Democratic Staff FY 1997 Budget Analysis :: March 28, 1996

The President's Fiscal Year 1997 Budget Request for R&D and Long-Term Outlook for Science

Analysis by the Democratic Staff

March 28, 1996

This Democratic staff analysis is intended as a preliminary review of the President's budget for research and development with emphasis on those elements within the jurisdiction of the Committee on Science. Long term implications for the health of science and the economy are also examined. Any comments or questions may be directed to Dr. William Smith, Democratic Deputy Chief of Staff, at the Democratic staff office.

Defining Policy Differences

Over the past year, Democratic and Republican policy differences on science and technology have come sharply into focus. Although both have committed to the need for a balanced budget, the President and Congressional Democrats have emphasized the need to imbed in any balanced budget plan sustained investments in R&D that will stimulate productivity. That is, long term economic growth will depend on both achieving a balanced budget and achieving productivity gains. Democrats have framed this as a direct responsibility of the Federal Government and have supported not only basic research, but also applied research and targeted technology programs.

Republicans, on the other hand, have emphasized shrinking the Government and spending cuts alone as the means to economic growth and have advocated deeper reductions in R&D than have the Democrats. Republicans believe that the market alone should address technology development and associated productivity gains.

Because of well known market failures, the private sector underinvests in long term research and technology development. The President's F.Y. 97 budget has set aside funding for certain investments in R&D which have emerged as priorities, even under a sharply declining discretionary budget. Other areas of investment include education and training, children's programs, the environment, and law enforcement. Many of these investments also represent Republican targets for spending reductions.

Thus the debate over R&D, as in other areas, is more related to differing policy priorities than deficit reduction per se. The questions Congress will address in the context of the F.Y. 97 budget will focus on issues such as how to allocate resources between defense and non-defense programs, how narrow should be the Federal role in funding research and development, and how to structure R&D priorities within a declining budget to best meet economic and broader social goals.

Overall Balanced Budget Context

R&D, as well as all other discretionary programs, will be directly affected by the ongoing discussions aimed at agreeing on a seven year balanced budget. The President's F.Y. 97 budget submission reflects the balanced budget plan that was developed in January of this year.

At the outset it is important to note that there are two sets of budget figures that characterize the President's request. First there is the Office of Management and Budget (OMB) scored request that achieves a balanced budget in the year 2000. Second there is the Congressional Budget Office (CBO) scored request which reaches a balance in the year 2002. This difference is significant since the OMB scored request, which comprises all of the budget figures for the individual agencies, anticipates that as a result of balancing the budget in the year 2000, the tax cut will "sunset" and additional revenues will be allocated back to discretionary accounts, including R&D. In order to avoid confusion, it is important to distinguish which figures are being compared.

The Republican budget plan, which was also developed in January of this year, has thus far only been scored by CBO. A comparison of the two CBO-scored plans shows that the long term spending levels are virtually identical; however, the trajectory to achieve these levels is more moderate in the President's plan. For the first 3 or 4 years, the President's planned spending levels in fact reflect the baseline developed in F.Y. 96. Thus there are no major program cancellations included in this year's budget.

Although details of the Republican plan are not available, it likely will emphasize defense discretionary spending over non-defense. A preliminary comparison shows that the Republican plan for non-defense discretionary spending declines much more aggressively than the President's plan in the early years.¹ If the budget is not balanced by the year 2000, the President's budget would continue to decline until there would be only a negligible difference in the two spending levels by the year 2002. If the budget is balanced by the year 2000 (as assumed by OMB), the President would provide more funding for non-defense discretionary spending until it regains present spending levels. Essentially, the President's budget provides more funding over the next several years in order to allow the affected agencies to pay for personnel streamlining, acquisition of more efficient technologies, and for restructuring critical programs.

For comparison purposes, the President's balanced budget plan saves $297 billion in overall discretionary spending over the seven year period, while the most recent Republican plan saves $348 billion. Because the computed savings in either plan are referenced to the somewhat artificial CBO baseline, which assumes unconstrained spending beyond the year 1999, both plans achieve the majority of savings in the later several years. In the last two years of these plans, the President achieves 57% of discretionary savings while the Republicans achieve roughly 51%.

In F.Y. 97, there is a difference of $13 billion between the President's plan and the Republican plan for overall discretionary spending overall, and a gap of as much as $20 billion in non-defense discretionary spending. Although this is relatively minor in a proportional sense, it is a major difference for agencies now operating on the margin. Essentially, if the Republicans' balanced budget plan becomes a binding Budget Resolution this year, at least $13 billion will have to be trimmed from discretionary accounts.

