Trends in Discretionary Spending

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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.
FY2008 federal spending accounted for just over a fifth (20.9%) of the U.S. economy, nearly
equal to its average share of gross domestic product (GDP) since FY1962. While discretionary
spending was the largest component of federal spending until the mid-1970s, mandatory spending
now accounts for about 3% more of GDP than discretionary spending.
From FY1962, when discretionary spending accounted for 47.2% of total outlays, to FY2008,
discretionary spending’s share of federal outlays has fallen by almost a fifth. Over time,
discretionary spending has fallen as a percentage of GDP because it has grown slower than the
overall economy. Rapid growth of entitlement outlays and slower growth in defense spending
relative to other federal spending are two major causes of the long-term fall in discretionary
spending’s share of federal spending.
Discretionary spending is often divided into defense, domestic discretionary, and international
outlays. Defense and domestic discretionary spending compose nearly all of discretionary
spending. In FY1962, discretionary spending equaled 12.3% of GDP, with defense spending
making up 9.0% of GDP. In FY2008, total discretionary spending fell to 7.9% of GDP with
defense spending totaling 4.3% of GDP. However, over the last six years, military spending has
increased sharply. On average, from FY1999 to FY2008, defense outlays grew 8% per year in
real terms, while non-defense discretionary outlays grew 2.5% per year in real terms.
Increases in discretionary spending are likely over the next several fiscal years due to the current
economic turmoil and resulting federal intervention to stimulate the economy. Over the long term,
projected future growth in entitlement program outlays may put severe pressure on discretionary
spending unless policies changes are enacted or federal revenues are increased.
This report will be updated annually.

What Does Discretionary Spending Include?..................................................................................1
Budget Authority and Outlays...................................................................................................1
Trends in Discretionary Spending...................................................................................................2
How has the Composition of Discretionary Spending Changed?.............................................2
Discretionary Defense Spending...............................................................................................5
Discretionary Non-defense Spending........................................................................................6
Discretionary International Spending........................................................................................6
The FY2009 Budget and Beyond....................................................................................................6
Current Situation.............................................................................................................................7
Discretionary Spending in the Long Term.......................................................................................8
Figure 1. Components of Federal Spending as a Percentage of Total Outlays, FY1962 –
FY2008 ......................................................................................................................................... 3
Figure 2. Components of Federal Spending as a Percentage of GDP, FY1962-FY2008................4
Figure 3. Discretionary Outlays by Type, FY1962-FY2008...........................................................5
Table 1. Categories of Federal Spending.........................................................................................1
Author Contact Information............................................................................................................9

Discretionary spending is provided in, and controlled by, annual appropriations acts, which fund
many of the routine activities commonly associated with such federal government functions as
running executive branch agencies, congressional offices and agencies, and international ²
operations of the government. Essentially all spending on federal wages and salaries is ³
discretionary.
Discretionary spending is often contrasted with mandatory, or direct, spending. Mandatory
spending includes federal spending on entitlement programs, the Food Stamp program, and other ⁴
spending controlled by laws other than appropriation acts. Spending levels for mandatory
programs are generally controlled by eligibility criteria and size of the eligible population.
The distinction between outlays and budget authority is important to understanding the federal
budget and, particularly, discretionary spending. Appropriations legislation, which controls
discretionary spending, grants budget authority to accomplish specific ends. Budget authority is
what federal agencies can legally spend. Budget authority has been compared to funds deposited
into a checking account, which then can be used for specified federal purposes. Outlays are
disbursed federal funds. Therefore, an outlay is not recorded until the federal government
disburses appropriated funds to purchase goods and services.
Table 1 illustrates the different categories of federal spending (i.e., mandatory and discretionary
spending) by contrasting the type of budget authority needed for specific purposes.
Table 1. Categories of Federal Spending
^{Budget Authority Provided b}^y^{Budget Authority Provided b}^y
^{Law Other than}^App^ro^{priation A}^cts^Appr^{opriation Acts}
^Entitlement^Medicare^Appro^{priated Entitlement}^s
^Social^Security^{(e.g., veterans’ compensation, M}^edicaid^{, TANF)}
^{Food Stamps (with caveats)}
^{Not an}^{Salaries for Members}^{of Congres}^s^{Discretionary Spending}^a
^Entitlement^{Mandatory no}^{n-entitlements}^{(defense, non-defens}^{e domestic discretionary, and}
^(e.g.^{, Forest Service payments}^{to states)}^{international)}
^Source:^{Compiled by CRS.}
^a.^{Discretionary spending}^programs^{. See discussion in text.}
¹
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Outlay data are used to assess the macroeconomic effects of the federal budgets, while budget
analysis of specific federal programs is typically based on budget authority, because that is what
Congress controls most directly. Congressional appropriations, which grant budget authority for
specific purposes, are not always tightly linked to changes in outlays in the following year. While
budget authority can be granted for a single year, some appropriations (such as for many military
construction projects) provide budget authority for multiple years, or indefinitely. Thus outlays
that flow from an appropriated sum might be spread over several fiscal years, implying that ⁵
budget authority totals will differ from outlay totals for a single fiscal year.

