This week the Congressional Budget Office (CBO) released its latest report on the federal fiscal outlook through FY 2028. According to CBO’s baseline:
-
Total federal spending will rise from 20.6 percent of U.S. gross domestic product today to 23.6 percent of GDP in 2028.
- Within that general rise, net interest payments – in other words, payments we make to our creditors for borrowing – would roughly double, from 1.6 percent of GDP today to 3.1 percent in 2028.
- Mandatory spending would rise to 15.2 percent of GDP, mostly due to increased spending on Social Security, Medicare, and Medicaid
- Meanwhile, defense and nondefense discretionary spending would decline from 6.4 percent of GDP today to 5.4 percent in 2028.
- Overall, the annual deficit would rise to 5.1 percent of GDP – nearly equal to the discretionary budget. In dollar terms, CBO’s baseline suggests the deficit would surpass $1 trillion by FY 2020 and stay there after that.
Why Does This Matter for R&D?
Just about all R&D is contained in the discretionary budget, which is the part of the budget Congress allocates annually through spending bills. While it can fluctuate year-to-year, R&D tends to remain a rather steady share of discretionary outlays, and rising or falling discretionary spending is usually a strong indicator of where the R&D budget is headed.[1]
Given the above, where might one expect R&D to end up? Using CBO’s baseline assumptions for spending growth, and assuming defense and nondefense R&D maintain their recent historical performance as a share of appropriations, the picture might look like the “baseline” scenario in figure 2. Under this scenario, discretionary spending (and thus, R&D) falls off a cliff in FY 2020, as is scheduled to happen under current law following expiration of the recent spending cap deal (see this link, especially the first graph). It then grows at roughly 2.6 percent a year thereafter, surpassing $160 billion by FY 2028 compared to an estimated $143 billion today.[2] However, inflation would erase all of these gains, and the R&D budget in constant dollars would end up about $11 billion or eight percent lower than today’s levels by FY 2028.[3] As a share of projected GDP, federal R&D would drop to 0.55 percent of GDP (figure 3). This would represent a post-Sputnik low.
A More Likely Alternative
This doesn’t paint a terrific picture, but it’s also not the most likely scenario. More likely is that Congress prevents most or all of the big spending drop scheduled for FY 2020, continuing the series of such deals since 2013. The reasons are similar to those for the recent cap deal:
- Defense hawks won’t want to accept the big cuts for Department of Defense programs.
- Democrats and some moderate Republicans won’t want to accept the big cuts for domestic nondefense programs, including scientific research.
- Whoever controls the Senate next year won’t likely have 60 seats, which means the minority party will have leverage in spending negotiations.
There will certainly be a negotiation next year – and it may be as disruptive as this year’s negotiations, spilling well past the start of the fiscal year – but odds would seem to favor Congress limiting the size of the spending drop, if not avoiding it altogether (even if the White House plays hardball). CBO’s outlook presents such a set of more realistic assumptions, in which discretionary budget authority simply rises by 2.6 percent in FY 2020 and thereafter.[4]
The implications for R&D under this scenario are labeled as “alternate” in figures 2 and 3. Under this scenario, federal R&D would avoid the big drop in FY 2020, and instead grow at an average of 2.5 percent per year. By FY 2028 it would surpass $180 billion, though again inflation would eat up most of this increase. In constant dollars the R&D budget would approach $150 billion in FY 2028, only a 3.7 percent increase in total, with year-over-year increases that hug the rate of inflation.
In Figure 3, federal R&D would drop to 0.61 percent of GDP by FY 2028: not quite a post-Sputnik low point, but approaching it.
A Continuing Global Slide?
This outlook might mean a less research-intensive economy, even as other nations are pointedly ramping up their own investments. For instance, South Korea plans to double basic research expenditures within the next five years, while Germany’s new government intends to continue their progress up the global R&D league tables. And we all know about China.
The United States is not alone in grappling with difficult fiscal choices, but as seen in figure 4 (based on OECD data for select countries), others are increasingly doing better on the public research front. As of 2008, the United States ranked 3rd globally in public R&D as a share of GDP, but had slipped to 11th by 2015, the most recent year for which data is available.