Over the long term, the decline in overall discretionary spending is so large under either plan that there is no credible way to define the savings in terms of actual agency budgets and programs. Thus, if either plan is followed, national priorities would need to be reassessed every year and agency budgets adjusted accordingly. For some agencies contained in the President's request, run out budgets beyond F.Y. 97 are not accompanied by actual program plans or internal budget structure.

Characteristics of the President's Request for R&D²

The President has requested a total of $72.679 billion for research and development in F.Y. 97. This represents an increase of $1.229 billion over F.Y. 96, including a 3% increase for civilian research. Civilian research accounts for 47% of the total, or $34.4 billion. There would be no appreciable progress toward achieving a 50/50 split between civilian and defense research.

In constant F.Y. 97 dollars, total R&D outlays declined by just over 2%, primarily due to a slight decline in defense research outlays.

By theme, the largest proportional increase was for facilities, both in civilian agencies and in DOD. This primarily results from proposals in some agencies such as NASA and DOE to fully fund facilities this year rather than spreading out the funding over several years as has been the case in the past.

The actual budgetary numbers, however, are dominated by proposed increases in applied and basic research. The proposed increase for applied research is twice that for basic research.

Agency Funding Levels and Issues

Generally, the President has proposed setting aside certain "Investment" initiatives within each agency and holding these constant or providing inflationary increases. Overall reductions on the order of 22% in nominal terms would then be made to other non-investment agency programs over the period 1996-2001. Although a clear list of these investment initiatives was not provided with the Budget Request, they probably include:

• NSF grants;
• NASA's Space Station, Mission to Planet Earth, and New Millennium programs;
• NIST's ATP and MEP programs;
• DOE's energy conservation program;
• NOAA's weather service modernization program;
• NIH research; and
• EPA environmental technology programs.

Tables below [now in a separate appendix] show program funding levels for agencies within the jurisdiction of the Committee on Science. For comparison, the Republican proposals contained in the "Views and Estimates" are shown in the last column. As can be seen, the preliminary Republican proposal is for a substantial increase above the request levels for what they have identified as basic research (this differs somewhat from what the Federal agencies and the OMB identify as basic research). The Republican proposal is intended to amplify policy differences and strengthen the case against Presidential investment initiatives.

Long term funding profiles for some agencies have been developed to fit within the President's overall discretionary budget. Although some agencies such as NASA will be challenged to develop management and programmatic plans to fit these out year budgets, most science programs reflect the President's emphasis on targeted investments.

National Science Foundation

NSF research has been held constant through F.Y. 2000, except for certain investment accounts such as Global Change and Partnerships for a New Generation of Vehicles (PNGV) which were provided increases. The NSF request, however, contains no funding for the Academic Facilities Modernization Program created by Congress to address a persistent shortfall in investment in university based facilities. The request does, however, contain nearly $100 million in funding for the Laser Interferometer Gravitational-Wave Observatory (LIGO) and safety upgrades to the Amundsen-Scott Station at the South Pole.

The NSF long term budget represents a best case in terms of the clear intent to maintain steady funding throughout the first five years, and an increased investment beyond.

National Aeronautics and Space Administration

For F.Y. 97, NASA has requested slightly less than a freeze at F.Y. 96 levels (a reduction of $17 million below F.Y. 96). This year will be dominated, however, by debate over how to restructure NASA's programs to fit within the out year funding profile. NASA funding shows the characteristic "V" shape in its out year funding profile resulting in a 36% reduction by the year 2000. In the last two years of the President's budget, however, a substantial reinvestment occurs. At present, NASA does not have a firm program plan that reflects how these savings will be accomplished. Over the past three years, NASA has gone to extraordinary lengths to streamline and downsize its institution and restructure its basic program approach.

NASA's budget is dominated by Presidential investments such as the Space Station, Mission to Planet Earth, and New Millennium, and also by relatively fixed costs for the Space Shuttle. The request also contains an increase of $136 million for NASA's new Reusable Launch Vehicle program envisioned to reduce the cost of space transportation in the future.

National Oceanic and Atmospheric Administration

For F.Y. 97, NOAA has requested an increase of $171 million. Most of this is directly related to the weather service modernization program, including acquisition of ground and satellite systems. Over 37% of NOAA's funding is fixed by these systems costs. Increases of about 9% have also been requested for NOAA's National Ocean Service and National Marine Fisheries Service. Only NOAA's research program has been frozen (and in fact declines relative to the "base" funding it was intended to have).