The composition of the federal budget has changed dramatically since the early 1960s. Over time,
the share of total discretionary spending in federal spending has fallen, while the share of
mandatory spending has increased. Discretionary spending accounted for 67.5% of total outlays ⁶
in FY1962, but only an estimated 38.1% of total outlays in FY2008. Mandatory spending, by
contrast, rose from 26.1% of total outlays in FY1962 to 53.7% in FY2008.
In contrast to the longer term trends, between FY1999 and FY2008, discretionary spending grew
more quickly than mandatory spending. After falling for three decades between the late 1960s and
the late 1990s, discretionary spending increased 5.1% a year in real terms on average from
FY1999 to FY2008. Over the same period, the share of discretionary spending as a proportion of
federal outlays grew from 33.6% in FY1999 to 38.1% in FY2008.
In FY1962, discretionary spending comprised 67.5% of total outlays, with mandatory spending
and net interest accounting for 26.1% and 6.5%, respectively. Discretionary spending as a share
of total outlays reached its peak in FY1963. By FY2008, discretionary spending fell to an
estimated 38.1% of total outlays. Mandatory spending accounted for an estimated 53.7% of total
outlays, with net interest at 8.2%in FY2008. Figure 1 shows discretionary spending, mandatory
spending, and net interest payments in relation to total outlays since 1962.
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Figure 1. Components of Federal Spending as a Percentage of Total Outlays,
FY1962 – FY2008
^Source:^{OMB data, CRS calculations. Data for FY2008 a}^{re estima}^ted.
Another way to look at the changing composition of discretionary spending is to examine it as a
share of GDP. Measuring budget components as a share of GDP compares their size to the
economy as a whole. Figure 2 shows components of federal spending as a percentage of GDP
since FY1962. While discretionary spending was the largest component of federal spending until
the mid 1970s, mandatory spending now accounts for about 3% more of GDP than discretionary
spending. Medicare and Medicaid have continued to grow faster than overall federal spending,
contributing to the majority of the increase in mandatory spending over this period. Social
Security spending, the other large component of mandatory spending, has been relatively stable in
the last decade when measured as a share of GDP.

Figure 2. Components of Federal Spending as a Percentage of GDP, FY1962-FY2008
^Source:^{OMB data, CRS calculations. Data for FY2008 a}^{re estima}^ted.
Because of the decline in discretionary spending as a percentage of total outlays and the resulting
increase in the share of mandatory spending over time, controlling the federal budget may have
become more difficult for Congress. In other words, because mandatory spending is set
automatically, less money is available to allocate to other government agencies and programs
unless revenues rise or Congress modifies eligibility requirements and benefits of mandatory
spending programs.
In addition to these measures of spending, CBO also subdivides discretionary spending into
defense, domestic, and international categories. Figure 3 shows these categories of discretionary
spending as a share of GDP over the period FY1962-FY2008. Defense spending, 73% of total
discretionary spending in FY1962, accounted for 53.8% of discretionary spending in FY2008. In
terms of GDP, discretionary defense spending fell from 9.5% GDP in FY1968 to 4.3% in
FY2008. Over the same period, domestic and international discretionary spending have changed
less dramatically as a percentage of GDP. Domestic discretionary spending did increase in the

1970s but has since fallen, remaining closer to its period average.

