Budget Issues:

Budgeting for Capital

T-AIMD-98-99: Published: Mar 6, 1998. Publicly Released: Mar 6, 1998.

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GAO discussed ways the federal government should budget for capital, focusing on: (1) problems with the current process; (2) traditional capital budgeting proposals; (3) an alternative investment framework; (4) budgeting for federally owned capital assets; and (4) improving the way federal agencies plan for and manage federal capital acquisitions.

GAO noted that: (1) the current unified budget does not highlight different types of spending; budget data are not presented in a way that promotes decisions to be made between spending intended to have future benefits versus spending for current consumption and improving the current quality of life; (2) since the current budget does not provide this type of focus on the composition of spending, it is difficult to focus on the impact various types of spending would have on the long-term potential output of the economy; (3) some have proposed that the challenges agencies face in budgeting for capital acquisitions can be corrected by adopting a capital budget that separates revenues and outlays for long-lived physical assets from the rest of the budget; (4) many proposals for capital budgeting include an associated depreciation component for capital assets which is charged to the annual operating budget; (5) in addition, these proposals commonly envision special budgetary treatment for capital by requiring balanced operating budgets while allowing deficit financing of capital; (6) capital budgeting of this nature presents several unique problems at the federal level; (7) meaningful budget reforms can be considered to improve decision-making on investments, but they need to be tailored to the unique roles and environment of the federal government; (8) establishing an investment component within the existing budget constraints is one promising way to encourage Congress and the executive branch to make explicit decisions about how much spending overall should be devoted to investment; (9) programs proposed or defended as investments should be evaluated against the criterion of improving long-term economic capacity; (10) as federal agencies find themselves under increasing budgetary constraints and increasing demands to improve service, the importance of making the most effective capital asset acquisitions grows; (11) agencies and Congress must work together to find tools that encourage prudent capital decisions; (12) regardless of the budget approach ultimately chosen for federal capital, it is essential that agencies take the time to properly plan for and manage their capital acquisitions; and (13) GAO identified five general principles that are important to the capital decision-making process.

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