Similarly, NOAA's long range budget is also dominated by the weather service modernization program, which is a protected Presidential initiative. In order to carry out this program and other statutory responsibilities, however, a ramp up in budget authority has been requested over the next two years.

Within the NOAA request, several outstanding decisions will be made which may have budgetary effects. For example, NOAA has deferred its decision to begin development of a common civilian/defense meteorological satellite, although funding for this effort has been included in the request. Other budgetary adjustments will be made over the next several months.

National Institute of Standards and Technology

The NIST budget is dominated by two Presidential initiatives, the ATP and MEP programs. Of the requested increase in F.Y. 97, $182 million, $113 million is associated with these two efforts.

Department of Energy

In F.Y. 97, the President has asked for a freeze for the overall Department at F.Y. 96 levels. Within this, however, the President has asked for an increase of $253 million for energy R&D. Presidential investments such as Solar and Renewable and Energy Conservation R&D account for $244 million of this increase. Other Presidential initiatives such as Global Change and High Performance Computing contain only slight increases; however, the PNGV initiative receives an increase of nearly 25% to a level of $207 million. Although the request for Fusion Energy research has increased by 12% up to a level of $256 million, this falls short of the Fusion Energy Advisory Council report which called for $265 million.

The long range budget for DOE R&D programs is only available out to the year 2000 and indicates a decline in both nominal and real dollars. Energy Supply R&D declines by 12% while General Science and Fossil Energy decline by nearly 25%. Energy Conservation, however increases by almost 9% in nominal terms during this period.

Environmental Protection Agency

Environmental research has been a clear Presidential initiative as is evident in both the F.Y. 97 and out year request. EPA research increases by nearly 15% in nominal terms by the year 2002. Within this, however, participation in some past interagency programs will decline. A decrease of 24% in Global Change and 47% in High Performance Computing has been proposed. A small increase in the PNGV program will bring EPA's budget up to $17 million. Finally, EPA's Environmental Technology Initiative has been proposed to increase to $27 million as compared to the $10 million currently available.

National Institutes of Health

Another major Presidential R&D investment has been in health research. The long range budget for NIH increases by 4% in F.Y. 97 and remains steady until 2001, at which point additional resources are provided.

Overall Health of Science

With respect to the health of the science establishment, one of the most important questions which will confront the science community is whether and how to adjust to the decline in R&D dollars available. Since 1990, the increase in R&D funding available from Federal, private, and non-profit sources has not kept pace with the production of Ph.D.s in science and engineering. This gap is envisioned to widen in the coming decade. Clearly changes will need to be implemented both to "right size" the science establishment and to redefine the role of an advanced degree in future society.

It is also useful to review the role of science within the Federal agencies themselves. For NSF, the number of proposals has continued to increase; however, the ability to fund them has shown some declining trends since 1990. It will be crucial to monitor this indicator in the future. Even though both Republicans and Democrats are committed to protect basic research, a disinvestment in applied research in other agencies may result in an increase in proposals from underfunded scientists. Thus, a declining trend in the success rate will be an early indicator of stress in the science community as it struggles to adjust to the new structure of the Federal R&D portfolio.

For NOAA, it is important to recognize that an increasing level of operational responsibilities should be accompanied by a healthy level of supporting research. The magnitude of the national weather service modernization program has put a strain on the overall ability to sustain such a level, however. A comparison of the budget for Oceanic and Atmospheric Research with overall agency funding shows a slightly declining trend since 1992.

The F.Y. 1997 budget for NOAA takes the agency's science budget to its lowest point in a decade. Potential decreases in climate change and other science programs within the Congressional budget process may exacerbate this trend. NOAA is now engaged in a review of its science and laboratory structure in order to align them with long term strategic goals.

For EPA, the level of science funding has generally kept pace with the overall budget. Environmental matters have remained a high priority for the Administration. Notwithstanding this, however, the number of statutes and amendments for which EPA has responsibility has increased from 43 in 1980 to 62 today, over a 40% increase.

Within DOE, funding for energy R&D has fallen from a level of almost $9 billion in 1978 to $3 billion in 1995 in constant dollars. Within this, however, basic energy R&D has increased slightly.

