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Wise, U.S. House of Representatives

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JANUARY 30, 1998
I would like to thank you for holding these hearings. I have waited a long time to have this many people in one room interested in capital budgeting.

As you know, I have long been a supporter of capital budgeting. For many years, I have supported establishing a federal capital budget. I have introduced stand alone legislation and constitutional amendments to balance the federal budget using a capital budget. In 1994 I began introducing legislation to establish a Commission to study capital budgeting. I would like to think that your presence here is in part, response to the work that I have done over the years.

Since I began my capital budgeting crusade years ago many things have changed. Many of my allies, from both sides of the aisle, have left the House for the Senate, state office or retirement, the White House has changed administrations and the budget landscape looks bright. Now, we are not just talking about balancing the budget, we are talking about surpluses. Now is the time that we should be focusing on establishing a capital budget which highlights investment over consumption spending.

The Congress has passed legislation reaffirming the importance of investment in physical infrastructure. The effort to take the Transportation Trust Funds off-budget highlighted

many of the issues that the Chairman and I have addressed for years. This is not just an issue of using taxpayer dollars for their intended use, but our responsibility to future generations -- not to leave a legacy of crumbling roads and decaying bridges.

Next week we will receive the President's FY 1999 budget and begin work on crafting the nation's spending priorities for the next spending cycle. We will spend months getting our fiscal house in order and the major issues facing Congress boil down to prioritizing spending for the next decade and beyond. While there are 435 different answers to that question, almost everyone agrees that we need to invest in programs and projects that are lasting and will benefit future generations. That is why I am here today, to discuss the concept of Capital Budgeting.

At home in West Virginia, I am often asked, "Why doesn't the Federal Government balance its budget like my family?" As a veteran of six years of service on the House Budget Committee, I have come to believe that many of the budget problems facing this Congress, particularly the shift in recent years from public investment toward consumption spending, have as much to do with the budget process as with decisions made -- or not made -- by the Congress.

Perhaps the greatest, and to me the most mystifying, problem with the current system is the fact that the federal government's unified budget makes no distinction between money spent on investments and money spent for consumption. Highways, federal salaries, health benefits and foreign aid, which are all examples of federal programs that are paid for through taxes and borrowing, are all accounted for in basically the same way. But all borrowing is not created equal. Borrowing for physical infrastructure can be justified if it pays for itself in the long-run by increasing the nation's wealth and capacity for future economic expansion. Borrowing to meet the day-to-day expenses of government cannot.

That is why I have consistently introduced legislation that would divide the federal unified budget into an operating budget and a capital budget. Under my legislation, the operating budget would include all programs that meet the immediate obligations of running the government. The capital budget would include long-term, tangible investments in infrastructure. Under this legislation, the operating budget would be balanced, but the federal government could borrow money for certain investments in infrastructure that increase the national wealth and contribute to economic growth. Money borrowed for those infrastructure investments would be paid back over the life of the road, bridge, sewer system or other infrastructure investment.

The concept of a federal capital budget is not new. The budget was expanded in the 1950s to include information on investment spending. Reform in the 1980s required even more investment information in the unified budget. In fact since the Federal Capital Investment Program Information Act of 1984 Presidents Reagan, Bush and Clinton, have submitted budgets that include projections of Federal physical capital spending and information regarding recent assessments of public civilian physical capital needs.

The supplemental information currently provided is useful and it represents a good beginning. However, I do not believe it goes far enough because supplemental information plays no role in the formal budget process. It is not used in the formulation of the budget -- it is merely assembled after executive budget decisions have been made. In addition, the information plays no part in the congressional budget process. As a result, theinformation has had little effect on the level of capital investment undertaken by the Federal government.

