NCPA - National Center for Policy Analysis

A Capital Budget and the BBA

January 29, 1997

The argument for creating a federal capital budget is strong, says economist Bruce Bartlett. He suggests that capital expenditures ought to be excluded from the budget subject to a Balanced Budget Amendment (BBA) to the Constitution.

  • At present, the federal government makes no distinction between capital outlays and operating expenses, and the BBA would apply to both.
  • While almost all states are required to balanced their budgets, this generally applies only to operating budgets -- capital expenditures, like roads and buildings, are exempted from the requirement.
  • All businesses separately account for capital investments and the U.S. General Accounting Office has long argued that the federal budget ought to do the same.

The GAO argues that capital outlays do not immediately reduce the resource base of the government the way outlays for current operations do, because they represent exchanges of assets. The assets purchased produce future streams of benefits to the government in cash or by providing facilities for government operations.

A 1988 GAO report concluded that "debt incurred to finance capital investments should be thought of as 'capital financing' rather than as a contributor to the 'deficit.'"

The lack of a capital budget creates a bias toward uneconomical decisions. Thus a $10 million building that will last 30 years must be fully accounted for in a single year's budget, the same as a $10 million outlay for fuel or other operating expenses. This encourages bureaucrats to lease buildings rather buy them.

Some view capital budgeting as a gimmick to artificially reduce the deficit. And efforts inevitably would be made to call consumption outlays "investments" in order to avoid increasing the deficit. These are valid concerns, Bartlett says, but aren't compelling reasons to reject capital budgeting.

Source: Bruce Bartlett (senior fellow, National Center for Policy Analysis), "Capital Budget in the Balance," Washington Times, January 29, 1997.


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