Testimony: Secretary Rubin believes we are better off without a capital budget. He laid out pros and cons of adopting a capital budget, but stated he "always comes out on the negative side."

He feels there are two benefits in having a capital budget. First, he believes the capital budget would change the current nonsensical way of treating investment and operating expenditures the same. Second, he feels a capital budget may cause people to think about depreciating assets over time, thereby promoting more rigorous rates of return analysis on capital expenditures.

On the other hand, he believes there are two significant problems that clearly outweigh the benefits. First, he questioned what constraints would be in the capital budget. He believes some constraint on the total amount of Federal debt is absolutely necessary, but determining this would be totally arbitrary. He fears such lack of constraint and budget discipline might adversely impact the economy.

Second, he sees major problems in defining capital. He predicted adopting the capital budget would create a tremendous incentive to define all favorite programs as capital. He said programs producing intangible assets, such as education and law enforcement, have more long-term benefits than physical assets; but including them might cause all programs to be in the capital budget.

Questions from the Commissioners: Questions focused on the current budget process and how capital budget proposals could improve it.

Q.    Should we have a quasi-independent board to address the capital budget issues?
A.    The board would face the same inherent problems. Having a capital budget would still eliminate the discipline in the federal budget.

Q.    How does the Government Performance and Results Act (GPRA) relate to a capital budget?
A.    GPRA required serious planning in formulating our budget. Treasury went through a serious strategic planning exercise to comply with GPRA. This planning definitely influenced its budget decisions.

Q.    Does the federal budget process have any bias against programs having long term benefits?  If so, would a capital budget eliminate this bias?
A.    I believe there is a bias today, but having a capital budget may create another bias for investment spending. If only a fraction of capital spending is recognized in a budget year, programs that are not classified as capital may receive unwarranted cuts.

Q.    Should we link borrowing to a specific project?
A.    There's no point in separating financing for each project from the aggregate budget financing.  The government should optimize the overall federal debt structure to minimize financing costs.

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