oversight

Budget Trends: Federal Investment Outlays, Fiscal Years 1981-2002

Published by the Government Accountability Office on 1997-05-21.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                 United States General Accounting Office

GAO              Report to Congressional Requesters




May 1997
                 BUDGET TRENDS
                 Federal Investment
                 Outlays, Fiscal Years
                 1981-2002




GAO/AIMD-97-88
                   United States
GAO                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 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.


                   The share of total federal budget outlays and of gross domestic product
Results in Brief   (GDP) devoted to investment1 gradually declined from the early 1980s
                   through 1996. According to the administration’s policy estimates, this




                   1
                    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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             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 class4 ) 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.


             The current budget structure does not highlight for decision-making
Background   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



             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.


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                        decisions about how much spending overall should be devoted to
                        programs having a direct bearing on long-term growth and productivity.

                        We previously reported6 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.


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




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



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                     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.


                     The President’s policy estimates of what we have categorized as
Overall Investment   investment spending for fiscal year 1998 amount to $148.6 billion, or
Trends               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.




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

12   Percent of outlays



10



 8



 6



 4



 2



 0

 1981                     1985                       1990                            1995                         2000       2002

 Fiscal year


               Actual
               Estimate




                                          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.




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

3.0   Percent of GDP



2.5



2.0



1.5



1.0



0.5



 0

  1981                     1985                       1990                               1995                                  2000   2002

  Fiscal year


                Actual
                Estimate




                                         Figure 3 shows nondefense outlays7 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.




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



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

10   Percent of total outlays




 8




 6




 4




 2




 0

 1981                           1985                 1990                        1995                         2000       2002

 Fiscal year


               Actual
               Estimate




                                          Page 7                                    GAO/AIMD-97-88 Federal Investment Outlays
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Figure 4: Nondefense Investment as a Percent of Gross Domestic Product, Fiscal Years 1981 Through 2002

2.5   Percent of GDP




2.0




1.5




1.0




0.5




 0

  1981                     1985                     1990                       1995                         2000       2002

  Fiscal year


                Actual
                Estimate




                                         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.




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

140   Dollars in billions


120


100


 80


 60


 40


 20


 0

  1980                      1985                     1990                          1995                         2000       2002

  Fiscal year

                Actual
                Estimate



                                          Investment by category is a way of describing the three major types of
Investment by                             investment financed by the federal government—outlays for physical
Category                                  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                           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



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                                          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

40   Dollars in billions




30




20




10




 0

 1981                      1985                      1990                         1995                         2000       2002

 Fiscal year


               Actual
               Estimate



Research and                              This category includes the R&D activities of the Department of Defense
Development                               (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.




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

70   Dollars in billions


60


50


40


30


20


10


 0

 1981                      1985                     1990                        1995                           2000     2002

 Fiscal year

               Actual
               Estimate



Education and Training                   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.




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

50   Dollars in billions




40




30




20




10




 0

 1981                      1985                      1990                        1995                         2000       2002

 Fiscal year


               Actual
               Estimate



                                          Budget functions are groupings of budgetary resources according to the
Investment by Budget                      national needs being addressed without regard to agency or organizational
Function                                  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                        The Education, Training, Employment, and Social Services function
                                          contains such investment items as the Department of Labor’s training and



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                                          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 function8 (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

50   Dollars in billions




40




30




20




10




 0

 1981                      1985                        1990                                 1995                                2000           2002

 Fiscal year


               Actual
               Estimate




                                          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

                                          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.



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                                          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

14   Dollars in billions


12


10


 8


 6


 4


 2


 0

 1981                      1985                      1990                         1995                           2000     2002

 Fiscal year

               Actual
               Estimate



Mixed Trends                              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.




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

12   Dollars in billions



10



 8



 6



 4



 2



 0

 1981                      1985                      1990                        1995                         2000       2002

 Fiscal year


               Actual
               Estimate




                                          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.)




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

50   Dollars in billions




40




30




20




10




 0

 1981                      1985                       1990                                1995                               2000          2002

 Fiscal year


               Actual
               Estimate




                                          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 capital9
                                          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.

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



                                          Page 16                                            GAO/AIMD-97-88 Federal Investment Outlays
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Figure 13: Investment Outlays for the Transportation Function in Constant 1992 Dollars, Fiscal Years 1981 Through 2002

30   Dollars in billions



25



20



15



10



 5



 0

 1981                      1985                      1990                        1995                         2000       2002

 Fiscal year


               Actual
               Estimate



Downward Trends                           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.




                                          Page 17                                   GAO/AIMD-97-88 Federal Investment Outlays
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Figure 14: Investment Outlays for the Natural Resources and Environment Function in Constant 1992 Dollars, Fiscal Years
1981 Through 2002

12   Dollars in billions



10



 8



 6



 4



 2



 0

 1981                      1985                      1990                        1995                         2000        2002

 Fiscal year


               Actual
               Estimate




                                          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.




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

12   Dollars in billions



10



 8



 6



 4



 2



 0

 1981                      1985                      1990                        1995                            2000    2002

 Fiscal year


               Actual
               Estimate



                                          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



(935225)                                  Page 19                                   GAO/AIMD-97-88 Federal Investment Outlays
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