CHAPTER
4
The Long-Term Outlook for Other Federal Spending
In 2008, a little more than one-half of federal spending went toward programs other than Medicare, Medicaid, and Social Security and for net interest payments on the public debt. The category of other federal spending includes discretionary programs, which are funded through the annual appropriation process, and mandatory programs (other than Medicare, Medicaid, and Social Security), which are usually funded according to the underlying statutes that establish eligibility and payment standards. Other mandatory spending also includes the refundable portions of the earned income tax credit and the child tax credit, which the budget records as outlays.
The two scenarios that the Congressional Budget Office used in making its long-term budget projections reflect two of many possible future paths for the category of other federal spending (see Figure 4-1):
Spending Other Than That for Medicare, Medicaid, Social Security, and Net Interest, Calendar Years 1962 to 2080
(Percentage of gross domestic product)
Source: Congressional Budget Office.
bNote: The extended-baseline scenario adheres closely to current law, following CBO’s 10-year baseline budget projections from 2009 to 2019 and then extending the baseline concept for the rest of the projection period. The alternative fiscal scenario deviates from CBO’s baseline projections, beginning in 2012, by incorporating some changes in policy that are widely expected to occur and that policymakers have regularly made in the past.
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Under the extended-baseline scenario, CBO used the projections for other federal spending from its 10-year baseline for fiscal years 2010 to 2019.1 In the baseline, mandatory programs are assumed to operate as they do under current law, and funding for discretionary spending is projected to grow at the rate of inflation. After 2019, other federal spending under the extended-baseline scenario is maintained at the same share of gross domestic product (8.6 percent) projected for 2019 under the baseline, except that refundable tax credits are permitted to change in tandem with movements in income tax revenues. Thereafter, because of the refundable tax credits, such spending declines slightly, to 8.4 percent of GDP in 2080. |
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Under the alternative fiscal scenario, which incorporates some changes in policy that are widely expected to occur and that policymakers have regularly made in the past, other federal spending would drop to 10.5 percent of GDP in 2012 and then, because of the refundable tax credits, would decline gradually to 10.3 percent in 2080. |
Spending for this broad category of programs and activities is unusually high in 2009 because of the impact of the recession, the fiscal stimulus legislation, and efforts to stabilize the nation’s financial system. For a brief discussion of how spending related to the current recession and to military operations in Iraq and Afghanistan affects the projections under the two scenarios, see Box 4-1.
Spending Related to the Recession and the Wars in Iraq and Afghanistan
In fiscal year 2009, spending for programs and activities other than Medicare, Medicaid, Social Security, and net interest will total about 16.6 percent of gross domestic product (GDP), the Congressional Budget Office (CBO) estimates.1 Roughly a third of those outlays (about $835 billion) will be for activities that are related to the current economic situation and might be considered extraordinary: The Emergency Economic Stabilization Act of 2008 (Public Law 110-343) created the Troubled Asset Relief Program (TARP), which provides financial assistance and loans to banks, automotive companies, and other firms in the financial sector; and the American Recovery and Reinvestment Act of 2009 (P.L. 111-5, or ARRA) provided funding to stimulate the economy, such as grants to states for highway construction and education. In addition, the government will spend about $170 billion (1.2 percent of GDP) on military operations in Iraq and Afghanistan. Spending Under the Extended-Baseline Scenario For the extended-baseline scenario, CBO assumed that spending for programs other than Medicare, Medicaid, and Social Security would continue to grow as specified by standard baseline rules through 2019 and then remain constant as a share of GDP after that.2 By 2019, CBO estimates, spending related to the current economic situation will be negligible. At that point, other federal spending will amount to 8.6 percent of GDP. The extended-baseline scenario assumes spending at about that level throughout the projection period. The long-term outlook, which is constructed from CBO’s March 2009 baseline, includes the following projections:
Spending Under the Alternative Fiscal Scenario In the alternative fiscal scenario, for most of the programs, CBO holds the percentage of other federal spending as a share of GDP constant at its fiscal year 2009 level. However, in the March 2009 baseline, in consultation with the budget committees, CBO did not project forward the discretionary budget authority provided under ARRA. Because the stimulus legislation was intended to be a one-time appropriation, projecting such a significant amount of funding for future years would make the forecast less useful for policymakers. In a similar manner, CBO has adjusted its alternative fiscal scenario to reflect the temporary nature of TARP, ARRA, and programs with a cyclical component. Of the 16.6 percent of GDP devoted to other federal spending in 2009, spending related to the current economic situation (not including the wars in Iraq and Afghanistan) is about 6.0 percent. Because of the extraordinary nature of many of those expenditures, CBO has used an adjusted 2009 spending level equal to 10.5 percent of GDP as the basis for the long-term projections. Thus, in the alternative fiscal scenario, outlays for other spending are set equal to the baseline projections or the adjusted 2009 projections, whichever are larger. Specifically, outlays are 16.6 percent of GDP in 2009, 13.1 percent in 2010, 11.9 percent in 2011, and 10.5 percent in 2012. Thereafter, the assumed amount declines slightly because the refundable portions of the earned income tax credit and the child tax credit decline as a percentage of GDP, reaching 10.3 percent in 2080. 1. For consistency with CBO’s standard baseline budget projections, the values in this box for 2019 and earlier years are fiscal year values. 2. Those rules, which CBO uses to construct its baseline budget projections, are specified in section 257 of the Balanced Budget and Emergency Deficit Control Act of 1985. 3. The present value is a single number that expresses a flow of current and future income or payments in terms of an equivalent lump sum received or paid today. 4. On May 20, 2009, the President signed into law the Helping Families Save Their Homes Act of 2009 (P.L. 111-22), which CBO estimates will increase outlays for deposit insurance by about $4 billion in 2009 and $7 billion in 2010. Those increased outlays, though, will be offset by increased premiums; over the 2009–2019 period, the added premiums will exceed the increase in outlays by about $3 billion. Including those effects in the extended-baseline scenario would have a negligible impact. |
A distinct pattern in the federal budget since 1962 is the diminishing share of spending provided through annual appropriations (see Figure 4-2). As a share of the budget, discretionary spending has fallen from 68 percent in 1962 to 38 percent in 2008. Relative to the size of the economy, such spending has declined from 12.7 percent of GDP in 1962 to 8.0 percent in 2008.
