Should there be legally binding or non-binding targets for capital investment?

Discussion

There have been several suggestions for focusing additional attention on capital investment in the budget process: require special crosscutting reviews for investment in OMB's fall review process; enhance the presentation of investment information; establish non-binding targets in the President's budget and the congressional budget resolution or create binding investment targets by adding an investment category to the Budget Enforcement Act categories. Witnesses who are familiar with the congressional budget process have testified that enhanced information, while valuable, is not likely to significantly influence resource allocation decisions in that process. Therefore, the options discussed below focus on legally binding and non-binding targets.

Currently, the BEA defines several categories of discretionary spending (spending provided in annual appropriations acts, which includes spending for most Federal programs) and specifies dollar caps on the amount of budget authority that may be appropriated in each of the fiscal years 1997 through 2002 (when the BEA expires). The BEA also caps the level of outlays estimated to result from the specified level of budget authority. The categories vary from year to year. For FY 1999, they are defense, non-defense, violent crime reduction, highway, and mass transit. The defense category is eliminated after FY 1999, and the violent crime category is eliminated after FY 2000, so that the remaining categories for FY 2001 and 2002 are discretionary, highway, and mass transit.

The highway and mass transit categories were added by the recently enacted Transportation Equity Act for the 21^st Century (TEA-21), which is the current authorization for highway and mass transit programs. The funding included in these categories is mainly for grants for transportation infrastructure and highway safety programs. The highway category is significantly different from the others in that it is based on the estimated level of highway receipts and is required to be adjusted for actual receipts. The mass transit category is not tied to highway receipts and will not be adjusted in to reflect actual receipts. The levels for other categories are relatively fixed, although adjustments are required for specified reasons (such as to accommodate funding for designated emergencies).

Though legally the caps are limits on spending, in practical effect they are targets, because Administrations tend to request and Congresses tend to appropriate amounts up to the limits. While less than the cap level may be appropriated, the difference cannot be used to increase spending in other categories. The levels for the defense, non-defense, and violent crime reduction categories (and for the combined category in later years) reflect broad agreements reached in bipartisan budget negotiations. They were enacted as part of omnibus budget reconciliation acts. The highway and mass transit categories were the result of a recent political decision to allow highway taxes earmarked for transportation and mass transit to be spent for that purpose. Creating separate categories was a compromise in response to pressures to move highway and mass transit spending off-budget.

A common advantage of all of the options discussed below is that they maintain the current cost measurement (full cost up-front) of investment, so that decision-makers have the information and incentive to make spending decisions on the basis of comparing benefits with the full cost of the spending. They also allow the budget to continue to show overall claims on the Nation's income by the Federal Government, which may help maintain budget discipline and promote private as well as public investment.

A common issue for any of the options that create binding targets is defining capital investment. This topic is addressed broadly in another paper. However, the appropriate definition of investment for the four target options discussed below may be different than for many other uses. Arguably, the targets should include all investments that serve the same general purpose, namely, building up "national capital" for general economic growth--such as in infrastructure, research, and education--rather than providing an input for producing direct Federal Government outputs. The common functionality allows for trade-offs at two levels--between this function and other broad purposes of Government, and within this function based on alternative means of achieving the general purposes of this function. It does not prevent trade-offs between alternative methods of producing Government outputs, which is a problem with separate controls on spending for Federally-owned capital investments and Federal agency operations.

Except for Option 1 (include a non-binding investment target in the President's budget), the options would significantly further complicate an already very complicated budget process.

Options

Option 1. Establish a non-binding target for public investment combined with enhanced presentation of public investment information

Description: The Administration would define investment and include its proposals for investment spending as the amount of the target. The definition could be modified as circumstances change or a new President with different priorities is elected. This could encourage policy makers to focus on investment, and it could be highlighted as a priority in the budget documents, in testimony before Congress, and in speeches.

Arguments For:

• Could focus greater attention on the level of Federal investment, which could result in increased funding for needed investments.

• Largely jawboning. Capital spending is already displayed as part of the present budget.

• Does not change current budget practices, so it may not affect real decisions about public investment.

Description: Discretionary spending could be divided between investment and consumption for purposes of the Congressional Budget Resolution. The Resolution could set a floor on investment spending, in total, by function, or by category of investment. The target could be enforced by subdividing Budget Committee allocations to other committees between investment and consumption, with points of order against legislation that fails to meet the target.

Arguments For:

• Requires Congress to make decision about the appropriate level of Federal investment.

• Could provide enforcement mechanism to ensure that spending decisions by each committee are consistent with the investment target set in the Resolution.

• The Congressional Budget Resolution is not a law and therefore does not require the President's signature, so the President's formal role is less than if the targets are enacted in law.

• Would not have the force of law. Points of order may not be raised, or if raised, could be waived.

Description: The current discretionary caps could be split into caps for investment spending and caps for operating spending. The investment caps could be floors, to protect investment. The sum of the caps could be equal to the current caps or be higher or lower than the current caps. The caps could be set so as to emphasize one category of spending, for example, to increase investment spending and constrain operating spending over time.

Arguments For:

• Requires the President and the Congress to evaluate the levels of investment and consumption and encourages them to make an explicit decision about the allocation of resources between current consumption and investment. Also, it would implement budget rules for enforcing that decision.

• Ensures an agreed upon level of investment beforehand in each fiscal year's budget negotiations.

• Investment programs would be pitted directly against each other in the competition for scarce resources. Unless the investment caps allowed for increased spending, there might be no additional investment spending.

• The definitions of investment and operating spending could become politicized. The Congress and the Administration could want to use different definitions.

• Depending on the definition of investment, it could be more difficult for OMB and CBO to track than the current discretionary caps, which generally are defined by whole budget accounts. Investment is sometimes part of an account, not the full amount.

• Would not allow appropriators to make tradeoffs between investment and operating spending by decreasing investment below the target and using the money to fund operating spending (or vice versa), even though there are very logical tradeoffs that should be considered. For example, would it be more cost effective to provide health care to veterans by adding capacity at VA hospitals (investment) or by making payments to private health care providers (operating spending)?

Description: This option uses the highway category model. Like spending for highways, some other investment is or could be financed through earmarked taxes or user fees (e.g., Federal Aviation Administration investments financed from airports and airways trust fund receipts). However, the spending for such investments is discretionary under the BEA, while the receipts are classified as mandatory. Thus, increases in receipts cannot be used to fund increases in the spending, even though that is the purpose for increasing the receipts. This option would combine the earmarked receipts with the spending in a new BEA category. Spending up to the level of the earmarked receipts would not be counted under the general discretionary spending cap. Any spending in excess of that amount would count against the general discretionary caps.

Details would need to be ironed out. For example:

• Would this option be authorized generically for any investment program financed by earmarked receipts or only for designated programs?

• Would there be separate caps dependent on the earmarked receipts for each program or broader categories--such as transportation infrastructure?

• Where earmarked receipts finance investment and operations (e.g., airport and airways), should there be a separate category for investment spending? If so, how would the receipts be divided?

• Reestablishes link between earmarked taxes and spending, which has been severed by the BEA.

• Provides a source of financing to pay for investment.

• Makes it difficult to trade less of user-financed investment for investment that is funded by the general fund. We could get locked into user-financed investment.

• Encourages thinking of user-financed investment in isolation from rest of Federal taxes and spending.

• Would add further complexity to a budget process that some would say is already far too complicated.