October 26, 2011
This morning, for a second time, I testified before the Joint Select Committee on Deficit Reduction—the body created under the recently enacted Budget Control Act (Public Law 112-25) to propose further deficit reductions. This morning’s testimony focused on discretionary spending in the federal budget, whereas my previous testimony in September centered on the budget and economic outlook and CBO’s analysis of the fiscal policy choices facing the Committee and the Congress.
My testimony addressed four basic questions:
- What does discretionary funding comprise?
- What have been the trends in discretionary funding?
- How will discretionary spending evolve over the next decade under current law?
- How might the path of discretionary funding be altered?
What Does Discretionary Funding Comprise?
Discretionary outlays—the part of federal spending that lawmakers generally control through annual appropriation acts—totaled about $1.35 trillion in 2011, or close to 40 percent of federal outlays. Slightly more than half of that spending was for defense. The remainder went for a wide variety of government programs and activities, with the largest amounts spent for education, training, employment, and social services; transportation; income security (mostly housing and nutrition assistance); veterans’ benefits (primarily for health care); health-related research and public health; international affairs; and the administration of justice.
What Have Been the Trends in Discretionary Outlays?
Discretionary outlays declined from about 10 percent of gross domestic product (GDP) during much of the 1970s and 1980s to about 6 percent in 1999, mostly because defense spending, as a share of GDP, declined over that period. Since then, discretionary outlays have risen relative to the size of the economy, totaling about 9 percent of GDP in 2010 and 2011, in part because of military operations in Afghanistan and Iraq and in part because of the discretionary funding provided by the American Recovery and Reinvestment Act of 2009 (Public Law 111-5). The 2010 and 2011 figures were the highest in about 20 years.
|Defense, Nondefense, and Total Discretionary Outlays, 1971 to 2011|
How Will Discretionary Spending Evolve Over the Next Decade Under Current Law?
Lawmakers have already taken significant steps to constrain discretionary spending for the previous year and over the next decade. Specifically:
For Fiscal Year 2011: Budget authority—the authority to incur financial obligations—provided for defense activities in 2011 was $3 billion (or less than 1 percent) below the amount provided the year before; budget authority for discretionary nondefense programs (plus the obligation limitations that govern spending for certain discretionary transportation programs whose budget authority is not classified as discretionary) was $39 billion (or 7 percent) below the amount provided in 2010.
As a result, total discretionary funding (that is, budget authority plus obligation limitations) in 2011 was the lowest, as a share of GDP, since 2002. Nevertheless, discretionary outlays in 2011 were close to the amounts spent in 2010, CBO estimates, because of spending from funds appropriated in previous years.
For Fiscal Years 2012 – 2021: The Budget Control Act instituted statutory caps on discretionary appropriations for each of the fiscal years 2012 through 2021. The new caps do not constrain spending for the war in Afghanistan or similar activities or for designated emergencies; however, if implemented as written in the act, the caps would keep other appropriations for 2012 and 2013 below the amounts provided for 2011 and would limit the growth of those appropriations to about 2 percent a year from 2014 to 2021.
Compared with allowing nonwar discretionary appropriations to grow at the rate of inflation, the capped amount of discretionary budget authority would be about 4 percent lower in 2012 and 9 percent lower in 2021; as a result, budget deficits would be reduced by $778 billion between 2012 and 2021, CBO estimates (not counting the savings in interest payments resulting from lower outlays).
How Might the Path of Discretionary Funding Be Altered?
The future path of discretionary spending may be affected by the actions of the Joint Select Committee on Deficit Reduction. For example:
- Changing the caps: Under provisions of the Budget Control Act, legislation originating from this Committee could directly alter the path of such spending, for example, by changing the caps.
- Automatic Reductions: If legislation originating from this Committee and estimated to produce at least $1.2 trillion in deficit reduction (including an allowance for interest savings) is not enacted by January 15, 2012, automatic procedures to cut spending will take effect in January 2013. CBO expects that 71 percent of the net savings from the automatic procedures would come from reductions in discretionary appropriations. If those procedures were triggered, appropriations for defense, excluding funding for overseas contingency operations (war-related funding), would be $110 billion—or 16 percent—lower by 2021 than they would be if they kept up with inflation; funding for nondefense activities would be $99 billion—or 15 percent—lower.
Because discretionary spending is determined by the appropriation process each year, it is not always clear what metric should be used when thinking about future needs and measuring the impact of policy changes. One metric is to assume that current funding grows at the rate of inflation. For some programs, however, such an approach understates the cost of maintaining current policies or plans. For example, implementing the Administration’s multiyear defense plans would require nonwar defense spending to grow faster than the rate of inflation (see CBO’s June 2011 publication Long-Term Implications of the 2012 Future Years Defense Program) and the demands for veterans’ health care and Pell grants for higher education have also been growing more quickly than inflation. In contrast, the funding required for war-related activities—in Afghanistan and other countries—will be smaller than the amounts provided in recent years if the number of deployed troops is smaller and the pace of operations is diminished.
Regardless of the constraints placed on discretionary spending through the Budget Control Act or other actions taken by this Congress, subsequent Congresses will make the final decisions about future discretionary appropriations. Those decisions might or might not satisfy the constraints put in place by this Congress. Nevertheless, CBO assumes in its baseline projections that discretionary funding subject to the caps in the coming years will be equal to the amounts currently specified in law for those caps. As a result, legislation that reduced the funds available for a particular discretionary activity or achieved savings in undertaking a particular activity would only reduce projected total appropriations if the legislation also lowered the caps; without a reduction in the caps, funding for other discretionary activities would probably fill the gap created by the specific reduction or savings.