Staff Summary of Testimony to the PCSCB: Spratt, House Budget Committee
Representative John M. Spratt, Jr. (SC) and Richard Kogan (January 30, 1998)

Representative Spratt and Mr. Kogan did not appear before the Commission.  A summary of their written statement on capital budgeting follows.

Written Testimony: Representative Spratt believes the Federal budget should be kept on a cash basis, especially for Congressional decision-making. He feels capital budgeting may enhance the current supplemental analyses or may be applied experimentally to one area of the Federal budget, such as defense research, development, and procurement, but capital budgeting should not replace the current cash-based system. He discussed four issues on the strengths and weaknesses of capital budget accounting: 1) creation of bias for capital spending; 2) competing concepts of Federal spending; 3) the impact on the Congressional decision-making process; and 4) the impact on agencies' budget planning and formulation.

He believes capital budget accounting creates a bias in favor of capital goods. If the Congress is squeezing spending to meet budget targets, the incentive to cut capital investment would be much less than the incentive to cut consumption, because cutting investment would save only the first-year's depreciation cost under capital budget accounting.

The current cash-based accounting and capital budget accounting are competing concepts. The cash accounting has two advantages: 1) yearly surplus or deficit changes measure how the budget stimulates or restrains the economy and 2) the budget supports stabilization and counter-cyclical policies. Capital budget accounting, on the other hand, supports interperiod equity. This concept is defensible, but the accounting method has two problems: 1) it doesn't distinguish between wise and wasteful investments and 2) it encourages shifting tax requirements to future taxpayers.

Capital budget accounting attempts to change Congressional decision-making. This accounting attempts to change marginal incentives and give scorekeeping advantage to capital investments, but the current budget process already has a bias in favor of physical investments. Under the current process, outlay caps are tighter than budget authority caps, leading to a favorable treatment of programs with low initial outlays but requiring high upfront budget authority.

He believes capital budget accounting may help agencies plan and formulate their budget in two ways: 1) calculating depreciation may help agencies find out if budget requests are adequate to replace their depreciating assets and 2) the accounting method may help determine trade-offs among competing uses of resources. However, he noted cost-benefit analysis based on cash flows does a better job of determining trade-offs among competing needs.

He noted that the disadvantages for capital budget accounting outweigh the advantages, and summarized his five concerns: 1) the Federal government would still need budget authority figures even with a capital budget; 2) deferring costs to future generations is not desirable considering the impending retirement of baby boomers; 3) depreciation may be manipulated; 4) a bias for capital investments already exists in the current budget system; and 5) defining capital is problematic, and misses the fact that some "consumption" may provide future societal benefits while some "capital acquisitions" may not.

President's Commission to Study Capital Budgeting

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