What would it look like if the U.S. were to re-commit to keeping up with the pack? Figure 5 shows R&D spending growth under a few additional paths (along with the 2.5 percent annual R&D growth suggested by the alternate CBO scenario). These paths were calculated based on CBO’s economic projections, historical data on public R&D investments from the OECD, and recent AAAS estimates of R&D. The paths shown include:
- Simply allowing federal R&D to maintain its estimated 2018 share of U.S. GDP (0.71 percent), which would require annual increases of about four percent.
- Keeping pace with Germany’s rate of public R&D growth since 2005, which would require annual increases of 5.9 percent.
- Finally, keeping pace with China’s public R&D growth rate, which would require increases of 6.7 percent.
Tall orders? Maybe so. Several decades of data suggest R&D is pretty well fixed as a share of the discretionary budget. However, individual agencies can fare better or worse over time. For instance, NIH, the Department of Energy’s Office of Science, and the National Institute of Standards and Technology (NIST) account for much larger shares of the nondefense budget today compared to where they were thirty years ago, while NASA, the Department of Agriculture, and the U.S. Geological Survey are smaller. Some large agencies like NIH and the National Science Foundation have actually seen average annual budget growth above four percent in recent decades, even with periods of decline. A modest path of increased funding seems within political striking distance even with a tight fiscal outlook, though it would require disrupting the political “equilibrium” that has kept R&D steady within the discretionary budget over many years. That might mean encouraging policymakers to continue growing popular agencies like NIH, or re-focusing on new support for agriculture, space, or other technology areas that haven’t kept up, or both. Perhaps rising foreign competition in artificial intelligence, nanotechnology, or other fields will provide some impetus for change.
What About the Deficit?
In a vacuum, many policymakers would probably be fine with increased spending on many priorities in the discretionary budget, including R&D. Unfortunately, there’s not a vacuum, but a deficit: big and growing. As mentioned above, CBO projects the deficit to surpass $1 trillion in a year or two and reach as high as $2 trillion by FY 2028, with public debt approaching historic heights. This reflects a mix of reduced revenues from the tax reform bill and increased spending from the recent cap deal, on top of an already problematic fiscal situation (in other words, these policy changes didn’t create trillion-dollar deficits, just moved them up a few years).
There are of course other macroeconomic aspects to consider, but to maintain an admittedly narrow focus on science funding here, deficits are a threat for two related reasons.
- First, rising deficits mean rising interest payments, as seen in figure 1 above. The more money put towards interest payments, the less available for other priorities. This gets worse as interest rates rise.
- Second, rising deficits can invite a political backlash focused on reducing spending, with discretionary spending as an “easier” target than mandatory spending. Congress has put multiyear caps on discretionary spending twice – in the 1990s, and the current caps in place today – and both moves were fueled partly by large deficits.
In the very near term, a rising deficit could also adversely impact the last round of spending cap negotiations next year.
One can argue that some deficit financing of science and innovation makes sense given the long-term returns these can produce, especially while the cost of borrowing is low; one can also argue that some of those who talk tough on deficits only get fiscal religion when the other guy’s in charge. Either way, it doesn’t change the very real possibility that discretionary spending will be limited in the years ahead as deficits persist. And that could mean a limited ceiling for science.
[1] For a recent example, see the recent budget deal and the big R&D gains it facilitated in the FY 2018 omnibus.
[2] These numbers and others in this piece are not directly comparable with historical R&D data from past years: beginning in FY 2017, there was a major accounting change in the way federal agencies tally up R&D. Specifically, about $34 billion in DOD development, testing, and evaluation activities, funded through what’s known as the "operational systems development" or "6.7" account, are no longer officially counted as R&D. This is a good change and means the official data will more accurately reflect science and experimental technology development, but it also means the official R&D budget is now much smaller than it used to be. Thus, total R&D dollars and other metrics like federal R&D as a share of GDP will not be directly comparable to past years going forward. Note that the “6.7” account has typically accounted for roughly 15-20 percent of federal R&D in recent years.
[3] This adjustment uses the CBO’s GDP price index; the rate of inflation in many research fields is typically higher.
[4] CBO also assumes a similarly modest increase in FY 2019 rather than the 3.0 percent increase allowed under the budget deal, but our assumption here is that Congress will spend up to its statutory limit rather than leaving money on the table.