A Capital Budget for the Federal Government? - Brookings Institution

I am going to assume that the major issue before the Commission is not whether the federal government should provide budget accounting data that distinguishes capital from current outlays, accompanied by estimates of the depreciation of government capital. Information on federal investment has long been published in relatively full detail. More recently aggregative estimates of capital depreciation have also been published. Both scholars and government policy-makers could make good use of even more detailed presentations, especially for depreciation. This, of course, is not where the controversy lies. Rather, those who urge a capital budget for the federal government are proposing a general rule of budgetary operation: Under normal circumstances revenues should cover current operating expenditures (including depreciation of government capital), but net investment outlays should typically be financed by borrowing.1 Adopting such a rule would, in my view, be a mistake, probably at any time, but certainly under the circumstances now facing the nation and the government.

The Economic Consequences

In times of normal high employment, additional government investment outlays will necessarily displace some other types of spending in the economy. Government capital outlays financed by borrowing will come chiefly at the expense of privateinvestment. On the other hand, if government finances its capital outlays by reducing other, non-investment, spending, by raising taxes, or by forgoing otherwise scheduled tax cuts, the added government outlays will come principally at theexpense of private and public consumption, not private investment. Operating the federal government under a capital budgeting rule will lead to lower private investment than would be the case if government investment spending were paid for out of each year s revenues.

Let me elaborate briefly. ... (continued on: A Capital Budget for the Federal Government? - Brookings Institution)