One issue that complicates discussions of discretionary spending—including the question-and-answer portion of my testimony to the deficit-reduction committee—is the difference between “funding” and “outlays.” That difference, which I’ll explain in a moment, may seem rather technical, but it turns out to be very important in understanding the recent pattern of discretionary spending and the outlook for such spending under current law.
Discretionary spending is the part of federal spending that lawmakers generally control through annual appropriation acts; the other large category of noninterest federal spending is mandatory spending, which consists primarily of benefit programs for which the Congress sets eligibility rules and benefit formulas rather than appropriating specific amounts each year. For discretionary spending, appropriation acts provide “budget authority” to federal agencies, an allocation of funds that they can use to make financial commitments (“obligations”). To calculate total discretionary “funding,” CBO adds up all of that budget authority, along with some other budgetary resources provided for certain transportation programs (the details of which are described in the testimony but aren’t crucial here). Agencies use that funding to incur obligations, some of which are paid quickly (for example, employees’ salaries) and some of which are paid over several years (for example, payments to contractors for major construction projects). The amount of money paid out by the government is known as “outlays.”
Thus, the Congress specifies the funding available for discretionary purposes each year, but it does not directly control when outlays occur. In any given year, discretionary outlays include spending both from new funding and from funding provided in previous years.
Let me explain how the difference between funding and outlays matters in considering the nondefense portion of discretionary spending. (The same distinction between funding and outlays applies to defense spending. However, it turns out that defense funding and outlays have moved more in tandem during the past few years than nondefense funding and spending, so I won’t discuss defense spending here.)
Looking at the past few years, nondefense discretionary funding (the lighter line in the figure below) spiked upward in 2009, owing largely to the American Recovery and Reinvestment Act. However, nondefense discretionary funding then fell back sharply relative to GDP in 2010 and dropped a little more on that basis in 2011. The bulge in funding in 2009 pushed up nondefense discretionary outlays—shown by the darker line in the figure—in 2009, 2010 and 2011. Thus, in 2011, nondefense discretionary funding was a smaller share of GDP than it had been, on average, during the preceding decade, while nondefense discretionary outlays were a higher share of GDP than they had been in any year in the preceding decade except for 2010.
Nondefense Discretionary Funding and Outlays, 1980 to 2021
Looking ahead, the Budget Control Act of 2011—the major budget legislation enacted in early August—imposed caps on discretionary appropriations (that is, budget authority) for each year from 2012 through 2021. The caps will keep appropriations for 2012 and 2013 (including budget authority for both defense and nondefense purposes, apart from war funding and certain other exceptions, as explained in the testimony) below the amounts provided for 2011—and thus well below appropriations in 2009. The caps will also limit the growth of those appropriations to about 2 percent a year from 2014 through 2021. With a decline in funding from 2011 to 2012, and growth in funding in subsequent years that will be significantly less than CBO’s projection of the growth rate of the economy, total discretionary funding will fall sharply relative to GDP and, by 2021, reaching levels not seen in decades.
The allocation of discretionary budget authority among various programs is not specified in the law, with the exception of separate caps on two broad categories of budget authority for 2012 and 2013. Wednesday’s testimony presented some alternative hypothetical allocations between defense and nondefense purposes. For example, if the Congress ends up enacting proportional reductions in defense and nondefense funding relative to a benchmark of maintaining such funding at the 2011 amounts adjusted for inflation, CBO projects that, in 2021, funding and outlays for both defense and nondefense purposes (apart from that for any overseas military operations) will both be at their lowest shares of GDP in decades.