Testimony: Sen. Lautenberg raised concerns about declining public investment spending due to current Federal budget practices. According to the Senator, Federal spending on nondefense investment has dropped from 2.6 percent of total national income in 1981 to 1.5 percent in 1998. Unlike a business, the Government treats operating and investment expenses the same. By not considering the long-term benefits of investment spending, the Government makes significant spending decisions without considering their effect on economic growth and productivity.

Sen. Lautenberg pointed to a growing body of evidence that public investments carefully chosen can contribute to economic growth. He mentioned a CBO report that found high rates of return from Federal investment in physical infrastructure such as highway and aviation projects, and even higher benefits from maintaining existing infrastructure assets.

Nevertheless, Federal capital investment has declined over the past decade in terms of overall spending and as a share of the economy. Today, the U.S. devotes less of its national income to public capital investment than any other major industrialized nation. Sen. Lautenberg cited a study by the Department of Transportation which found the U.S. would need to spend $15 billion per year on highway and transit systems to maintain them. To make necessary improvements to these systems would cost an additional $25 billion.

There are a number of issues which must be considered when contemplating a Federal capital budget. Some are technical issues, such as whether and how to depreciate assets purchased indirectly through grants to States and localities. Sen. Lautenberg also cautioned against the use of a capital budget to inappropriately promote certain types of spending. However, he noted that States effectively distinguish between what is capital investment and what is not.

He said he was convinced the Federal budget process must be changed to promote investment, and hoped the Commission would be able to resolve the difficult issues involved. If not, he encouraged the Commission to evaluate other approaches, such as establishing specific targets for public investment, that also would promote a greater focus on investment.

Questions from the Commissioners:

Q.    Would you recommend that an independent, outside body define Federal capital and develop guidelines regarding the use of a Federal capital budget?
A.    Yes. It is a good idea to have a board or commission with a degree of permanence making judgments on defining capital.

Q.    Are you concerned about the political pressure to include more and more expenditures in a separate capital budget?
A.    Yes. A capital budget would present an opportunity for political gamesmanship. Inclusion in a capital budget should be limited to investment spending with long-term benefits.

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