President Reagan and his senior advisers know it. Most members of Congress will admit it. The federal budget process, as we have come to know and love it, is dead. The current system has produced little except partisan rhetoric, fear, polarization and uncertainty about the future course of U.S. economic policy.
Since the passage of the Congressional Budget Act of 1974, there has been an unmistakable deterioration in the budget process. Today, the budget is a political football, often distorting the true relevance of deficits, debt and government spending. In less than a decade, we have succeeded in transforming the federal budget from a decisive instrument of national planning into a national fire hydrant for every cause and special interest group.
The current budget impasse is only a symptom of a deeper problem. The evidence is clear. Decisions are deferred and deadlines are not met. Budgets are repudiated and forecasts invalidated only days or weeks after submission.
With the budget process at its nadir, we have an opportunity and responsibility to devise a new system that, in the words of President Reagan, "befits the great government of a great nation."
The U.S. government's current "unified" budget system lumps operating expenses (salaries for civil servants, office supplies, etc.) with capital expenditures (public buildings, roads, land, etc.). The government makes no distinction between one type of expenditure and another. Construction of a capital asset such as a hospital for veterans, for example, adds to the deficit, whereas the sale of land reduces the deficit. This is done even though the hospital, under normal accounting practices, would be treated as a long-term asset, not a deficit. Also, the government expenses the total cost of that hospital over the one or two years it takes to construct the building-- even though the hospital will be in use for 30 to 40 years, or longer.
If business used this system of accounting, the years of greatest capital investment for growing businesses would be the years of greatest deficit, or of markedly lower profits. For example, this type of accounting would have lowered AT&T's 1981 profits to $9 billion from $19 billion.
If the average American followed the federal government's accounting methods, very, very few would ever be able to purchase a car or house.
Today's "unified" budget is misleading in that it not only does not recognize the nation's capital assets, it encourages higher deficits by hiding future- year costs. And it provides no formal planning for the maintenance and replacement of America's vitally important public infrastructure. In an era of limited resources, such as today, a unified budget may also give the American people false information and choices that could lead us to abandon our commitment to education, jobs, health and a better life for the less privileged in our society.
Clearly, a change is needed. But to what? As a first step in rebuilding our federal budgetary system, I suggest our national leaders take a fresh look at an old idea--a capital budget.
Unlike the federal government, nearly all private corporations, state governments and most local governments use a capital budget. Under a capital budget, first proposed for the federal government by the 1949 Hoover Commission, expenditures are separated into current operating expenses and capital investments. Under a capital budgeting system, capital or investment-type programs are financed separately from current expense programs. Included in a capital budget would be current and future maintenance and construction capital requirements, sources of financing, and life-cycle costs.
For discussion purposes, let's assume that we transform the U.S. government into America, Inc., with a business-style balance sheet and capital budgeting system. There would be several surprises.
First, we would discover that America,Inc., has enormous assets that are not widely publicized or known. America, Inc.'s land holdings consist of 500 million acres--one-fifth of our nation's oil and gas resources, 50 percent of our coal, 80 percent of our oil shale, 50 percent of our uranium and 50 percent of our geothermal energy resources.
Unfortunately, no one really knows how much America, Inc.'s total assets are worth--we've never taken an inventory. Capital budgeting would force such an accounting, giving Congress and the president better information on our net worth on which to base national policy.
The second surprise we would discover is that America, Inc., like other large corporations, has a serious need to improve its capital investments program. America's public facilities are wearing out faster than they are being replaced. It is estimated that it will cost between $2.5 and $3 trillion over the next decade to maintain just the present level of services and public infrastructure.
Currently, the U.S. government has no system for planning or setting priorities for public works expenditures other than through wasteful and indefensible "pork barrel" politics. A capital budgeting system would establish a formal system of long-range planning to manage the public infrastructure necessary for private-sector growth rather than focusing on single projects advocated by individual politicians.
Third, a capital budget would give us a new perspective on America, Inc.'s debt and its "deficits." America, Inc.'s long-term debt today is about $1.1 trillion--by any measure, a lot of money. But, rhetoric aside, how significant is a $1 trillion debt? Historically speaking, it's not much to be concerned about. America's debt at the end of World War II was slightly larger than our gross national product. In the late 1950s, our debt was about 50 percent of GNP; by 1974, it was 25 percent of GNP. Today, $1 trillion represents about 28 percent of GNP--hardly a figure to justify the current hysteria and hyperbole.
Deficit projections, ranging from $92 billion to $233 billion are a constant feature of the front pages and a favorite subject for speeches these days. The current "unified" accounting system distorts the significance of these numbers because it ignores our assets.
Don't misunderstand. I am not saying that deficits, particularly in the $100 billion and up range are not important. They are important. They drive up interest rates, compete with private-sector borrowing, and prolong the recession, and they must be dealt with.
But, they must be dealt with in the perspective of America's total net worth. The deficit is not the single most important indicator of our national net worth. The rhetoric surrounding the deficits has caused many Americans to overlook and to doubt their country's real economic strength.
A capital budgeting system would provide a comprehensive and balanced picture of America. It would provide more openness in the budget process and more accurate accounting of total life-cycle costs. Decisions on proposed government expenditures could be made based on hard numbers, not on the politics of the moment.