The Congressional Budget Office has issued a report to discuss the effects of federal investment on the federal budget and economy.
CBO said in the report published Thursday that federal spending on research and development programs and physical capital as well as on education and training initiatives that are expected to increase productivity in the private sector in the future is regarded as federal investment.
According to the report, a rise in productivity associated with federal investment results in a gradual increase in economic output.
CBO projects that the average annual rate of return on federal investment is approximately 5 percent, a figure that represents half of the agency’s estimated average rate of return on private sector investment.
The macroeconomic effects of a federal investment increase would rely on how the federal government funds federal spending, according to the report.
The report said that a reduction in other federal spending in order to finance an increase in federal investment would result in an increase in gross domestic product over the next 10 years.
CBO cited three factors that would impact the economy once a federal investment increase was financed by an increase in federal borrowing.
Those factors include a rise in productivity and GDP, a reduction in the amount of available funds for private investment and an increase in total federal spending.
Growth in federal investments would result in an increase in taxable income and federal revenues as well as a decline in federal budget deficit as a result of an increase in GDP, CBO said.
The report also noted that interest rates and federal budget deficits would rise if the federal government raised federal borrowing in an effort to fund a federal investment increase.
