Discretionary Spending: Prospects and History

Discretionary Spending: Prospects and History

Order Code RS22128
April 27, 2005
CRS Report for Congress
Received through the CRS Web
Discretionary Spending:
Prospects and History
Philip D. Winters
Analyst in Government Finance
Government and Finance Division
Summary
Federal spending has changed, both in size and composition over the last 40 years.
Total federal spending is now a larger percentage of the economy (as measured by gross
domestic product — GDP) than it was in 1965 (19.8% of GDP vs 17.2% of GDP).
Mandatory spending (generally spending that result from laws other than appropriations
acts, such as Social Security and Medicare), has grown substantially, both as a
percentage of GDP and as a percentage of total spending to become, today, the largest
component of federal spending. Mandatory spending, without significant changes to the
programs composing it, will continue growing as a percentage of GDP and as a
percentage of total outlays into the future.
Discretionary spending (generally outlays that result from the budget authority
provided in appropriations acts, such as defense, education, and transportation), and in
particular its defense spending component, has shrunk over the last 40 years. Defense
spending in 1965 dominated the budget, making up 43.2% of total spending. Total
discretionary spending was 65.8% of total outlays. In 1965, defense spending was 7.4%
of GDP and total discretionary spending was 11.3% of GDP. By 2004, defense
spending had fallen to 19.8% of total spending and 3.9% of GDP. Total discretionary
spending had fallen to 39.1% of total spending and 7.8% of GDP.
Under President Bush’s FY2006 budget proposals (February 2005) discretionary
spending will continue falling as shares of total spending and of GDP over the next five
years (if not longer). This report will not be updated.
The size and nature of federal spending has changed dramatically over the last 40
years.1 In 1965, measured as percentages of gross domestic product (GDP), total outlays
were 17.2% of GDP and discretionary spending was 11.3% of GDP (defense spending
was 7.4% of GDP). Mandatory spending was 4.6% of GDP and net interest was 1.3% of
GDP. Measured as shares of total outlays, discretionary spending was 65.8% of total
spending and defense spending was two-thirds of that, 43.2% of total outlays. Mandatory
1 Unless otherwise noted, all years referred to in this report are fiscal years.
Congressional Research Service { The Library of Congress

CRS-2
spending — there were fewer (no Medicare) and generally much smaller programs than
today — were 26.9% of total outlays.2 Net interest was 7.3% of total outlays.
By 2004, total discretionary spending had fallen to 7.8% (defense spending had
fallen to 3.9%), mandatory spending had grown to almost 10.7% of GDP, and net interest
was 1.4% of GDP, similar to its level in 1965. As shares of total outlays in 2004,
discretionary spending was 39.1% (and of that, defense was 19.8%), mandatory spending
had risen to 53.9%, and net interest was 7.0% of total outlays .
Prospects for Discretionary Spending in the President’s Budget. The
President’s fiscal year (FY) 2006 budget proposed limiting growth in discretionary
spending, both defense and nondefense, during the five years covered by his budget,
(through 2010). The proposal would hold discretionary spending growth (measured by
net budget authority rather than outlays) to 2% in 2006 and 3% in 2007. If adopted, these
proposals would, according to the budget, produce a shrinkage in total discretionary
spending in real terms and as a share of GDP over these years. The President also
proposed cutting non-defense, non-homeland security spending by 1% in 2006 and to hold
it to no dollar growth in subsequent years. If these proposals were adopted, according to
the Administration’s projections, non-defense, non-homeland security discretionary
spending would fall as a share of GDP, in inflation-adjusted terms, and in spending per
capita over the next five years.
The Congressional Budget Office’s (CBO) reestimates of the President’s proposals
(March 2005) showed total discretionary spending (again in budget authority) not growing
at all between 2005 and 2010.3 Budget authority for nondefense discretionary spending
would fall at an average annual rate of 0.8% in CBO’s reestimates of the President’s
proposals from 2005 through 2010. CBO extended the President’s proposals through
2015 by incorporating an inflation adjustment to discretionary spending after 2010 and
continuing mandatory spending.
CBO points out that the President’s proposals do not include any funding (beyond
proposed regular defense spending) for continuing activities in Iraq and Afghanistan after
2005. Continuing that funding at approximately current levels, according to one path
estimated by CBO, would raise the deficit by approximately $70 billion in 2006.
Assuming that the funding for these activities is still needed, but taper off over time, CBO
estimated that $285 billion would be needed between 2006 and 2010 and that $418 billion
would be needed for the 10-year period, 2006 through 2015.4 If the funding were to
occur, it would fall mostly within discretionary spending and most of that would likely
be for defense spending. Therefore, the Administration’s proposals for the years 2006
through 2010 have likely understated the level of discretionary spending that would
probably be needed, if the government is to maintain the ongoing operations in Iraq and
Afghanistan.
2 Social Security produced somewhat over half the outlays of mandatory spending in 1965.
3 CBO. An Analysis of the President’s Budgetary Proposals for Fiscal Year 2006, March 2005.
4 These amounts do not include another $172 billion in additional net interest payments over 10
years from the bigger federal debt resulting from larger deficits.

