Brown Investment Strategy :: September 25, 1996

EMPHASIZING INVESTMENT IN R&D

A Proposal for a Balanced Budget
Presented by the Honorable

GEORGE E. BROWN, JR.

Ranking Democratic Member
Committee on Science
U.S. House of Representatives
September 25, 1996

The current political debate over balancing the budget has not fully recognized the proper role of Federal spending in certain investment areas such as R&D which can stimulate productivity and have positive benefits for economic growth. Although more difficult for economists to quantify and longer term in nature, R&D investments can have substantial economic dividends just as eliminating the deficit does in current budgetary scoring rules.

This proposal illustrates one possible approach to achieving a balanced budget by the year 2002 while maintaining such R&D investments. The goal of this proposal is to demonstrate the feasibility of reorienting our national priorities towards investment rather than consumption and to offer an alternative to the current competing budget proposals.

A central feature of this budget is the proposal for a 5% annual increase for all Federal R&D. This provides about $38 billion more than the President and $49 billion more than the Republicans for R&D over the six year period. (Figure 1)

Figure 1

This increase is intended to ensure that overall investment in R&D will keep pace with, and establish a strong relationship with, the growth of the overall economy. The objective here is to encourage overall R&D expenditures, both public and private, to maintain the current investment ratio with respect to the GDP, about 2.4%. If industrial R&D, which comprises more than half of all R&D expenditures, performs moderately well and responds to Federal funding trends and to other policies intended to encourage private investment, this goal will be maintained. If successful, this combination of increased public and private investment in R&D will reverse the declining national trend which has attracted widespread concern. (Figure 2)

Figure 2

It should be mentioned, however, that this proposal simply freezes the current investment ratio; it does not recover the investment ratio of about 3% of the GDP that has been advocated by many, nor does it guarantee that the U.S. will remain competitive with the Japanese and other industrial competitors who are surpassing us in the percent of GDP dedicated to R&D investments. Reaching the 3% goal, which was proposed by the Office of Science and Technology Policy in 1994,¹ and remaining abreast of our international competitors must be addressed after the budget is in balance - that is, beginning in the year 2002.

Past attempts to structure policies aimed at providing such sustained growth for R&D have been frustrated by the reality that the overall Federal budget is a zero sum game.² Increases in one area must be offset by decreases in other areas. Thus, this balanced budget proposal takes account of the need to consider all elements of the Federal budget. It represents one example of how R&D can be provided a positive growth envelope within a balanced budget context. Basic features of this proposal are as follows:

 

• For Defense discretionary spending, this proposal maintains Defense at the President's 1997 request level throughout the six year period. This spending profile does not include the reductions contained in the President's proposal in the next two fiscal years nor does it include the increases in the out years. (Figure 3) This proposal does not include the higher Defense spending levels proposed by the Republicans for unrequested new projects.³ For Defense R&D, which comprises more than half of all Federal R&D, growth would primarily take place in the basic and applied research categories rather than weapons systems development.

Figure 3

 

• In other areas of domestic discretionary spending, this proposal provides stable funding throughout the six year period and avoids the potential reductions that would be necessary to balance the President's budget or the reductions advocated in the Republican budget. This proposal provides about $33 billion more than the President and $103 billion more than the Republicans for non-R&D related domestic discretionary spending. (Figure 4) This can be used for other investment categories such as physical capital, and education and training that have a long term economic benefit.

Figure 4

 

• The resulting overall discretionary spending is over $50 billion above the President's budget and $117 billion above the Republican budget but still provides $187 billion in savings over the current baseline. (Figure 5)

Figure 5

 

• For Mandatory spending, this proposal adopts the recommendations of the Coalition (Figure 6). This includes a number of programmatic reforms, some of which resemble the recently passed welfare reform bill, H.R. 3734. Full adoption of the welfare reform bill would provide an additional $13 billion in savings.

Figure 6

 

• For revenues, this proposal adopts the recommendations of the Coalition. This includes several revenue enhancing initiatives such as spectrum auctioning and elimination of tax loopholes but is most heavily influenced by the absence of a tax cut.

 

• For Net Interest, this proposal adopts the assumptions of the Coalition.

 

• The resulting deficit profile is more favorable than either the President's budget or the Republican budget and resembles somewhat the Coalition profile. (Figure 7) The deficit is eliminated by 2002.

Figure 7

Although beyond the scope of this analysis, additional increases in some spending areas could be established after the budget is balanced in the same manner as proposed by the President. The highest priority candidates for this reinvestment would be high payoff areas such as R&D.

ENDNOTES

[1] Clinton-Gore policy paper Science in the National Interest, August, 1994.

[2] Augustine, et al., Report of the Advisory Committee on the Future of the U.S. Space Program, December, 1990.

[3] For F.Y. 97, Senator James Exon (D-NE) has estimated that $4.6 billion has been added to the Defense Authorization bill for unrequested projects; Washington Post, July 19, 1996, page A-31.