure that the benefits of economic growth are equitably distributed. (For example, productivity gains in technology and transportation alone may only enable industry to relocate to cheaper foreign labor markets and would thus widen the income gap unless parallel investments in the domestic workforce were maintained.) Work force education and training accounts for roughly 20% of productivity increases in the last several decades in the U.S.⁹

A brief summary of the investments included in the Investment Budget follows:

• All civil R&D programs, including:
• the National Institutes of Health;
• the National Science Foundation;
• the National Institute of Standards and Technology;
• the Department of Energy;
• the National Aeronautics and Space Administration;
• the Department of Agriculture; and
• the National Oceanic and Atmospheric Administration

have been provided an annual growth rate of 5% per year. In sum, this bill contains $409 billion over the next 5 years for all civil R&D, an increase of $31 billion over the President?fs request. Defense R&D has been increased by $4.6 billion above the President?fs request over the same 5 year period, primarily in the post 1999 time frame in order to support modernization needs.

• Stable funding for all Environmental Protection Agency regulatory, research and enforcement programs including the Superfund program. In sum this bill contains over $24 billion, an increase of $2 billion over the President?fs request.
• Stable funding for all rural development and economic development assistance programs. This bill contains $6.4 billion, an increase of $500 million over the Administration?fs request.
• A total of $218 billion for ground, air and water transportation programs, an increase of $37 billion over the President?fs request.

• A total of $196 billion for elementary, secondary, vocational education, and higher education programs. This reflects the President?fs request.

• $34 billion for Social Service programs, including the National Service Initiative and Children and Family Services programs. This reflects the President?fs request.
• $21 billion for nutrition programs, including the Special Supplemental Food Program for Women, Infants and Children (WIC). This reflects the President's request.

Overall, the Investment Budget provides about $70 billion above the Administration's request for these programs. The increase is dominated by - and about equally divided between - research and development and transportation systems.

Balancing the Budget

Although many economists do not necessarily consider a balanced budget an economic necessity in the current environment,¹⁰ it has become a political imperative.¹¹ Thus, the Investment Budget initiative was undertaken with the goal of producing a fully balanced budget by the year 2002 using Congressional Budget Office (CBO) scoring. The CBO has estimated that policy changes that have the effect of reducing spending or increasing revenues by $387 billion over the next five years will result in a reduction of the debt service and an overall fiscal dividend that will fully erase the deficit by the year 2002.¹² The CBO has found that the Investment Budget will achieve over $395 billion in savings over the next five years and result in a surplus by 2002. In addition, the Investment Budget meets the FY 1998 discretionary spending cap, as computed by CBO, and begins to reduce the deficit in the first year.

A summary of budgetary savings and other initiatives in the Investment Budget, compared to the CBO baseline, follows:

• Defense spending has been frozen at the F.Y. 1997 spending level throughout the five year period. This results in a $40 billion, or 3%, reduction in outlays over the next five years compared to the Administration request. Within this, however, defense R&D has been increased by $4.6 billion. The Investment Budget is envisioned to result in a rich technological environment that will offer a new generation of improved, cost saving innovations by the year 2000. This will offer an array of potentially useful new weapons systems that may dramatically affect the current concepts of force structure and defense posture.¹⁴ In view of this, the Investment Budget does not commit to any specific modernization program before the year 2002, but would provide for a continuous program of prototype development and technology demonstration.
• Medicaid growth has been slowed by $25 billion over the five year period by adoption of the Conservative Coalition recommendations for entitlement reform. This includes a per capita cap constraining the rate of increase in Federal payments to States.
• Medicare growth has been slowed by $120 billion over the five year period by adoption of the Conservative Coalition recommendations for entitlement reform. This includes extension of the 25% Part B premium until the year 2002, expanded choice, and changes to provider payments.

• The Consumer Price Index has been reduced by 0.5% throughout the five year period. This is less than recommended by the Boskin Commission, but reflects the assumptions used in the Investment Budget in 1996.
• All of the recommendations contained in the President's request for elimination of unwarranted benefits, extension of excise taxes, and other revenue proposals have been included.
• The Investment Budget contains no tax cuts. Although some targeted initiatives such as the proposed $500 per child tax credit, and the extension of the R&D tax credit may have merit, they should be accomplished through a separate tax package not related to balancing the budget.
• The Investment Budget does not utilize asset sales in order to balance the budget. Of particular importance, spectrum auctioning is not utilized as a revenue enhancement. Instead, the Investment Budget requires that all proceeds from the sale of spectrum be deposited in a trust fund that can be used to sustain investment spending in the future.

Because the CBO has found that the President's request does not represent a balanced budget, direct comparisons are difficult. However, overall non-defense discretionary spending in the Investment Budget is $13 billion above the President's unmodified request. The difference would likely be much larger if the President's request were modified to include additional discretionary cuts. The CBO has indicated that over $35 billion in additional reductions may need be made to discretionary accounts in 2001 and 2002.

A comparison of the deficit reduction schedules for the Investment Budget and the modified President's budget shows that the Investment Budget reduces the deficit at a moderately more aggressive rate.

However, as is invariably the case, the need to phase in specific spending policies on a realistic schedule, together with the steeply rising CBO deficit baseline reference, results in most of the deficit reduction taking place in the last two years. The Investment Budget eliminates over 50% of the deficit in this time frame. A more meaningful test of credibility, however, is not how the deficit reduction is distributed chronologically, but whether the deficit reduction policies are permanent in nature, and whether the overall economy will have the capability to grow after the budget is balanced. The Investment Budget meets these tests.

Budgetary Process Improvements

The Investment Budget will be developed as a Budget Resolution, the only legislative vehicle that directly balances all spending elements of the budget together with revenues and interest on the debt. The goal is to meet all binding criteria for the Congressional budget including the current limitation on discretionary spending, inclusion of all trust funds within the budget, and elimination of the deficit by the year 2002.

For the first time, the Investment Budget directly identifies investments at the Subfunction level and provides recommended levels of funding throughout the five year period. The legislation requires, further, that allocations by the Appropriations Committee must be made in accordance with the recommended division between investments and non-investments. Thus, once these allocations are made, the subdivided allocations in each Appropriations Subcommittee cannot be exceeded. That is, funding cannot be transferred from investments to non-investments. Although this does not preclude a Congressional reduction of investment spending for the sole purpose of reducing Federal expenditures, it would discourage distortions of the budget process that have placed a high political value on non-investments in the past.

Summary

The Investment Budget is aimed at maintaining strong Federal investment in areas such as research and development, capital infrastructure, and education and training within an overall balanced budget. This proposal is the only credible balanced budget plan which provides sustained growth for the very investments that form the basis for expanding the future economy. The Investment Budget recognizes that in the post-Cold War era, the critical balance should be struck between investments and consumption rather than defense and non-defense. The legislation establishes a process which protects investments from excessive growth in consumption programs. Key aspects of the Investment Budget:

• Balanced Budget. The Investment Budget eliminates the deficit by the year 2002 using CBO assumptions.
• Investments. The legislation identifies $910 billion in public investments over the 5 year period. This exceeds the President's request for these programs by over $70 billion.
• Offsets. In addition to eliminating the Federal deficit, this proposal fully offsets all increases for investments in the bill.
• Permanent Savings. The Investment Budget is fiscally responsible and includes no one-time budget-balancing gimmickry. It does not utilize asset sales such as spectrum auctioning as a revenue enhancement to balance the budget. Instead, the Investment Budget proposes to deposit all proceeds from spectrum auctioning in a trust fund in order to meet future public investment needs.
• No Tax Cuts. The legislation assumes no tax cuts before the budget is balanced.