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Tuesday, April 20, 2010

Trends in Discretionary Spending

D. Andrew Austin
Analyst in Economic Policy

Mindy R. Levit
Analyst in Public Finance

Discretionary spending is provided and controlled through appropriations acts, which fund many of the activities commonly associated with such federal government functions as running executive branch agencies, congressional offices and agencies, and international operations of the government. Essentially all spending on federal wages and salaries is discretionary. 

Federal spending in 2009 accounted for just under a quarter (24.7%) of the U.S. economy, as measured by gross domestic product (GDP). Federal spending since 1962 has averaged about a fifth of GDP. (Years denote federal fiscal years unless noted otherwise.) Discretionary spending accounted for 35.2% of total outlays in 2009, as extraordinary federal responses to financial turmoil sharply increased mandatory spending (59.5% of outlays in 2009), reducing discretionary spending's share of total spending. 

In 1962, discretionary spending accounted for 47.2% of total outlays and was the largest component of federal spending until the mid-1970s. Since then, discretionary spending as a share of federal outlays and as a percentage of GDP has fallen. The long-term fall in the share of discretionary spending as a portion of total federal spending is largely due to rapid growth of entitlement outlays and slower growth in defense spending relative to other federal spending in past decades. 

Discretionary spending is often divided into defense, domestic discretionary, and international outlays. Trends in those categories may indicate broad national priorities as reflected in federal spending decisions. Defense and domestic discretionary spending compose nearly all of discretionary spending. In 1962, discretionary spending equaled 12.3% of GDP, with defense spending making up 9.0% of GDP. In 2010, total discretionary spending is estimated to fall to 9.6% of GDP with defense spending totaling 4.9% of GDP. Military spending has increased sharply over the last decade. On average, from 2000 to 2010, defense outlays grew 6.8% per year in real terms, whereas non-defense discretionary outlays grew 5.6% per year in real terms. 

The G. W. Bush and Obama Administrations each created their own division of security and nonsecurity spending. Dividing spending into security and non-security components, however, presents many conceptual and practical difficulties. Some federal activities, such as Coast Guard patrols, advance non-security and security interests. Furthermore, federal programs tasked with non-security aims in normal times may respond to specific homeland security challenges. Nondefense security discretionary budget authority increased sharply after Hurricane Katrina, although changes in outlays were less dramatic. Non-defense non-security outlays, which have ranged between 3% and 3.5% of GDP since the mid-1980s, are estimated to reach about 4% of GDP in 2010, largely due to economic stimulus measures and other recession-related spending. 

The Obama Administration in its recent budget submission called for a three-year freeze on nonsecurity discretionary spending. Weak economic conditions have depressed federal revenues and may continue to increase government social safety-net expenditures. Some contend that additional stimulus measures are needed to reduce high unemployment levels, while others have called for imposing greater budgetary stringency. Over the long term, projected future growth in entitlement program outlays may put severe pressure on discretionary spending unless policy changes are enacted or federal revenues are increased.

Date of Report: April 12, 2010
Number of Pages: 23
Order Number: RL34424
Price: $29.95

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