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Monday, April 29, 2013

Trends in Discretionary Spending

D. Andrew Austin
Analyst in Economic Policy

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. Spending can be measured by budget authority (BA; what agencies can legally obligate the government to pay) or outlays (disbursements from the U.S. Treasury). This report mostly discusses trends in outlays.

Federal spending in fiscal year (FY) 2012 was just under a quarter (23%) of the U.S. economy, as measured as a share of gross domestic product (GDP). Federal spending since 1962 has averaged about a fifth of GDP. (Years denote federal fiscal years unless otherwise noted.) Discretionary spending accounted for 34% of total outlays in 2012 ($3,538 billion), well below mandatory spending’s share (60% of outlays in 2012). Weak economic conditions in recent years as well as long-term demographic trends have increased spending on mandatory income support and retirement programs, while policy makers have taken steps to constrain the growth of discretionary spending. Net interest costs were 6.3% of federal outlays in 2012, but are projected to rise sharply as interest rates return to historic levels.

Discretionary spending’s share of total federal spending has fallen over time largely due to rapid growth of entitlement outlays. In 1962, discretionary spending accounted for 47% 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 share of GDP has fallen. Under current law projections, discretionary spending’s share of GDP will fall to 5.5% in FY2023. Discretionary spending can be split into various categories to reflect broad national priorities or how federal spending decisions are made. In 1962, discretionary spending was 12.3% of GDP, with defense spending making up 9.0% of GDP. In 2012, discretionary spending was 8.3% of GDP, with defense spending (including war) totaling 4.3% of GDP. Defense spending can be divided between base budget and war expenditures, both of which grew sharply over the last decade. On average, defense outlays grew 6.8% per year in real terms from 2000 to 2010, while real nondefense discretionary outlays grew 5.6% per year. Discretionary spending has also been divided into various security and non-security categories. Non-defense security spending, which rose sharply after 2001 and Hurricane Katrina in 2005, was 1.1% of GDP in 2012, about twice its pre- 2001 level. Non-defense non-security outlays, which ranged between 3% and 3.5% of GDP since the mid-1980s, were 2.9% of GDP in 2012. Security spending, which includes almost all defense spending, was 5.3% of GDP in 2012.

The Budget Control Act of 2011 (BCA; P.L. 112-25) reintroduced statutory limits on discretionary spending by imposing a series of caps on discretionary BA from FY2012 through FY2021. The American Taxpayer Relief Act of 2012 (ATRA; P.L. 112-240) modified those limits for FY2013 and FY2014. The FY2013 full-year funding bill (H.R. 933) enacted March 26, 2013, conformed to those limits. Many believe that previous discretionary spending limits helped achieve federal surpluses in the late 1990s.

The direction of fiscal policy has been the focus of contention among macroeconomists. Some contend that more spending would help reduce high unemployment levels, while others call for imposing greater budgetary stringency. Over the long term, 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 15, 2013
Number of Pages: 34
Order Number: RL34424
Price: $29.95

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