In fiscal year 2013, half of the federal government’s spending went toward major health care programs (Medicare, Medicaid, and the Children’s Health Insurance Program), Social Security, and net interest. The other half—which we refer to as other federal noninterest spending—includes outlays for two broad categories of programs: discretionary programs, which are funded through the annual appropriation process, and mandatory programs (other than major health care programs and Social Security), which are usually funded according to underlying statutes that establish eligibility and payment standards. Mandatory spending in this category also includes the refundable portions of the earned income tax credit, the child tax credit, and the American Opportunity Tax Credit, which are recorded in the budget as outlays.
During the past 40 years, federal spending for everything other than major health care programs, Social Security, and net interest has averaged 11 percent of gross domestic product (GDP). Such spending declined from 12 percent of GDP in 1973 to 8 percent in the late 1990s and early 2000s, stayed close to 10 percent through most of the first decade of the 2000s, and then spiked to 14 percent in 2009, before receding to 11 percent of GDP in 2012.
CBO projects that if current laws generally continued without change, other federal noninterest spending would drop from a total of 11.3 percent of GDP in 2012 to 7.6 percent in 2023 and then to 7.1 percent in 2038. Through 2021, most discretionary appropriations are constrained by the caps and automatic spending reductions put in place by the Budget Control Act of 2011; in preparing its current-law (baseline) projections for 2022 and 2023, CBO assumed that discretionary appropriations in those years would equal the 2021 amount with increases for projected inflation. Under that assumption, outlays from those appropriations are projected to decline from 8.0 percent of GDP last year—already below the 40-year average of 8.4 percent—to 5.3 percent in 2023. That 2023 amount would be the lowest level of discretionary spending relative to GDP in more than half a century (since at least 1962, the first year for which comparable data are available). Under those projections, defense and nondefense discretionary spending would each equal 2.6 percent of GDP in 2023, which would also be the smallest share of the economy for each category in at least five decades. For its current-law projections beyond 2023 (the extended baseline), CBO assumed that discretionary spending would remain at its 2023 percentage of GDP thereafter.
According to CBO’s projections, under current law mandatory spending other than that for major health care programs (which in 2014 and later will include the subsidies that will be provided through health insurance exchanges), Social Security, and net interest would decrease from 3.3 percent of GDP last year to 2.3 percent in 2023 and to 1.8 percent in 2038 (see the figure below).
How Has Discretionary Spending Changed Over the Past Four Decades?
A distinct pattern in the federal budget since the 1970s has been the diminishing share of spending that occurs through the annual appropriation process. Between 1973 and 2012, discretionary spending fell from 53 percent of total federal spending to 36 percent. Relative to the size of the economy, discretionary spending declined from 9.6 percent of GDP to 8.0 percent.
Most of that decline involved spending for national defense. Defense discretionary spending peaked at 9.1 percent of GDP in the late 1960s, at the height of the Vietnam War. In the late 1970s, defense spending dropped below 5.0 percent, and during the defense buildup of 1982 to 1986, it averaged 5.9 percent. After the end of the Cold War, outlays for defense fell again relative to GDP, reaching a low of 2.9 percent at the turn of the century. Such outlays began climbing again in 2002, however. Defense spending averaged 4.6 percent of GDP from 2009 through 2011, mainly as a result of increased spending on operations in Iraq and Afghanistan, before falling to 4.2 percent in 2012.
Nondefense discretionary spending covers a wide array of federal activities, such as education, transportation, income security, veterans’ health care, and homeland security. Over the past four decades, nondefense discretionary spending has generally ranged between about 3 percent and 4 percent of GDP, although from 1975 to 1981, it averaged almost 5 percent of GDP. More recently, funding from the American Recovery and Reinvestment Act of 2009, as well as other funding associated with the federal government’s response to the 2007–2009 recession, helped push nondefense discretionary outlays above 4 percent of GDP from 2009 through 2011. Like defense discretionary spending, such outlays declined as a share of GDP in 2012 (to 3.8 percent).
How Has Spending for Other Mandatory Programs Changed Over the Past Four Decades?
Spending for mandatory programs other than Medicare, Medicaid, the Children’s Health Insurance Program, and Social Security covers such things as unemployment compensation, retirement benefits for federal civilian employees and military personnel, the Supplemental Nutrition Assistance Program (formerly known as Food Stamps), veterans’ benefits, and other programs. Spending for that category is net of various offsetting receipts, such as the contributions that government agencies make to federal civilian and military retirement programs and the proceeds from leases to drill for oil and natural gas on the Outer Continental Shelf.
Other mandatory spending averaged 3.7 percent of GDP from the mid-1970s through the early 1980s. It was generally lower from the mid-1980s to 2008, averaging 2.5 percent of GDP, with some fluctuations. In 2009, however, other mandatory spending nearly doubled to 5.1 percent of GDP because of the financial crisis and recession and the federal government’s response to them. In particular, spending increased sharply for unemployment benefits and federal nutrition programs, and additional outlays were recorded for the Troubled Asset Relief Program (TARP), deposit insurance, and payments to Fannie Mae and Freddie Mac (two institutions, now under government conservatorship, that facilitate the flow of funding for home loans). Some of that spending proved temporary, and net outlays for the TARP and for Fannie Mae and Freddie Mac have turned out to be noticeably lower than originally recorded in 2009. As a result, total other mandatory spending declined to an average of 3.4 percent of GDP over the 2010–2012 period.
To learn more, visit our Budget page for a complete set of CBO’s work on this topic.
Noah Meyerson is an analyst in CBO’s Health, Retirement, and Long-Term Analysis Division. Sam Papenfuss is Chief of the Income Security and Education Cost Estimates Unit in CBO's Budget Analysis Division.