October 10, 2019

The United States currently faces a range of complex challenges including deteriorating infrastructure, a changing climate, and an inadequate system of education. However, over the past 50 years, the share of the federal budget devoted to investment in our future has fallen sharply — at the same time that the national debt has grown to its highest level since just after World War II.

Fiscal sustainability is critical to meeting our nation’s challenges over the long term. While Americans’ concern about those challenges is rising, our fiscal condition and ability to address them are falling. Getting our fiscal house in order will better position our nation to build a stronger foundation for the future of America.

Investment vs. Consumption

Federal spending makes up one-fifth of all economic activity in the United States, representing $4.1 trillion of the country’s $20.2 trillion gross domestic product in 2018. Of that spending, the vast majority is targeted to meeting the immediate needs of the population, such as retirement benefits and healthcare. But only $492 billion (12 percent) went toward activities that might be thought of as longer-term investment.

The Congressional Budget Office (CBO) divides spending into two categories:

  • Investment is spending on physical assets such as infrastructure, buildings, or equipment; scientific research and development, such as new cures for cancer and research on the changing climate; and education. Investment can be separated into those for defense and nondefense. In 2018, defense investment accounted for 40 percent and nondefense investment accounted for 60 percent of total investment spending.
  • Other forms of spending — most of which produce value for less than a year — can be classified as consumption. Examples include spending on retirement benefits or nutrition assistance because those goods and services are normally consumed promptly.

Not every expenditure fits neatly into one category or the other. However, adopting the CBO distinction is useful for historical comparisons and for exploring whether our country is pursuing the physical and intellectual tools we’ll need to compete and thrive in the future.

Investment Declining as Percent of Spending

Over time, the rapid growth of consumption expenses has substantially diminished the portion of the federal budget dedicated to longer-term investment. In the 1960s, total investment accounted for about 30 percent of federal spending; it is now about 12 percent of federal spending.

Last year, nondefense investment accounted for $297 billion, or only 7 percent of total federal spending. By comparison, that amount is:

  • Less than one-third the cost of Social Security
  • About half as much as Medicare spending
  • Less than the government spent on paying interest on the national debt

Over the past 50 years, the share of the federal budget devoted to investment in the future has fallen sharply

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In coming years, investment will likely account for an even smaller percentage of overall spending. Growth in spending for retirement programs and rising health costs — as well as mounting interest payments on the national debt — will further squeeze spending categorized as investment. If current policies stay in place, mandatory programs (which are governed by provisions of permanent law rather than funded through the appropriation process) and interest will make up 82 percent of federal spending by 2049 — and leave little room for much else.

Keeping Pace with Modern Demands

Federal investment for nondefense purposes spiked following enactment of the American Recovery and Reinvestment Act (ARRA) in response to the recession of 2007–2009, but has subsequently declined. ARRA provided funding for large increases in primary, secondary, and vocational education, including $40 billion in state stabilization funds to help avert education cuts. The policy also increased federal spending on Pell Grants and tuition tax credits, which are education awards made on the basis of financial need.

With regard to physical capital, ARRA provided funding for transportation projects, energy and water infrastructure, and the modernization of federal buildings. Most of that funding was spent over the following few years.

Education is now the largest category of federal investment

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The U.S. economy grew by close to 3 percent last year and the population increased by over two million people; however, there has not been any significant effort to improve America’s infrastructure nationwide. The federal government invested $110 billion in physical assets in 2018 but CBO estimates that existing assets also depreciated by $113 billion because of factors such as damage and routine wear and tear.

According to the World Economic Forum, numerous countries now have better infrastructure than the United States. By not keeping up with the rest of the world, we are not only risking the safety and well-being of our population, we are putting our nation at a competitive disadvantage.

The United States ranks 13th in quality of overal infrastructure according to the World Economic Forum

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Can We Afford Not to Invest?

Many argue that investments should be made with borrowed money and paid off later, since future taxpayers will continue to benefit from those investments. However, the amount of debt accumulating every year far exceeds the amount that is being invested in our future. Large primary deficits, coupled with high levels of consumption, make borrowing necessary just to meet our short-term needs, while there is little available to invest in long-term goals.

The kinds of investment in physical and human capital necessary to support a prosperous economy may be expensive to develop, build, and maintain, but they can also contribute to future expansion of the economy. According to a report by the American Society of Civil Engineers issued in 2016, failure to address investment gaps throughout the nation’s infrastructure sectors would lead the economy to lose almost $4 trillion and 2.5 million jobs between 2016 and 2025. To afford such investment, the federal government will need to more closely match its consumption spending with its revenue collection to avoid large deficits. Otherwise, the national debt will continue to grow at an unsustainable pace and restrain our ability to sustain economic growth.


Related: How Much Government Spending Goes to Children?


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