Federal Capital Budget Plan Draws Defense Industry Interest, Concern

Article excerpt

Pesident Clinton in March 1997 issued Executive Order 13037, which created a commission to study the possibility of establishing a federal capital budget. This was prompted by a request from Sen. Robert Torricelli (D-NJ)-and as many believed to secure the senators vote against the balanced budget amendment.

The Commission to Study Capital Budgeting will submit its findings to the White House by midDecember. The report svl specifically detail:

* Capital budgeting techniques used by private sector entities and state governments.

* What constitutes a federal capital expenditure

* How to determine depreciation at the federal level.

* The effect of capital budgeting on federal budgetary choices and potential choices for budgetary discipline.

While there may be merit to capital budgeting, industry is only now beginning to look at the prospect of a federal capital budget. Those in the defense sector who have been advised of the developing situation have obvious concerns about the potential impact the establishment of capital budgets could have on the defense budget.

An actual switch to capital budgeting procedures could profoundly change the we ay the government prioritizes defense spending, particularly if elements of defense are not considered to be a "capital" investment.

Generally, the term capital is used to describe an item purchased to make money or produce other goods and resources. Perhaps most important to those concerned about capital budgeting procedures on the federal level is the definition of what will constitute a federal capital expenditure.

Yet, can one assign such an economic value to the nation's security? While capital expenditures may be less difficult to define for individual businesses or state governments, such classifications would be considerably more complex to make when planning the federal budget. Lawmakers would be forced to examine exactly what constitutes capital in the formulation of the federal budget, and how to decide the kev elements of a nations infrastructure.

Most perplexing would be deciding how to put a value on what contributes to economic growth. Considering that most segments of the federal budget combine what would be classified as traditional capital investment spending with current-use spending, such classifications are, indeed, difficult.

Those in favor of capital budgets contend that such measures are the optimal means by which the nation can make much needed restorations to its deteriorating infrastructure. The United States is lagging in terms of infrastructure investment in capital planning, with only 7 percent of its revenues used for that purpose.

The proponents of capital budgets assert that major capital improvements could be funded for the federal government much as they are on the state level, with the federal government borrowing to finance and invest in such improvements. State and local governments, however, are limited by the financial market and their respective abilities to pay back loans.

The federal government is not likely to be under the same constraints and, thus, would be able to borrow to make capital improvements without any real limitations. In response to this, an annual cap on expenditures, as well as ways of limiting federal indebtedness, have been proposed. …