This report examines approaches to budgeting that would distinguish expenditures for investment in physical capital, education, and research and development from other expenditures.
Federal investments can provide long-term benefits and can spur economic growth. The federal budget records expenses for investment projects up front, not over the project’s lifetime of use. Because of that mismatch between when costs are recorded and when benefits occur, investment projects may seem expensive relative to other government expenditures, and the large amounts of up-front funding required for some types of investments can make it difficult to fund them within the constraints of the budget process.
The economic benefits of increasing capital spending would depend on how well the additional funds were targeted to high-value projects and on the extent to which they displaced spending that would otherwise be undertaken by the private sector or by state and local governments. However, among competing uses of federal resources, more federal investment might not be the most warranted or desirable option.
This report examines budgetary options that would distinguish expenditures for investment in physical capital, education, and research and development from other expenditures.
Adopting an accrual approach with a separate capital budget would spread the cost of investments over the period when potential benefits accrued rather than appearing in full when the spending occurred (the current cash-based approach). For physical capital, the budget would record costs as the assets lost value over time.
Such an approach would eliminate some of the spikes in programs’ budgets from up-front funding of new capital investments. In addition, accrual accounting would facilitate comparisons of competing programs’ costs and benefits. However, an accrual approach with a separate capital budget could lessen lawmakers’ control over budgetary resources, increase complexity, and diminish transparency. It would also make the federal budget process more prone to manipulation by federal agencies and policymakers that might adopt a broad definition of capital investment or understate depreciation costs.
An alternative (more incremental) approach would provide both cash and accrual measures of capital spending in separate budgetary accounts within the unified budget, which shows the sum of all government activity. The accounts would be structured so that depreciation was reported in an agency’s budget (and netted out elsewhere), but the cash flows associated with an investment would affect the overall budget deficit, as they do now.
Other options would retain cash-based accounting. To focus on investment spending, lawmakers could adopt a separate cash-based capital budget (an approach used by many states). A more limited change can be found in the Trump Administration’s 2021 budget, which proposed establishing a revolving fund to serve as a cash-based capital budget for federally owned buildings. Alternatively, lawmakers could establish a separate cap on investment funding within the unified budget.