Figure 3. Discretionary Outlays by Type, FY1962-FY2008
^Source:^{CBO and O}^{MB data, CRS calculations. Data for FY2008}^{are estimated.}
Since the late 1960s, defense spending grew more slowly than federal spending in other areas.
Some contend that defense expenditures as a proportion of GDP should be expected to fall over
the long term because the cost of defending the nation depends on factors that are largely
independent of economic growth.
Defense spending increased sharply in the mid-1960s as the United States’ involvement in
Vietnam deepened. After large-scale withdrawals of American troops from Vietnam began in
1969, defense spending as a share of GDP fell for the next decade. The Soviet invasion of
Afghanistan prompted the Carter Administration, and then the Reagan Administration, to boost
military expenditures resulting in an increase in defense spending during the early 1980s. After
the Berlin Wall was opened in November 1989 and communist governments in central and
eastern Europe collapsed, defense spending as a share of GDP dropped to historically low levels,
providing what some called a “peace dividend.” Defense spending again rose after the attacks of
September 11, 2001, and wars in Afghanistan and Iraq began.
Increased defense spending accounts for 75.6% of the increase in discretionary spending in the
past decade. Discretionary defense spending increased 8% a year in real terms on average

between FY1999 and FY2008.⁷ Discretionary defense spending, which had fallen to 3% of GDP
by the late 1990s, rose sharply to 4.0% of GDP in FY2005, and reached an estimated 4.3% of
GDP in FY2008. Defense spending increases, however, were concentrated in the past six years,
while non-defense discretionary spending has grown more gradually. The trajectory of future
defense discretionary spending depends in large part on the scale of future operations in Iraq and
Afghanistan.
Trends in domestic non-defense discretionary spending are less dramatic. Non-defense spending
supports the largest number of federal agencies and programs, including foreign affairs, science
and technology research, natural resources, energy, education, and numerous others. None of the
individual programs within the non-defense discretionary category have approached 1% of GDP
since FY1962. Most of these programs spent less than 0.5% of GDP during that period.
Domestic non-defense discretionary spending, 2.5% of GDP in 1962, rose to a peak of 4.8% in

1980. Domestic non-defense discretionary spending’s share of GDP fell during the Reagan ⁸

Administration, reaching 3.1% of GDP in FY1987. Since then it has fluctuated between 3.0%
and 3.7% of GDP. CBO estimates that FY2008 domestic non-defense discretionary spending will
account for 3.7% of GDP.
Discretionary spending for international programs since FY1962 has averaged 0.4% of GDP,
reaching its peak of 1.0% of GDP in FY1962. Since that time, international spending has
generally trended downward. Between FY2001 and FY2008, spending on international programs
rose from 0.2% of GDP to 0.3% of GDP. The majority of the funding in this category in recent
times has been devoted to diplomatic missions, foreign aid, and international finance.
Although discretionary spending has increased rapidly in the past half decade, spending in some
government departments and agencies has grown very slowly or has been cut, while spending in
other areas has expanded rapidly. Funding for defense and emergency and disaster management
increased sharply in the wake of hurricane Katrina, boosting overall discretionary spending
further. In recent years, disaster funding has dropped sharply, allowing non-defense spending as a
share of GDP to fall as well.

Congress and the President will begin dealing with budget issues in early 2009. Due to the
transition to the Obama Administration, however, budget details might be unavailable in early
February, thus effectively compressing the Congressional budget cycle and shortening the time
available for Congress to review budget proposals. New shocks to the financial system and the
⁷
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economy may present Congress with new demands for federal responses. Federal spending tied to
means-tested social programs has been increasing due to rising unemployment, while federal
revenues will likely fall as individuals’ incomes drop and corporate profits sink. Funding requests
for military operations in Iraq and Afghanistan will likely continue. New policies and requests, if
implemented, could affect discretionary spending levels in FY2009.
In his final budget submission, President Bush’s FY2009 budget called for limiting growth in
defense and non-defense discretionary spending during the five years FY2009-FY2013. The
proposals would reduce total discretionary spending in dollars, in real terms, as a share of GDP, ^th
and as a percentage of total federal spending over the five-year period. The 110 Congress
enacted few of these proposed cuts in discretionary spending.
In President Bush’s budget proposal, discretionary defense spending would rise from $549.2
billion in FY2007 to $670.7 billion in FY2009. After FY2009, proposed defense outlays fall,
although this is largely due to the omission of war costs. Continuing current levels of war funding
over the coming five years would slow the fall in defense spending as a percentage of GDP. The
Bush Administration projected a fall in discretionary defense spending to 3.1% of GDP in ⁹
FY2013. The Bush Administration has made a priority of holding down growth in “non-security” ¹⁰
discretionary spending. After rising slightly in FY2008 and FY2009 from $493 billion in
FY2007, the Bush Administration proposed decreases in non-defense spending by FY2013.