NASA's space science program has been one of the highest profile Federal efforts in science. Historically, the science community has set a benchmark of 20% as the proportion of NASA funding that should be related to science, a benchmark NASA and Congress have been able to maintain. Under the future declining budget scenario, however, discussion has centered around more meaningful goals that better reflect productivity metrics. Specifically, the science community and NASA have worked to fundamentally restructure the science effort to accomplish more frequent lower cost missions that will serve a broader segment of the science community and still maintain an intellectually robust enterprise. NASA's current plan is to substantially reduce mission costs by a factor of 7 and increase flight rates by a factor of 4 by the turn of the century.

Long Term Economic Implications

Within the current political and budgetary environment, science and technology has come under great stress. It is useful to maintain an overall view of how this stress has affected the productivity of science, how the structure of the R&D establishment is evolving, and how the linkages between R&D and overall economic performance are changing. Although there is no single indicator which is unequivocal and without fatal caveats, an array of such indicators may suggest where symptoms of such stress exist and where we may look for successes and failures of policy.

As discussed at the outset, Democrats have sought to establish a firmer relationship between R&D and overall national productivity, and between productivity and desirable economic growth. It is not possible to draw a precise quantitative relationship between R&D and economic growth; however, the link has been strongly inferred. Economic studies have suggested that about one quarter to one half of all productivity results from technological innovation. Thus it is possible to examine indirect relationships.

Some have suggested that overall national productivity, as measured by a standardized index of output per hour, has begun a renewed growth pattern over the past five years after a decade of relative stagnation. This is seen more sharply in the annual productivity change which suggests the steady erosion of productivity growth during the period from 1970 to 1990.

One indicator of how successfully investments in technology have found their way into the mainstream of the economy is the initial public offerings in high tech business firms. This shows that high tech initial public offerings have increased markedly since 1990 both in number and in revenues, although fluctuations between 1992 and 1994 are evident.

This and many other indicators are also sensitive to overall economic performance. The recession of 1990-1991, and the ensuing weak recovery, are clearly evident.

Another measure of the rate of infusion of technology into the economy is the number of patents granted. After notable fluctuations during the 1980's, the number of patents granted has increased slightly but steadily during the 1990's. Moreover, the U.S. has maintained its international share of patents granted. A more in-depth analysis of patent grants also shows a growing link to research and development rather than incremental product improvement.

Recently, there has been a concern expressed that the proportion of U.S. patents awarded to foreign applicants threatened to outpace awards to U.S. citizens and companies. Since 1992, however, the gap between U.S. and foreign applications and grants has begun to improve.

In summary, the retrospective view suggests that over the past four or five years, technology and productivity have shown favorable trends. Inasmuch as the relationship with R&D is usually envisioned to be a long term one, any favorable indicators in the 1990's are likely related to R&D investments of the 1980's or earlier. For example, desktop computers, Internet connections, lightwave communicators, MRI medical scans, DNA testing and so on were in their conceptual infancy only a decade ago.

R&D expenditures by the Federal Government and the private sector show that the overall level of investment in R&D has in fact begun to fall in real terms after 1990. This decline is dominated by the decline in Federal investments. Industry investments have held constant since 1990, although more recent studies suggest that a slight increase may be seen in future years. Some studies indicate that Federal investments and private sector investments are in fact directly correlated and a decline in the former will presage a decline in the later. It will be important to reassess the outlook for private sector investment over the next several years.

The national R&D investments of the 1980s are evident and the increasing role of industry funding is clear. The future, however, is less favorable. Although much debate has revolved around whether an inflation-adjusted view is valid in this period of fiscal restraint, such adjustments are consistent with the hypothesis that R&D and the economy are linked and that at least a constant inflation adjusted level of investment is necessary for continued economic growth.

As can be seen, however, R&D as a per cent of the GDP has fallen over the past five years both for Federal R&D and total R&D including industry, academic, and non-profit sponsored funding. The Administration's goal is to restore total R&D to a level of 3%, the level characteristic of the mid-1960's and 1980's.

A notional comparison of annual changes in total R&D investment compared with annual changes in productivity that may result, say within ten years, strongly suggests that the investments of the 1960's and the 1980's may partially explain productivity growth in the 1970's and 1990's. Conversely, negative R&D investment in the early 1970's may have led to negative productivity growth in the early 1980's. The extent to which the present underinvestment in total (Federal plus private sector) R&D will affect future growth should be a matter of serious consideration.

[1]Republican budget plan data presented at the hearing of the Subcommittee on Science, March 21, 1996.

[2]All data in this section is taken directly from the President's budget books. These comparisons assume that the President's proposed adjustments to the F.Y. 1996 Continuing Resolution are accepted.