The Budget Control Act May Have Cost Over $200 Billion in Federal R&D

This week the book is closing on the Trump Administration, but we're also at the end of another era: the era of the Budget Control Act. Adopted in 2011, the Budget Control Act (BCA) established a decade-long set of discretionary spending caps. These caps expire at the end of the current fiscal year, and the recent omnibus package is thus the final set of annual appropriations that will be adopted under the caps.

Originally, the Congressional Budget Office (CBO) estimated the caps would reduce discretionary spending by nearly $2 trillion over their full lifetime. Because of several Congressional deals to partially or entirely raise the caps, most recently in 2019, the actual amount of lost spending will be less than that. Still, when it comes to federal agencies that fund R&D, actual spending over the past decade has been suppressed far below historical rates. AAAS calculations based on historical spending data suggest the amount of "lost" R&D may surpass $200 billion. Congress and the new Administration can start making up the lost ground now.

Budget Control Act Basics

The original Budget Control Act did a few things. First, it established an initial set of caps beginning in FY 2012 to reduce spending by $840 billion below CBO's March 2011 adjusted baseline. Second, it established a joint Congressional “supercommittee” to reach a grand bargain to further reduce the deficit. Third, it put in place the threat of another $1 trillion or so in additional discretionary funding cuts should that deficit committee fail, through an across-the-board cut known as "sequestration" in FY 2013 and even lower caps in the following years through FY 2021. (This helpful Congressional Research Service report gets into all of this — and see the graph below).

When the “supercommittee” failed to reach a deal, the additional spending reductions took effect. However, it didn’t take long for Congress to begin searching for ways around these cuts. Legislators adopted a series of deals in 2012, 2013, 2015, 2018, and 2019 to raise the caps a couple years at a time. In the end, while spending did drop substantially, it did not drop by quite as much as the original BCA text set out. The graph below shows CBO’s March 2011 adjusted baseline, the caps established by the original BCA law, and actual spending levels following the series of spending deals.

Reduced Spending for R&D Agencies

Even with the subsequent changes, the spending caps no doubt derailed the budgets for research agencies. The graph below aggregates the discretionary budgets for most of the largest funders of R&D, adjusted for inflation.[1] As can be seen, aggregate spending in real dollars for these agencies and offices did recover after five years and continued subsequent growth. Still, the cumulative fiscal effect for just those five years is in the tens of billions for these agencies.

How might federal R&D have fared without the caps? For a baseline we can refer to historical spending patterns in the 30-year period leading up to FY 2008, the last appropriations year before the 2008 financial crisis. Various metrics — including OMB data on R&D outlays and discretionary budget authority, NSF data on federal R&D expenditures, and AAAS data on R&D budget authority — all suggest an annual growth rate for R&D agencies in the neighborhood of 6% in the 30 years before FY 2008. To be specific, we can use 5.7%, the growth rate in federal R&D budget authority over that time.

In FY 2011, adjusting for recent changes in what gets counted as R&D, federal R&D stood at $114 billion between basic research, applied research, development, and R&D facilities. Projecting this spending forward at 5.7% annual growth leads to an FY 2021 R&D budget of $198 billion. Subtracting these projections from actual spending levels since FY 2011 results in the below figure.

Under these reasonable assumptions, cumulative “lost” federal funding may amount to $96 billion for basic and applied research, and $240 billion for total R&D. In other words, if R&D agencies had simply grown at their historical pace, the R&D budget would today be about $33 billion or 20% larger.

This “lost” funding cuts across the entire federal enterprise, including defense and nondefense offices:

• Over $7 billion per year less for NIH and Veterans Affairs health research
• Over $1 billion per year less for energy science and technology
• Nearly $2 billion per year less for the National Science Foundation
• Hundreds of millions less for agricultural and environmental research

Most agencies saw a shortfall of 15% below what would have been their historical trendline, and some much more.

What Did We Lose?

There is probably no way to know the precise cost in terms of discoveries, technologies, or discouraged talent. But we do have some general ideas about what we get out of federal R&D — not least of which is preparedness for public health emergencies, as well as for the achievement of public missions like clean water, earthquake prediction, or border security.

Federal R&D also lays the groundwork for broader innovation. In general, there seems to be a substantial and growing relationship between public R&D investments and the quality and quantity of invention. According to one recent study, a $10 million increase in NIH disease research generates on average an additional 2.7 pharma patents. Evidence suggests patents associated with federal research tend to be more influential and novel.

There is also evidence that public R&D leads to “crowding in,” stimulating additional private R&D investment. This may be particularly true of small firms and startups in advanced technology areas, which are more likely to be cash-strapped and in need of capital. Federal programs that target such firms substantially increase the odds of follow-on venture investment, as well as inventive capacity and sales.

Lastly, approximately one in four doctoral students and half of all postdocs – representing the next generation of STEM innovator – relies on federal financial support, and the federal government is the largest source of support for university research, an important source of not just discovery but training.

Federal shortfalls in R&D likely equate to a slower pace of discovery and innovation, inhibited ability to meet public missions, reduced opportunities for U.S. talent, and reduced ability to compete.

Making Up Ground

What would it take to recover from the BCA years and return federal R&D to its historical trajectory? As the figure below suggests, it would not take much of an acceleration above current levels to return R&D to its historical path.

These calculations suggest an annual increase of 9.6% would return defense and nondefense R&D to its historical pre-BCA trendline in five years. To achieve the trendline in ten years would take roughly 8% growth. Again, this is in contrast to an historical average of 5.7% growth.

This year and beyond, legislators and the Biden Administration may want to consider such a restorative strategy to return R&D to its pre-BCA levels.