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Saturday, April 17, 2010

Impact on the Federal Budget of Freezing Non-Security Discretionary Spending

Mindy R. Levit
Analyst in Public Finance

As economic recovery continues, the focus on the federal budget has shifted, in part, towards deficit reduction. In fiscal year (FY) 2009, the federal budget deficit, relative to the size of the economy, reached a level not seen since the end of World War II. Deficit levels are projected to remain elevated through FY2011. The budget deficit for FY2011, according to CBO's analysis of the President's budget, is projected to be $1,342 billion. In his FY2011 budget, the President made several proposals to curb spending, while acknowledging that additional steps are needed to achieve long-term fiscal stability. 

The President proposes to freeze non-security discretionary spending for the next three fiscal years (FY2011-FY2013) at FY2010 nominal levels (i.e., spending levels would not be adjusted for inflation). After FY2013, growth in this category of spending would be linked to inflation. Non-security discretionary spending is defined as discretionary spending outside of defense, homeland security, veterans affairs, and international affairs. If enacted in this form, the President's budget projects that this proposal would save approximately $250 billion over the next 10 years. 

Under the Administration's Current Policy baseline, the deficit is projected to equal 7.5% of GDP in FY2011, falling to 5.6% of GDP in FY2020. If all of the President's proposed policies are implemented, the Administration projects that the deficit will fall from 8.3% of GDP in FY2011 to 4.2% of GDP in FY2020. In other words, the deficit would be 1.4% of GDP lower in FY2020 compared to current policy if all of the President's proposals are enacted. In order to achieve even greater deficit reduction, larger cuts would be needed. To illustrate, even if non-security discretionary spending is cut to zero and there are no other policy changes implemented, the deficit would fall from 4.0% of GDP in FY2011 to 3.3% of GDP in FY2020. This would mean no federal funding for education, transportation, most energy, and numerous other programs. In order to balance the budget, significant additional spending cuts, tax increases, or a combination would still be required. 

Freezing non-security discretionary spending can reduce the deficit relative to certain policy alternatives. In other words, whether or not freezing non-security discretionary spending actually lowers the deficit depends on which deficit projections are used as the starting point to measure the impact of policy changes. Depending on which one of the three Administration's baseline scenarios are used as a starting point to measure savings, this proposal may generate lower levels of savings compared to what is described in the President's budget. Achieving savings from this proposal ultimately depends on what policies Congress enacts this year and in each subsequent budget cycle. Congress enacts appropriations every year and would continue to face a decision on legislation restraining non-security discretionary spending in future years. 

The proposal to place a three-year freeze on non-security discretionary spending, as analyzed in this report, represents a small reduction in the federal budget deficit. Freezing this spending does not address longer-term budgetary challenges. 

This report will not be updated. 

Date of Report: April 12, 2010
Number of Pages: 14
Order Number: R41174
Price: $29.95

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