Austin Analyst in Economic Policy
Mindy R. Levit Analyst in Public Finance
spending is divided into three broad categories: discretionary spending,
mandatory spending, and net interest. Mandatory spending is composed of
budget outlays controlled by laws other than appropriation acts, including
federal spending on entitlement programs. 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, and Supplemental Nutrition Assistance Program
(SNAP). In contrast to mandatory spending, discretionary spending is
provided and controlled through appropriations acts. Net interest spending
is the government’s interest payments on debt held by the public, offset
by interest income that the government receives.
In FY2011, mandatory spending accounted for over half of total federal spending
and over an eighth of 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 10 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 5.7% of GDP in FY2011 to
17.2% in FY2085 according to CBO’s extended baseline projection. Social
Security is projected to grow from 4.8% of GDP in FY2011 to 6.4% of GDP by
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 has fallen over time 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 by CBO to increase. Revenue increases are projected by CBO 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.
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