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Tuesday, April 24, 2012

Mandatory Spending Since 1962

D. Andrew Austin
Analyst in Economic Policy

Mindy R. Levit
Analyst in Public Finance

Federal 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 FY2085.

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.

Date of Report:
March 23, 2012
Number of Pages:
Order Number: R
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