Many other industrialized countries employ a capital budget, and businesses and most state and local governments have investment budgets that separate long-term capital investments from year-to-year operating costs. Individuals and groups as diverse as former OMB Director Richard Darman, the General Accounting Office and the Progressive Policy Institute have endorsed distinguishing between investment and consumption spending in the budget. As a recent GAO report on the harmful effects of the deficit points out, "a new [budget] decision-making framework is needed, one in which the choice between consumption and investment spending is highlighted throughout the decision process, rather than being displayed for information purposes after the fact."

Businesses know the difference between borrowing to consume and borrowing to invest. Borrowing is a smart move when the money is used to finance productive investments that help a business modernize its equipment, expand and become more profitable. But borrowing money to pay salaries or executive bonuses or to send employees to expensive conferences rather than to modernize would be foolish.

I believe the federal government should make this same distinction in its budget. By borrowing for current expenses the government is asking future generations of taxpayers to pay for the cost of running the government today. But borrowing to invest is different. If the government passes part of the cost of building a road to future taxpayers, it also gives them something in return -- a new highway that will encourage economic development, facilitate commerce and increase economic growth for years to come.

Instituting a capital budget would force policy makers to decide whether or not each investment is worth borrowing money to finance. In addition, the public would benefit from knowing that the government's current costs are being paid for and that any borrowing is for investments in the future rather than paying for the present and saddling future generations with bad debt.

All of us agree that the U.S. must make investments that are critical to future economic growth but that the budget deficit must also be reduced. Rather than going from crisis to crisis, the federal government should have an institutionalized system of long-term investment planning. Adopting a federal capital budget would provide such a mechanism.

Members of the Commission, this is a time of fundamental change in the way government serves the people. In order to be more responsive to taxpayers' needs and more responsible with taxpayers' money, I believe the federal government should reform its budgeting to distinguish between consumption and investment. I am hopeful that the Commission will recommend establishing a capital budget that addresses long-term planning and investment. It is important to remember that the current budget process is biased -- for consumption and at the expense of capital investment. I appreciate the opportunity to discuss this matter with you today.

 Legislation to Establish a Capital Budget
Representative Bob Wise
Section-by-section summary

Section I: Short Title

Section II: Statement of Findings and Purpose

Section III: Establishes Capital and Operating Budgets

    -- Requires that the budget submitted by the President be a unified budget comprised of an operating budget and a capital budget.
    -- Limits the capital budget to major activities, projects and programs that support the acquisition, construction,alteration, and rehabilitation of physical infrastructure that produces services or benefits for more than five years and has an initial cost of at least $500,000.
    -- Restricts expenditures from the capital budget to: roadways and bridges; airports and airway facilities; mass transportation systems; waste water treatment systems; water distribution delivery and related systems; water resource projects; medical facilities; resource recovery facilities; public structures; space and communication facilities and strategic petroleum reserves and mineral stockpiles.
Section 4: Review of capital expenditures
    -- Requires the Comptroller General to review and report to Congress to ensure that those investments included in the capital budget adhere to the criteria set out in this act.
Section 5: Balancing the operating budget
    -- Requires the Budget Committee to submit to the House proposed legislation to establish additional deficit targets that require the eventual elimination of deficits in the operating budget.
Section 6: Evaluation of capital investments
    -- Directs the Government Operations Committee to report legislation directing the Comptroller General to evaluate the value and usefulness of actual and proposed investments in the capital budget.
Section 7: Implementation of capital budget
    -- Directs the Rules Committee to report legislation establishing rules to enforce this act.
Section 8: Reports to the House and the Senate
    -- Transportation: Requires the Secretary of Transportation to report on capital investments in roadways and bridges, airports and airway facilities and mass transportation systems.
    -- Water pollution: Requires the Administrator of the Environmental Protection Agency to report on capital investments associated with waste water treatment, water distribution delivery systems and related facilities.
    -- Water resources: Requires the Assistant Secretary of the Army for Civil Works to report on capital investments associated with water resource projects.
    -- Public buildings: Requires the Administrator of the General Services Administration to report on capital investments associated with public buildings.

President's Commission to Study Capital Budgeting

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