Budget Issues

The Role of Depreciation in Budgeting for Certain Federal Investments Gao ID: AIMD-95-34 February 1, 1995

This staff study explores the applicability and the usefulness of depreciation in federal budgeting for spending on transportation infrastructure, research and development, and human capital. GAO's review of professional literature and consultation with budget and accounting experts did not support depreciating such investment in federal budgeting as useful or appropriate because (1) it could undermine budgetary control, (2) it would result in depreciating assets the government does not own, and (3) determining the value and the useful life of these investments would be difficult. Although GAO does not view depreciation for these types of federal investments as an appropriate budgetary treatment, it does believe that federal investments with long-term potential benefits for economic growth and productivity should be considered differently than they now are in the budget. One option is to include an investment component in the budget focusing on these areas of investment within the Budget Enforcement Act framework, possibly with a separate floor for investment spending, to help focus attention on areas needing investment while preserving established controls in the existing budget process.

GAO found that: (1) the federal government generally does not depreciate transportation infrastructure, R&D, and human capital investments for accounting or budgeting purposes; (2) Congress and the Administration are considering budgeting alternatives to decrease the annual federal deficit and increase long-term federal investments; (3) budget and accounting experts do not support depreciating these investments for budgeting purposes, since it is difficult to determine the value and useful life of such investments; (4) depreciation in accounting is complex and involves such key factors as the asset's value, its useful life, and its salvage value; (5) federal agencies do not depreciate assets they do not own because it is difficult to link federal grant money to the value of a specific asset; (6) although economists depreciate infrastructure and R&D investments to generate national economic wealth estimates, the problems of determining ownership or control of assets are not relevant in these analyses; and (7) private businesses use depreciation primarily to match revenues with expenses for a given period and for tax purposes.

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