Most non-defense discretionary spending programs are now operating under a continuing
resolution through March 6, 2009. With the inauguration of the new President, budgetary
priorities may change as the new Administration and Congress confront ongoing financial and
economic challenges while facing the need to complete funding for the remainder of FY2009 and
begin consideration of the FY2010 budget. Given the current state of the economy, significant
increases in discretionary spending, at least over the next several years, are likely.
The federal government has responded to this financial turmoil with an extraordinary set of
measures. In February 2008, Congress enacted a $152 billion package (P.L. 110-185, Economic
Stimulus Act of 2008) to stimulate consumption that sent refunds to taxpayers and let firms
depreciate their capital more quickly. Later in the year, the Federal Reserve created a panoply of
lending facilities to provide financial institutions with loans in exchange for various types of
collateral. On October 3, Congress passed the Emergency Economic Stabilization Act of 2008
(EESA; P.L. 110-343), which authorized the Treasury Secretary to use $700 billion (subject to
certain Congressional restrictions and notifications) to intervene in financial markets or to inject
capital into key financial institutions as part of a Troubled Assets Relief Program (TARP).
In response to economic downturn, federal spending has increased and revenues have decreased. ^th
Slow growth is expected for the next few years. As the beginning of the 111 Congress
⁹
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approaches, many economists believe that another large fiscal stimulus is in order. The size,
variety, and complexity of new stimulus in addition to previous federal responses to this turmoil
present many challenges to budget analysis. The ultimate costs of these responses and their
budgetary impact, especially with regard to discretionary spending levels, will depend on how the
economy performs, how well firms with federal credit guarantees weather future financial shocks,
and whether the government receives positive returns on its asset purchases.

The annual budget process, and the appropriations decisions in particular, provide Congress with
the ability to change, continue, or reverse trends in discretionary spending. If discretionary
spending were held constant in real terms, as the CBO baseline presumes, then discretionary
spending per capita would decrease as population grows and it would shrink as a share of GDP as
the economy grows. On average the U.S. population grew 1% a year and per capita GDP grew ¹¹
2.25% per year from 1962 to 2005. If those trends were to persist, then holding discretionary
spending constant in real terms implies per capita discretionary spending would shrink by 1% a
year and discretionary spending as a share of the economy would shrink by 3.25% per year.
Due to the current economic downturn, large-scale fiscal stimulus and aggressive spending
measures intended to mitigate systematic risks in financial markets may be needed to limit serious
damage to the economy. When economic recovery begins, and as soon as appropriate, many
economists and policy makers hope that spending increases used to stimulate the economy will be
reversed. At that point, it is suggested that attention turn to deficit reduction.
Over the long run, growth in entitlement spending will present severe fiscal challenges. Recent
research on long-term fiscal challenges has focused on continued increases in the per beneficiary
cost of health care, as well as the more predictable demographic changes that will occur as the
baby boom generation retires. Projections from a variety of sources predict that spending on ¹²
Medicare and Social Security will increase sharply as a share of GDP in coming decades. CBO
projects that Medicare will expand from 5.6% of GDP in 2030 to 14.8% in 2082 and that Social
Security will grow from 6.1% of GDP in 2030 to 6.4% of GDP by 2082. Federal Medicaid ¹³
outlays, 1.4% of GDP in FY2007, are projected to reach 17.6% of GDP in 2050.
Social Security, Medicare, and Medicaid outlays as a proportion of GDP are projected to equal or
exceed the present share of federal revenues as a proportion of GDP (17.7% in FY2007) ^st
sometime after the middle of the 21 century. Maintaining current levels of discretionary
spending would then require either substantial tax increases or major changes in those entitlement
programs.
¹¹
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