The Option of Freezing Non-defense Discretionary Spending to Reduce the Budget Deficit

The Option of Freezing Non-defense Discretionary Spending to Reduce the Budget Deficit

Order Code RS21756
March 23, 2005
CRS Report for Congress
Received through the CRS Web
The Option of Freezing
Non-defense Discretionary Spending
to Reduce the Budget Deficit
Gregg Esenwein
Specialist in Public Finance
Government and Finance Division
Philip D. Winters
Analyst in Government Finance
Government and Finance Division
Summary
Congressional concern over the size of the federal budget deficit has prompted calls
for a reduction in federal expenditures. One proposal would freeze non-defense
discretionary funding at its FY2005 level. Since non-defense discretionary outlays
constitute slightly under 20% of overall federal outlays, limiting their growth would
produce a modest reduction in the federal budget deficit. Congressional Budget Office
(CBO) estimates indicate that freezing non-defense discretionary funding at its FY2005
level would produce a cumulative savings of approximately $147 billion including
reduced interest payments over the FY2006 to FY2010 time period. These savings
would reduce the cumulative baseline budget deficit by approximately 12% over the
period. This report will not be updated.
The Congressional Budget Office’s (CBO’s) FY2006 budget report shows a large
estimated baseline deficit, $295 billion in FY2006, followed by declining deficits in
subsequent years. Legislative language directs how CBO is to produce its baseline
estimates, such that they “estimate the future paths of federal revenues and spending
under current laws and policies.”1 Hence these baseline projections of budget deficits do
not include future policy changes, no matter how likely they are to be adopted by
Congress. Examples of such policy changes might include continued funding for the
1 CBO, Budget and Economic Outlook: Fiscal Years 2006-2015, p. xiii.
Congressional Research Service ˜ The Library of Congress

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ongoing war on terrorism (including
activities in Afghanistan and Iraq);
extending certain expiring tax provisions;
and adjusting the alternative minimum tax
Discretionary Spending
(AMT) for individuals.
The Congressional Budget Office
defines federal discretionary spending as
When the cost of such policy changes
budget authority that is provided and
is included in the estimates, the budget
controlled by appropriation acts and the
outlays that result from the budget
deficit grows rather than shrinks after
authority. Hence, the discretionary
FY2006.2 The prospect of large budget
spending level can be changed through
deficits extending far into the future has
the appropriations process.
prompted calls for a reduction in federal
expenditures. One proposal for limiting
Mandatory spending is budget
future spending growth would freeze non-
authority provided and controlled by
defense discretionary funding at the FY2005
laws other than appropriation acts and
level. Even if non-defense discretionary
the outlays that result from the budget
spending is held constant, other spending,
authority. Hence, mandatory spending
receipts, and the economy continue growing.
can be altered only through changes in
substantive law.
Nondefense discretionary spending would
decline as a share of total expenditures, as a
Non-defense discretionary spending
percentage of GDP, in constant (inflation
includes, among other things, funding
adjusted) dollars, and per capita. Within a
for the FBI, the National Park Service,
few years of the freeze, non-defense
the National Institutes of Health, NASA,
discretionary spending would fall to
most federal education programs, a broad
unprecedentedly low post-World-War-II
array of agricultural programs, the
levels by all these measures.
Centers for Disease Control and
Prevention, EPA, transportation, most
As can be seen in Table 1, non-defense
homeland security, and most other
discretionary outlays accounted for 19.3% of
total outlays in FY2004. Although non-
defense discretionary outlays have increased over the last decade, from 17.7% to 19.3%
of total outlays, they still represent less than $1 out of every $5 the federal government
spends.
In contrast, mandatory spending and net interest payments currently account for
almost 61% of total outlays. Their percentage of total budget outlays is expected to
increase over the next few years as Social Security and Medicare expenditures rise in
response to demographic changes and medical cost pressures and as net interest payments
rise as a result of a growing federal debt.
2 See CRS Report RS22045, Baseline Budget Projections Under Alternative Assumptions, by
Gregg Esenwein and Marc Labonte.

