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Wednesday, April 6, 2011

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. The federal budget deficits over the last several fiscal years, relative to the size of the economy, reached levels not seen since the end of World War II. Deficit levels are projected to remain elevated through FY2012. The budget deficit for FY2012 is estimated to be $1,480 billion. As concern over the long-term effects of an elevated federal budget deficit grows, the calls for reducing the deficit to more sustainable levels have grown.

The President proposes to freeze non-security discretionary spending for the next five fiscal years (through FY2015) at FY2010 nominal levels (i.e., spending levels will not be adjusted for inflation). If enacted in this form, the President’s budget projects that this proposal will save approximately $406 billion over the next 10 years, relative to current policy.

Under the Adjusted Policy baseline, the deficit is projected to equal 6.9% of GDP in FY2012, falling to 4.5% of GDP in FY2021. If all of the President’s proposed policies are implemented, the Administration projects that the deficit will fall from 7.0% of GDP in FY2012 to 3.1% of GDP in FY2021. In other words, the deficit would be 1.4% of GDP lower in FY2021 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 this, even if non-security discretionary spending was cut to zero and no other policy changes were implemented, the deficit would fall from 4.0% of GDP in FY2012 to 2.5% of GDP in FY2021. 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 five-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.

Date of Report: March 22, 2011
Number of Pages: 14
Order Number: R41174
Price: $29.95

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