CRS-3
Federal Spending Since 1965. Figure 1 provides federal outlays by broad
category of spending for the years 1965 through 2015. The data for 1965 through 2004
are actual amounts; the estimated and projected amounts through 2015 are from CBO’s
estimates of the President’s policy proposals from his FY2006 budget. Mandatory
spending grew as a percentage of
Figure 1. Federal Outlays by Type
GDP throughout the period and is
(as p ercentages of GDP)
now, and likely to be in the future,
24%
the largest component of federal
spending. Net interest has varied
22%
over the period, growing with rising
Net Interest
interest rates or rapid increases in
20%
federal debt (resulting from large
18%
deficits) and declining with falling
interest rates, budget surpluses
16%
(which reduce federal debt), or
small deficits. If deficits remain
14%
P
large and federal debt grows faster
D
than GDP, net interest can be
12%
f G
expected to grow in the future.
% o 10%
Mandatory
Discretionary spending has fallen
over the period, and, under the
8%
Non-defense
President’s proposals (as estimated
by CBO) can be expected to
6%
continue falling as a share of GDP.
Discretionary
Defense discretionary spending had
4%
a dramatic fall from 7.4% of GDP in
2%
1965 to 4.3% of GDP in 2004.
Defense
Non-defense discretionary spending
0%
experienced little change over the
1965
1975
1985
1995
2005
2015
same period, moving from 3.9% of
Source: CBO data; CRS
Fiscal Ye ar
GDP in 1965 to 3.8% of GDP in
2004. Over the period, non-defense
discretionary spending ranged between 3% and 5% of GDP. CBO’s projections of the
President’s proposals show further reductions in discretionary spending for both defense
and non-defense, as shares of GDP to levels not seen previously. Discretionary spending
would fall from 7.8% of GDP in 2004 to 6.6% of GDP in 2015. If achieved, it would be
a historic low for discretionary spending in the modern era (see Table 1 on page 6).
Table 1 contains defense, nondefense, and total discretionary spending in billions
of dollars, as a percentage of GDP, and as a percentage of total outlays for the years 1965
through 2015. The data do not include any future spending, after 2005, for ongoing
operations in Iraq and Afghanistan. Because the Administration’s budget does not include
these estimates, neither does CBO’s estimates of the President’s proposals. This produces
the dollar reduction in defense spending for several years after 2005 (see Table 1).
The changing value of the dollar over a 40-year period limits the usefulness of
measuring spending changes in nominal dollars. Total discretionary spending grew from
$78 billion in 1965 to $895 billion in 2004, but without some reference point, all the
information tells us is that more dollars were spent in 2004 than in 1965. On the other
hand, comparing spending over time as a share of the economy (as measured by its