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Table 1. Components of Federal Outlays FY1994-FY2004
(as percentage of total outlays)
Fiscal
Mandatory
Net
Discretionary
Year
Spending
Interest
Defense
Non-defense
1994
49.1%
13.9%
19.3%
17.7%
1995
48.7
15.3
18.0
17.9
1996
50.4
15.4
17.0
17.1
1997
50.6
15.2
17.0
17.2
1998
52.0
14.6
16.4
17.1
1999
52.9
13.5
16.2
17.4
2000
53.2
12.5
16.5
17.9
2001
54.1
11.1
16.4
18.4
2002
55.0
8.5
17.4
19.2
2003
54.7
7.1
18.7
19.5
2004
53.9
7.0
19.8
19.3
Source: OMB, Budget of the United States Government for Fiscal Year 2006, Historical Tables, Feb.
2005, Table 8.3.
CBO provides estimates of the annual budgetary effects of a selection of alternative
policy scenarios.3 One of these scenarios is that discretionary non-defense funding is
frozen at FY2005 levels. The dollar difference between the baseline paths for nondefense
discretionary spending and the one assuming a funding freeze produces an estimate of the
savings resulting from freezing discretionary spending. Table 2 contains this
measurement (calculated from CBO data) from freezing non-defense discretionary outlays
at their FY2005 levels.
The savings from freezing non-defense discretionary outlays begin relatively small,
$7 billion in FY2006, and grow to $51 billion in FY2010. The cumulative savings over
the FY2006 to FY2010 period are approximately $141 billion (excluding interest payment
savings).
Table 2. Freeze Calculations, FY2005-FY2010
(in billions of dollars; outlays)
Non-defense
Total Savings
Discretionary
Non-defense
from Freezing
Non-defense Funding Frozen at Discretionary
Non-defense
Discretionary
FY2005 Levels
Savings
Net Interest
Discretionary
FY
(A)
(B)
(A-B)
Savings
Outlays
2005
$466
$466
$0
$0
$0
2006
476
469
7
0
7
2007
485
468
17
1
18
2008
493
466
27
2
29
2009
502
463
39
4
43
2010
511
460
51
6
57
Cumulative Totals, FY2006-FY2010
141
13
154
Source: CBO, Budget and Economic Outlook: Fiscal Years 2006-2015, Jan. 2005. CRS calculations.
3 See pp. 7-9 in the CBO report The Budget and Economic Outlook: Fiscal Years 2006-2015,
Jan. 2005.

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However, because freezing non-defense discretionary spending reduces the size of
the expected deficit, which in turn slows increases in federal debt held by the public, net
interest payments will be smaller than they otherwise would be during this period. The
estimated savings in net interest payments from freezing non-defense discretionary
spending grow from $1 billion in FY2007 to $6 billion in FY2010. The cumulative net
interest savings are $13 billion.4 Hence, the estimated total deficit reduction from
freezing non-defense discretionary outlays would be $154 billion over the period.
The CBO baseline budget deficit projection for the FY2005 through FY2010 period
is shown in Table 3. As mentioned earlier, it seems very likely that an alternative deficit
estimate that includes likely future action, such as additional expenditures for the Iraq and
Afghanistan campaigns and the extension of at least some if not all of the expiring tax
provisions, would make the deficit estimates larger.
Table 3. CBO Baseline Deficit Projections
(in billions of dollars)
Fiscal
Cumulative
2005
2006
2007
2008
2009
2010
Year
Total
Deficit
-$365
-$298
-$268
-$246
-$219
-$201
-$1,232
Source: CBO, An Analysis of the President’s Budgetary Proposals for Fiscal Year 2006, March 2005.
The cumulative baseline budget deficit estimate over the FY2005 to FY2010 period
is $1.2 trillion. The savings in both outlays and debt service payments from freezing non-
defense discretionary outlays at their FY2005 levels is $147 billion over the same period.
This would produce a cumulative reduction in the baseline budget deficit of just over
12%.
4 This report assumes that approximately half of the debt-service adjustment associated with
CBO’s projection of freezing all discretionary funding at FY2004 levels would accrue if the
freeze in funding was limited solely to non-defense discretionary funding.