Administration’s Proposed Cuts to Non-Defense R&D Pose Long-Term Risk to Rising Living Standards

New, high-quality research quantifying the powerful impact of federal non-defense research and development (R&D) on productivity and economic growth shows why the dramatic cuts to non-defense R&D funding proposed by the Trump Administration would reduce long-term growth in our economy and standard of living.

Most recently, a Congressional Budget Office (CBO) analysis estimates that every additional federal dollar invested in non-defense R&D increases the size of the economy by an average of $11.50 over 30 years.^[1] In fact, over the long run the extra economic growth would boost federal revenue by more than the cost of increased R&D, according to CBO. The report also explains that cutting R&D would have roughly comparable negative effects on the economy and the budget.

Trump Budget Cuts Broad Range of Non-Defense Research and Development

President Trump’s fiscal year 2026 budget proposes cutting non-defense R&D funding by $42 billion (21 percent). (See Figure 1.) For example:

• The National Science Foundation (NSF), a key contributor to the creation of the Internet, would be cut by 57 percent.
• The National Institutes of Health, the world’s largest funder of basic biomedical research on diseases such as cancer and diabetes, would be cut by 41 percent.
• The Environmental Protection Agency Office of Science and Technology would be cut by 34 percent.
• Department of Energy non-defense research and development appropriations would be cut by 33 percent, and the department’s Office of Energy Efficiency and Renewable Energy would be cut by 74 percent.
• The National Institute of Standards and Technology, a “vital component of the nation’s research infrastructure,” would be cut by 28 percent.^[2]
• The National Aeronautics and Space Administration would be cut by 24 percent.

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Recent Research Highlights Power of Federal R&D

The United States has an enviable history of scientific advancement and innovation flowing from its partnership of three complementary actors: the federal government, our world-class universities, and private businesses.

The federal government often plays a critical role at the early stages of the process with its funding of basic science, where the ultimate societal benefits can be huge but are highly uncertain and can take years or even decades to reach market fruition. Most of this federally funded research is conducted at universities; the resulting technological gains often “spill over” to the private sector.

Business investment in R&D tends to occur later in the process and typically focuses on the development of commercial or pre-commercial technologies and products. Companies have an incentive to invest in R&D activities that generate near-term profits for the company, rather than those that produce the largest long-term benefits for society. The federal government encourages private R&D through tax incentives for businesses’ R&D investment, including a tax credit for certain relevant R&D expenses and expensing for qualifying research expenses.^[3]

Examples abound of the large spillover effects that federal R&D can have on the economy. Consider, for example, how many times a day people conduct searches using Google, whose parent company, Alphabet, has a market capitalization of over $2 trillion. It all started with an NSF grant of $4.5 million to two Stanford graduate students, who developed an internet search engine with the funding. With the basic research completed, private venture capital came in and Google was born. NSF funding also supported University of Delaware researchers who helped develop the touch screens now used in everything from phones to store check-outs, airports, and banks.^[4] The list of early government-funded research yielding important innovation that then contributed to economic growth goes on, including inventions such as the Internet, MRIs, GPS, and LED lights.^[5]

Quantifying the benefits from federal R&D can be difficult, however. For decades, economists have studied the impact of technological advances on economic growth and rising living standards, but “empirical evidence on the relationship between R&D and productivity growth has come slowly,” according to former CBO director Douglas Elmendorf, former Council of Economic Advisers chair Glenn Hubbard, and current Dartmouth economics professor Heidi Williams.^[6] They recently highlighted two new papers that represent “a key step forward.”

The first paper, by Arnaud Dyèvre, examined firm-level data and found that the decline in federal R&D as a share of the economy in recent decades is responsible for about one-third of the decline in productivity growth over the 1950-2017 period.^[7] The second paper, by Andrew Fieldhouse and Karel Mertens, examined appropriations data for major defense and non-defense agencies and found that R&D spending accounted for one-fifth of productivity growth during the 1948-2021 period; the authors note that their findings “imply substantial underfunding of nondefense R&D,” given its power.^[8]

In another recent paper, a group of economists (including former senior CBO officials) cited these two papers, emphasizing how they “directly tackle the challenge of estimating the relationship between federally funded R&D and productivity. Notably, while the two papers rely on quite different empirical approaches, they end up reaching quantitatively similar conclusions.”^[9]

CBO Confirms Large Economic Benefits from Non-Defense Federal R&D

A recent CBO analysis on the economic effects of investments in non-defense federal R&D explains:

Federal funding for nondefense R&D contributes to innovation, which, on average, increases productivity and economic growth over time . . . [by supporting] the training of people, the creation of products, the production of reuseable ideas, and knowledge spillovers that generate further ideas. Some of the effects of those activities occur quickly, whereas others take years to manifest.^[10]

Specifically, CBO found that federal R&D spending:

• Boosts productivity relatively quickly — within the ten-year budget window. But the productivity effects are long-lasting, continuing for nearly three decades after the initial spending occurs.
• Complements private-sector R&D. “Research funded by the government typically complements other organizations’ R&D activities,” according to CBO, “so an increase in federal funding, on average, encourages other entities to provide additional funding as well.” On average, one dollar of federal R&D increases private-sector R&D by 25 cents. That means the federal spending “crowds in” rather than “crowds out” private spending, which amplifies the productivity effects of the federal investment.
• Pays for itself over the long term by generating additional economic activity.

CBO analyzed scenarios in which federal non-defense R&D increases by $30 billion a year for ten years, with the increase paid for either by reductions in non-investment spending or by higher deficits. Because the economic effects of R&D spending vary over time, CBO calculated a single “present value” estimate that captures these flows over 30 years. For this estimate, CBO used two different interest rates: the Treasury rate, which is the rate at which the U.S. government borrows, and a market rate, which reflects the higher rates that private-sector entities typically face.^[11]

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CBO’s results are stunning. It estimates that every additional dollar of non-defense federal R&D spending increases gross domestic product (GDP) by an average of $11.50 in present-value terms over 30 years, using the Treasury interest rate. (See Figure 2.) Even using the higher market rate, GDP would increase by an average of $7. These figures assume the R&D increase is financed by borrowing; the returns are slightly higher if it is offset by cuts to non-investment spending.^[12]

The positive effects of R&D spending grow over time, CBO found. The R&D increase would boost real GDP by 0.1 percent after 10 years, 0.5 percent after 20 years, and 0.8 percent after 30 years, regardless of whether it was funded through spending cuts or borrowing. Moreover, because the power to drive productivity and economic growth is so strong, cumulative deficits would be 1.1 percent smaller over 30 years even if the R&D increase were deficit financed.

For policymakers, figuring out what drives productivity growth — which leads to rising living standards — is a fundamental goal. The CBO analysis emphasizes the importance of federal investments in non-defense R&D in driving productivity gains.

CBO’s findings also highlight the long-term damage that the Administration’s proposed cuts in non-defense R&D would cause for the nation. Just as increasing federal R&D funding substantially boosts economic growth, cutting federal R&D would have a roughly symmetrical effect in reducing economic growth — a self-defeating policy that Congress should reject.