To Fix Uncle Sam's Budget Do What Homeowners Do
CONGRESS, and now the president, are intent on eliminating the $1 trillion-plus deficit of the coming decade. Programs and benefits will be cut, subsidies abolished, and Cabinet departments shrunk or shut. But as they work to reconcile their differences - including how much of a tax cut to add to the mix - we should take a harder look at the ostensible ''gap'' they are striving to close.Skip to next paragraph
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The huge aggregate number is the product of two very different types of government spending: operating outlays and long-term capital investments. Our ''unified'' federal cash budget treats both as one-time, current costs. In so doing, we do not spread the cost of physical investments over their useful lives. As a result, the ''deficit'' picture is ''front loaded.'' We should restructure the federal budget into separate capital and operating categories so that the burden of capital spending is shared with each generation that will enjoy its benefits. Only then can spending cuts we make today in the name of our children be intelligent choices.
America's current ''stock'' of physical assets is estimated at $1.4 trillion. We will invest an additional $1.2 trillion over the next decade at the rate of $120 billion to $130 billion each year. Roads and bridges, airports, mass transit, railroads, housing, and office buildings have useful lives that extend far beyond the years when they are built. Spending for these purposes is far different from spending on consumable items like paper and pencils, or on entitlements. Because the budget treats both types of spending the same, we debit the full amount of all these expenditures in the current budget year. As a result, today's taxpayers are made to pay the full freight of tomorrow's physical plant even as they are asked to bear the brunt of all current spending cuts at the same time.
To cite but one example, three air traffic control failures recently occurred in the New York area because of obsolete computer equipment. The president has asked Congress for $378 million in fiscal year 1996 to automate the United States air traffic control system. If approved, the entire amount will be debited as soon as Congress votes. This is a huge current charge for a system we will use for at least 15 years. A more equitable allocation would charge $25 million, plus interest, to each year of the system's prescribed 15-year useful life. Such debiting would reduce the need for cuts in the operating budget - cuts likely to cause a wave of retirements by technicians needed to make the control system work.
Amortization of capital costs is hardly a radical concept. It is how we manage our family finances. When we buy a house or a car, we usually make a down payment and spread the balance over the length of a home mortgage or auto loan. State and local governments do the same. Their streets, sewers, parks, traffic lights, police cars, and fire trucks are most often financed by borrowing. Installment payments (principal) are matched to the prescribed lives of these assets and repaid each year. Finance charges (interest) are debited on the operating ledger. Indeed, many argue that a truly balanced budget means a balanced operating one.
Of course, issues remain to be resolved. Capital budgets are susceptible to manipulation by those who seek to make operating deficits look smaller by classifying items of transient usefulness as ''capital investments.'' Also there is a school of thought that says outlays for research and development or education and training should likewise be categorized as capital. There is a risk that artificially low amortization or depreciation tables, or longer prescribed asset lives, could be used to further distort the picture.
Finally there is the question of the military. Defense-related spending comprises 48 percent of current national physical inventory. Some believe that none of this should be treated as an ''investment''; others object only to so classifying weapons, but are willing to amortize construction of military bases and the like. All such problems can be addressed if we have a bipartisan spirit of cooperation.
Once we agree that true capital expenditures should be amortized, and that we may borrow to finance them, limitations on our ability to incur indebtedness must be tackled. Local governments operate under state constitutional debt limits tied to real property values. The federal government, with its sovereign power to tax, has no similar constraint. We should consider a constitutional debt limit that links capital spending to a measure of debt capacity, such as a multiple of income tax revenues or gross domestic product. Congress also should be precluded from passing laws that treat items of transient usefulness as capital. If fiscal policy is to be addressed in the Constitution, this is a far more rational approach than a ''balanced budget amendment.''
As we go about the task of budget cutting in the name of our children, let us remember that their long-term prosperity and security require a healthy capital investment program as well. As future taxpayers, each next generation should properly be asked to share the amortized cost of capital expenditures as opposed to sharing the debt we incur simply to make ends meet. The integrity of the budget cuts we ask today's taxpayers to accept depends on it.