Discretionary Spending and Mandatory Spending Other Than That for Medicare, Medicaid, Social Security, and Net Interest, Fiscal Years 1962 to 2008
(Percentage of gross domestic product)
Source: Congressional Budget Office.
As a share of GDP, total discretionary spending peaked at more than 13.6 percent in 1968, boosted by outlays for defense that reached 9.5 percent of GDP at the height of the Vietnam War. Similarly, the trough in discretionary spending that occurred in 1999 and 2000 reflected the bottoming-out of defense expenditures, at 3.0 percent of GDP. In contrast, nondefense discretionary spending as a share of GDP varied over a narrower range—from 5.2 percent in 1980 to 3.2 percent in 1999.
Defense Discretionary Spending
In 2008, defense spending totaled 4.3 percent of GDP; under the assumptions of CBO’s 10-year baseline, it would constitute about 3.4 percent of GDP in 2019 (see Table 4-1). Since World War II, defense spending has fluctuated to a significant degree. For example, it increased during the Korean War (averaging 11.6 percent of GDP from 1951 to 1953), the Vietnam War (averaging 8.5 percent from 1966 to 1970), and the defense buildup from 1982 to 1986 (averaging 6.0 percent). It has risen again more recently—from 2001 to the present—to support military operations in Iraq and Afghanistan and related activities. During the intervening periods, defense spending tended to decline as a percentage of GDP. Overall, it has averaged about 5 percent of GDP during the past 40 years and about 4 percent over the past 20 years.
Other Federal Spending Under CBO’s Baseline
(Percentage of gross domestic product)
| 2008 | 2019 | ||||
| Discretionary Spending | 8.0 | 6.4 | |||
| Defense spending | 4.3 | 3.4 | |||
| Nondefense spending | 3.7 | 3.0 | |||
| Other Mandatory Spending | 2.8 | 2.1 | |||
| All Other Federal Spending | 10.8 | 8.6 | |||
Source: Congressional Budget Office.
Note: Other federal spending is all spending other than that for Medicare, Medicaid, Social Security, and net interest.
Nondefense Discretionary Spending
Discretionary spending for nondefense activities, such as education grants, housing, highways, and national parks, totaled 3.7 percent of GDP in 2008; under CBO’s baseline assumptions, it would constitute about 3.0 percent of GDP in 2019, CBO projects. Over the past 40 years, discretionary spending for nondefense activities has ranged between roughly 3 percent and 4 percent of GDP with one exception—from 1976 to 1981, when it rose to about 5 percent of GDP.
Other mandatory spending (that is, excluding outlays for Medicare, Medicaid, and Social Security) totaled about 2.8 percent of GDP in 2008 and is projected to be 2.1 percent in 2019 under CBO’s 10-year baseline assumptions. Other mandatory spending includes an amalgam of federal programs—including, for example, federal civilian and military retirement benefits, the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program), unemployment compensation, and veterans’ benefits—and certain receipts recorded as negative outlays. Those receipts, also known as offsetting receipts, include such payments as contributions for the federal civilian and military retirement programs and proceeds from energy leases on the Outer Continental Shelf. Other mandatory spending, after peaking during the mid-1970s to the early 1980s, has moved up and down around a 20-year average of 2.5 percent of GDP (see Figure 4-2).
In CBO’s 10-year baseline budget projections, premiums paid by Medicare beneficiaries, which are classified as offsetting receipts, are not included in the Medicare totals and are presented as offsets to total mandatory spending. In this report, CBO presents net federal spending on Medicare, which is equal to gross Medicare spending minus the offsetting receipts from Medicare premiums. Therefore, other mandatory spending is higher in this report than the amounts presented in CBO’s reports on its 10-year baseline projections, which include the receipts from Medicare premiums.2
For consistency with CBO’s standard baseline budget projections, the values in this chapter for 2019 and earlier years are fiscal year values.
For example, in 2008, gross Medicare spending was 3.2 percent of GDP, and other mandatory spending (including Medicare premiums) was 2.3 percent. Combining Medicare spending and premiums would yield net Medicare spending of 2.7 percent of GDP and leave other mandatory spending at 2.8 percent.