CRS-4
percentage of GDP), provides a more useful comparison: how much of the nation’s
economic resources did this type of federal spending use in 1965 compared to 2004?
Total discretionary spending fell from 11.3% of GDP in 1965 to 7.8% of GDP in 2004.
The change reflects a 32% reduction federal discretionary programs’ use of the nation’s
economic resources. Under the President’s proposals (as projected by CBO),
discretionary spending will exceed $1 trillion by 2015, but will have fallen to 5.5% of
GDP (a reduction of 29% in the nation’s economic resources being used by federal
discretionary programs), the lowest level for which data are available.5
If defense spending is adjusted to include additional spending for Iraq and
Afghanistan after 2005, total discretionary spending (CBO estimates) would be larger by
$70 billion in 2006, $75 billion in 2007, and $30 billion in 2010. The additional spending
raises defense spending by 14.8% in 2006 and by 16.4% in 2007. Total discretionary
spending would increase by 7.4% in 2006 and by 8.1% in 2007. The higher spending,
without any other changes, would raise defense and total discretionary spending by
approximately 0.5% of GDP in 2006, 2007, and 2008, and by lesser amounts
(approximately 0.2% of GDP) in subsequent years.
Separating discretionary
Figure 2. Defense and Non-defense Outlays spending into defense and non-
(as p ercentages of GDP)
defense spending provides
14%
information on which part, if either,
has driven the changes in total
discretionary spending. The data for
12%
discretionary spending and its two
components, defense and non-
defense spending are shown as
10%
percentages of GDP in Figure 2.
As shares of GDP, defense spending
has fallen from 7.4% in 1965 to
P 8%
D
3.9% in 2004. CBO’s projections of
f G
the President’s policies has the
defense share falling to 3.2% of
% o 6%
GDP in 2015. Non-defense
Defense
spending as a percentage of GDP
has had much smaller changes over
4%
the period than defense spending.
(This does not include any
additional funding for Iraq or
2%
Non-defense
Afghanistan after 2005.) In 1965,
non-defense spending was 3.9% of
GDP and it was 3.8% of GDP in
0%
2004. CBO’s projections of the
1965
1975
1985
1995
2005
2015
President’s policy proposals would
Fiscal Ye ar
Source: CBO data; CRS
reduce its percentage to 2.6% of
GDP in 2015. The shares of GDP
5 The Office of Management and Budget (OMB) does not provide this particular data prior to
1962.

CRS-5
in 2015 for both defense and non-defense (if fulfilled) would be their smallest shares
during the entire period shown in Table 1 (on the next page).
Defense spending, in the mid- to late 1960s, was a much larger component of the
budget (46.2% of total outlays in 1968) and as a share of the economy (10.5% of GDP in
1968) than it has been since. In the late 1960s, the country was engaged in the Viet Nam
War, pushing defense spending up as a share of GDP (and as a share of total outlays).
The current war on terror (at least those parts of the war on terror falling within defense
spending) has used a much smaller portion of the nation’s economic resources (GDP) than
were used in the 1960s or in the late 1980s and early 1990s. Defense spending fell as a
share of GDP throughout the entire period except for the Reagan defense build-up in the
1980s and the increase in funding after the terror attacks in 2001.
The non-defense spending category covers the largest number of federal activities,
but uses the smallest amount of money. These activities range from those provided by the
Federal Bureau of Investigation to the National Park Service to the Environmental
Protection Agency among many, many more. It’s share of GDP varied within a relatively
small range between 1965 and 2004, from a high of 5.2% of GDP (in 1978 and 1980) to
a low of 3.2% of GDP (in 1999).6 The constraints on non-defense spending proposed by
the Administration would reduce its share of GDP, its share of total spending, its spending
in constant (inflation adjusted) dollars, and its spending per capita.
6 In comparison over the 1965 to 2004 period, defense spending ranged from a high of 10.5% of
GDP in 1968 to a low of 3.3% of GDP in the years 1999 through 2001. Mandatory spending over
the same period ranged from a low of 4.6% of GDP in 1965 and 1966 to a high of 10.9% of GDP
in 2003.

