Congressional Budget Office

The authorities pays for an array of goods and services that are expected to be useful some years in the future. Those buys, called investment, fall into three categories: physical capital, research and development (R&D), and training and education. There are several financial rationales for federal investment. It can provide public goods that the private sector and state and local governments would not provide efficiently, such as nationwide defense and basic medical research. It could promote long-term financial growth-as education spending does by creating a skilled workforce, as R&D spending does by prompting invention, or as infrastructure spending will by facilitating commerce.

And it can support the task of the government by, for example, providing the structures and equipment essential to perform federal government activities. 531 billion on investment, representing 15 percent of federal spending and 3 percent of gross domestic product (GDP). 318 billion, which represented 2 percent of GDP-was for purposes other than national protection.

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Of that nondefense investment, 40 percent provided funding for physical capital, another 40 percent for education and training, and 20 percent for R&D. 213 billion, which symbolized a little over 1 percent of GDP. About two-thirds of federal government investment for defense purposes was devoted to physical capital and the rest to R&D. SO HOW EXACTLY DOES the government Support Investment? The federal government facilitates general public and private investment through several different mechanisms. Oftentimes, it creates the investment directly, such as when the Army Corps of Engineers constructs a dam or whenever a federal agency purchases computer equipment from the private sector.

In other cases, the government makes grants or loans to private-sector or individuals organizations, which in turn use the funds to make investments. Examples include the Federal Pell Grant Program for postsecondary education and the National Science Foundation’s research grants. 146 billion. Those grants or loans accounted for almost two-thirds of federal investment in nondefense physical capital as well as for half of federal government investment in education and training. State and local government authorities frequently have some latitude in determining how to spend the grant money.

Many federal grants or loans require state and local governments to spend their own funds as well. This statement focuses on investment that the government makes either straight or through grants. However, the federal government also facilitates investment in different ways. One of them is through tax expenditures-credits or deductions that decrease the federal income tax liabilities of people and firms because of this of certain investments that they make or finance.

Those credits or deductions can reduce the price of investment for condition and local government authorities as well. 42 billion supported investment in education and training, mostly through tax credits and deductions centered on higher education. 12 billion, which supported investment in R&D, was split roughly evenly between the price of a tax credit for increasing research and the expense of allowing companies to deduct the expense of research and experimentation immediately.

A more expansive description of tax expenditures that support investment would also include the ones that reduced the expense of private investment defined more broadly, including investment in intangible or financial possessions. Other federal policies can also affect private investment. Tax policies, including corporate and individual tax rates, can restrain or encourage economic activities by changing their relative prices. Regulatory policies impact investment by prohibiting or constraining certain activities, such as air pollution, or by necessitating others, as with the full case of federal government safety requirements. And federal deficits (and surpluses) influence the quantity of funds available for private investment and the cost of those funds.

For example, when the government issues bonds to financing its deficits, the funds that traders use to buy those bonds are no longer open to fund private investment. What Does the Federal Government Invest In? Observers define investment in various ways. Physical capital includes buildings, such as government buildings, transportation infrastructure, and water and power projects; major equipment, such as computer systems, equipment, and vehicles; and software. For spending on physical capital to qualify as investment, the physical capital will need to have around useful life of at least two years.

Most federal investment in physical capital for protection purposes is perfect for purchases of major equipment, such as plane and ships. Investment in physical capital for nondefense purposes, by contrast, is dominated by transportation spending, which gives infrastructure that plays a part in the functioning of the economy. Research and development has three components: basic research, which seeks to find scientific principles; applied research, which attempts to translate those discoveries into more practical matters; and the development of new technology and products. Federal R&D spending supports a multitude of work in government laboratories, universities, and the private sector, including health research studies, preliminary research in physics and chemistry, and the introduction of weapon systems.