CBO Report on Trends in Public Spending on Transportation and Water Infrastructure

This Congressional Budget Office (CBO) paper describes the trends in public spending for transportation and water infrastructure since 1956. The CBO focuses on spending for highways and roads, mass transit, rail, aviation, water transportation, water resources such as the construction and maintenance of dams and levees, and water supply and wastewater treatment. Those types of infrastructure, which draw heavily on federal resources, share the economic characteristics of being relatively capital intensive and producing services under public management that facilitate private economic activity. They are typically the types examined by studies that attempt to calculate the payoff, in terms of benefits to the economy, from government funding of infrastructure.

The paper reports public spending both for capital and for operation and maintenance. Capital spending is for the purchase, construction, rehabilitation, and improvement of physical infrastructure. Spending for operation and maintenance is composed of expenditures that are generally required to provide the services needed for infrastructure to function and that are often necessary for the repair and safe operation of existing infrastructure.

CBO’s tally of public spending on infrastructure provides a budgetary perspective on such spending. As such, this paper reports gross governmental spending on infrastructure capital and related operation and maintenance. The budgetary perspective stands in contrast to an alternative economic perspective that would, in particular, focus on measuring the value of the stock of infrastructure and changes in that value as investments are made and physical assets depreciate.

From 1956 to 2004, annual public spending on infrastructure, adjusted for inflation, rose steadily—growing an average of 2.3 percent per year. During the first several decades of the span, that growth was mostly attributable to increases in federal expenditures, particularly, rising capital spending on highways and roads, water supply and wastewater treatment facilities, and rail.

From 1987 onward, infrastructure spending by the federal government and by states and localities has grown in real terms by 1.7 percent and 2.1 percent, respectively.

Additionally, several other key features of public infrastructure spending have been quite stable over roughly the past two decades:

• Infrastructure spending by states and localities has accounted for around three-fourths of total spending;
• Capital expenditures have been slightly less (about 45 percent) than expenditures for operation and maintenance (55 percent);
• As a share of GDP, infrastructure spending has fluctuated between 2.3 percent and 2.6 percent; and
• Federal spending on infrastructure has hovered around 3 percent of total expenditures in the federal budget.

In 2006, the federal government spent $76.3 billion on infrastructure. Grants and loan subsidies totaled $50.6 billion, and all other federal spending on infrastructure totaled $25.7 billion. Over and above those amounts (and the other federal spending on infrastructure reported throughout this paper) are revenues forgone through the tax preferences that the federal government offers on municipal bonds issued by states and localities to finance their infrastructure spending. In 2006, those forgone revenues amounted to an estimated $7.9 billion, or about 16 percent of the value of grants and loan subsidies provided by the federal government in that year.

Several recent developments have influenced the amount of federal resources allocated to infrastructure and related activities. First, the hurricanes of 2005 prompted increased federal spending both to repair damage to highways and roads and to respond to and recover from future hurricanes, flooding, and other natural disasters. Those expenditures totaled $3.3 billion in 2006.

Second, as a result of the heightened terrorist threat after September 11, 2001, federal spending to make public infrastructure more secure––especially the facilities and services for air travel––has been sizable. Because such expenditures are essentially for national defense and law enforcement, they are not included in the totals reported here. However, from 2002 to 2006, spending on airline and airport security by the Transportation Security Administration of the Department of Homeland Security amounted to $28.8 billion (financed in part by $8.7 billion in revenues from security and cargo fees). Those expenditures have paid for a variety of security measures, including hiring additional federal air marshals and conducting more-rigorous screening of passengers, baggage, and other cargo. From 2003 to 2006, the Department of Homeland Security also provided $1.4 billion in grants to states.

Third, another relatively new development is the growth in the private sector’s interest in participating in infrastructure projects. According to the available data, such private activity has most likely accounted for only a very small share of spending on public infrastructure in the United States, but private funding and participation may increase in the future as the growing resources of pension funds that seek stable long term investments are tapped by governments at various levels for upgrades to and expansion of infrastructure.

As part of its analysis of public spending on infrastructure, CBO has also reviewed the current literature on the resulting economic returns. Such spending provides benefits to the economy by reducing the cost of private business transactions or yielding other social benefits. During the past 20 years, economists have attempted to measure the purely economic benefits from public expenditures on infrastructure and have obtained a wide range of estimates. The literature supports two conclusions: first, that public spending on infrastructure often has positive economic returns and, second, that both the average return and the range of returns among projects vary significantly and depend upon a number of factors. For example, research suggests that the returns to early public investments, such as expanding the interstate highway system, can be large but that the economic payoff from such spending declines as those types of systems grow.