Tuesday, June 28, 2011
D. Andrew Austin
Analyst in Economic Policy
Mindy R. Levit
Analyst in Public Finance
Federal spending is often divided into three categories: discretionary spending, mandatory spending, and net interest. Mandatory spending includes federal government spending on entitlement programs as well as other budget outlays controlled by laws other than appropriation acts. Entitlement programs such as Social Security and Medicare make up the bulk of mandatory spending. Other mandatory spending programs include Temporary Assistance for Needy Families (TANF), Supplemental Security Income (SSI), unemployment insurance, some veterans’ benefits, federal employee retirement and disability, Supplemental Nutrition Assistance Program (SNAP), and the earned income tax credit (EITC). Discretionary spending is provided and controlled through appropriations acts.
In 2010, mandatory spending accounted for over half of total federal spending and over an eighth of gross domestic product (GDP). Social Security accounted for a fifth of federal spending. Medicare and the federal share of Medicaid, the fastest growing components of mandatory spending, together accounted for 23% of federal spending. Those three programs, therefore, made up over 43% of federal spending. The composition of mandatory spending has changed significantly over the past 40 years. In 1962, before the 1965 creation of Medicare and Medicaid, mandatory spending was less than 30% of all federal spending. At that time, Social Security accounted for about 13% of total federal spending or about half of all mandatory spending.
Federal spending has outrun federal revenues for the last nine fiscal years. In the long term, projections suggest that if current policies remain unchanged, the United States faces a major fiscal imbalance, largely due to rising health care costs and impending Baby Boomer retirements. Federal mandatory spending on health care is projected to expand from 5.5% of GDP in 2010 to 17.9% in 2084 according to a Congressional Budget Office (CBO) extended baseline projection. Social Security is projected to grow from 4.8% of GDP in 2010 to 6.3% of GDP by 2084.
The share of mandatory spending has increased as a portion of total federal spending and as a percentage of GDP for four reasons. First, discretionary spending, defined as non-entitlement spending that is provided through appropriations acts, has fallen relative to mandatory spending. Second, domestic discretionary spending has been relatively stable as a share of GDP compared to mandatory spending, which has grown more quickly. Third, the number of beneficiaries of entitlement programs has grown as the average age of population has risen. Fourth, health care costs per capita have grown far faster than the overall economy.
In an effort to reform the private insurance market and expand health insurance coverage to the uninsured as federal spending on health care increases, the Patient Protection and Affordable Care Act (PPACA; P.L. 111-148) and the Health Care and Education Reconciliation Act of 2010 (HCERA; P.L. 111-152) were signed into law on March 23 and March 30, 2010, respectively. As a result of this legislation, mandatory federal outlays for health programs are projected to increase. Revenue increases are projected to offset the additional mandatory outlays.
Because discretionary spending is a smaller proportion of total federal outlays compared to mandatory spending, some budget experts contend that any significant reductions in federal spending must include cuts in entitlement spending. Other budget and social policy experts contend that cuts in entitlement spending could compromise their goals: the economic security of the elderly and the poor.
Date of Report: June 15, 2011
Number of Pages: 19
Order Number: RL33074
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