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Table 1. Federal Discretionary Outlays
(In dollars, percentage of GDP, and percentage of total outlays)
Defense Non-defense Total Defense Non-defense Total Defense Non-defense Total
$ in billions
% of GDP
% of total outlays
1965
$51
$27
$78
7.4%
3.9%
11.3%
43.1%
22.7%
65.8%
1966
59
31
90
7.8
4.2
11.9
43.9
23.1
67.0
1967
72
35
107
8.9
4.3
13.1
45.7
21.9
67.6
1968
82
36
118
9.5
4.2
13.6
46.2
20.1
66.3
1969
83
35
117
8.7
3.6
12.4
45.0
18.8
63.9
1970
82
38
120
8.1
3.8
11.9
41.9
19.6
61.5
1971
79
44
123
7.3
4.0
11.3
37.6
20.7
58.3
1972
79
49
129
6.7
4.2
10.9
34.4
21.3
55.7
1973
77
53
130
5.9
4.1
9.9
31.4
21.7
53.1
1974
81
58
138
5.6
4.0
9.6
30.0
21.3
51.3
1975
88
70
158
5.6
4.5
10.1
26.4
21.2
47.5
1976
90
86
176
5.2
4.9
10.1
24.2
23.1
47.2
1977
98
100
197
4.9
5.0
10.0
23.8
24.3
48.2
1978
105
114
219
4.7
5.2
9.9
22.8
24.9
47.7
1979
117
123
240
4.7
5.0
9.6
23.2
24.4
47.6
1980
135
142
276
4.9
5.2
10.1
22.8
24.0
46.8
1981
158
150
308
5.2
4.9
10.1
23.3
22.1
45.4
1982
186
140
326
5.8
4.3
10.1
24.9
18.8
43.7
1983
210
143
353
6.1
4.2
10.3
26.0
17.7
43.7
1984
228
151
379
5.9
3.9
9.9
26.8
17.8
44.5
1985
253
163
416
6.1
3.9
10.0
26.7
17.2
43.9
1986
274
165
439
6.2
3.7
10.0
27.6
16.6
44.3
1987
283
162
444
6.1
3.4
9.5
28.1
16.1
44.2
1988
291
174
464
5.8
3.4
9.3
27.3
16.3
43.6
1989
304
185
489
5.6
3.4
9.0
26.6
16.2
42.7
1990
300
200
501
5.2
3.5
8.7
23.9
16.0
39.9
1991
320
214
533
5.4
3.6
9.0
24.1
16.1
40.3
1992
303
231
534
4.8
3.7
8.6
21.9
16.7
38.6
1993
292
247
539
4.4
3.7
8.2
20.7
17.5
38.3
1994
282
259
541
4.1
3.7
7.8
19.3
17.7
37.0
1995
274
271
545
3.7
3.7
7.4
18.0
17.9
35.9
1996
266
267
533
3.5
3.4
6.9
17.0
17.1
34.1
1997
272
276
547
3.3
3.3
6.7
17.0
17.2
34.2
1998
270
282
552
3.1
3.3
6.4
16.3
17.1
33.4
1999
276
297
572
3.0
3.2
6.3
16.2
17.4
33.6
2000
295
320
615
3.0
3.3
6.3
16.5
17.9
34.4
2001
306
343
649
3.0
3.4
6.5
16.4
18.4
34.9
2002
349
385
734
3.4
3.8
7.1
17.3
19.2
36.5
2003
405
421
825
3.7
3.9
7.6
18.7
19.5
38.2
2004
454
441
895
3.9
3.8
7.8
19.8
19.3
39.1
2005
495
467
962
4.0
3.8
7.9
20.2
19.1
39.2
2006
472
474
947
3.7
3.7
7.3
18.6
18.6
37.3
2007
457
468
926
3.4
3.4
6.8
17.4
17.8
35.2
2008
468
463
931
3.3
3.2
6.5
17.1
16.9
34.0
2009
486
463
949
3.2
3.1
6.3
16.9
16.1
33.0
2010
503
465
968
3.2
3.0
6.1
16.8
15.5
32.3
2011
522
471
993
3.2
2.9
6.0
16.6
14.9
31.5
2012
526
480
1,006
3.1
2.8
5.8
16.1
14.7
30.8
2013
544
490
1,033
3.0
2.7
5.7
15.8
14.2
30.0
2014
558
500
1,057
3.0
2.7
5.6
15.5
13.8
29.3
2015
572
510
1,083
2.9
2.6
5.5
15.1
13.4
28.5
Sources: OMB, Budget of the United States Government, Fiscal Year 2006, Historical Tables, February
2005. CBO, An Analysis of the President’s Policy Proposals for Fiscal Year 2006, March 2005. CRS
calculations.