The Budget Control Act and Trends in Discretionary Spending
Released: 2014-11-26T00:00:00

What Does Discretionary Spending Include?

Discretionary spending covers the costs of the routine activities commonly associated with such federal government functions as running executive branch agencies, congressional offices and agencies, and international operations of the government. Mandatory programs and net interest costs are the other components of federal spending. Essentially all spending on federal wages and salaries is discretionary. Discretionary spending also funds grants, purchases of equipment and other assets, and contractor services that support various federal programs and activities.

Congress provides and controls discretionary funding through annual appropriations acts, which grant federal agencies the legal authority to obligate the U.S. government to make payments. Budget authority (BA) is the amount that can be legally obligated. Outlays are the payments made by the U.S. Treasury to satisfy those obligations. This report mostly discusses trends in outlays.

Budget Authority and Outlays

The distinction between outlays and BA is important to understanding the federal budget and, particularly, discretionary spending. Appropriations legislation controls discretionary funding and provides budget authority to fund specific programs. Congress exercises its constitutional power of the purse by deciding what funds federal agencies can obligate on behalf of the U.S. government, for what purposes and for specified time periods. While budget authority is available for just a single year (such as for most personnel compensation costs), some appropriations (such as for many military construction projects) provide budget authority for multiple years, or indefinitely. Agencies obligate funds by signing contracts or hiring employees or contractors or in other ways. Budget authority has been compared to funds deposited into a checking account, which then can be used for specified federal purposes.

Outlays are disbursed federal funds. Outlays are recorded when the U.S. Treasury disburses appropriated funds to purchase goods and services, pay employees, issue benefits, or make interest payments. Agencies typically do not spend all of their budget authority in the year it becomes available, which implies that outlays will lag behind budget authority.

Outlay data are used to assess the macroeconomic effects of the federal budget, whereas budget analysis of specific federal programs is often based on budget authority, because that is what Congress controls directly. Limits on discretionary spending set by the Budget Control Act of 2011 (BCA; P.L. 112-25 ) and modified by subsequent acts are defined in terms of BA.

Categories of Federal Spending

Federal spending can be divided into three basic budget categories:

discretionary spending ($1.17 trillion in FY2014 outlays), mandatory spending ($2.11 trillion in FY2014 outlays), and net interest costs (about $230 billion in FY2014),

for a FY2014 total of $3,504 billion.

Mandatory spending, also known as direct spending, funds entitlement programs, such as the Supplemental Nutrition Assistance Program (SNAP; formerly known as the Food Stamps program), and other spending controlled by laws other than appropriation acts. Spending levels for mandatory programs generally depend on eligibility criteria, size of the eligible population, and participation rates.

Different types of mandatory programs are set up in diverse ways, reflecting historical influences, technical demands, and specific legislative authorities. While the term "entitlement" can be defined to coincide with the mandatory programs, many would distinguish programs providing benefits to large populations meeting set eligibility requirements from more special payments, such as salaries of judges covered by Article III of the Constitution.

In some cases, mandatory and discretionary spending support similar activities. For example, Medicare health care benefits are classified as mandatory spending, while most health care benefits for veterans and military personnel are classified as discretionary spending.

Legislative procedures for funding discretionary programs differ from those for mandatory programs. Congress provides discretionary funds (BA) each year through the annual appropriations process. Other types of legislation, such as authorization measures, control mandatory spending. Some mandatory programs, such as Social Security, are financed outside the annual appropriations process. Other mandatory programs, such as Medicaid, are funded through appropriations measures, while the level of spending reflects eligibility requirements and other provisions set in authorizing legislation, as well as the pool of potential beneficiaries and program participation rates.

Table 1 provides a simple division of federal spending (i.e., mandatory and discretionary spending) by contrasting the type of budget authority needed for specific purposes.

Recent Fiscal Policy and Discretionary Spending

Policy disagreements about fiscal policy challenges continue to influence trends in discretionary spending. Fiscal policy describes how a government chooses to balance spending and revenues, which can be used to influence the level of economic activity. Substantial evidence suggests that fiscal policy can stimulate economic activity when an economy is operating below its potential level of output and when short-term interest rates are near zero.

Discretionary spending, which is controlled through an annual budget process, is potentially a more flexible fiscal instrument than mandatory spending. Some features of mandatory programs have often been changed to respond to economic conditions. For example, the period of eligibility for unemployment insurance benefits has often been changed during recessions. Tax policy changes have also been used to respond to macroeconomic conditions. In addition, as incomes fall during recessions, tax revenues fall and more families become eligible for means-tested mandatory programs; deficits rise, which helps dampen economic shocks. When economic growth resumes, those changes run in the opposite direction. Those changes are therefore known as automatic stabilizers.

Fiscal Policy Complicated by Slow Recovery

Addressing short-term and long-term challenges simultaneously is difficult because additional government outlays, according to most economic research, would boost economic recovery, while reducing spending could help enhance fiscal sustainability—as would increases in federal revenues. Some have called for linking a package of policies to provide short-term fiscal stimulus with longer-term measures aimed at fiscal sustainability, although designing such packages to ensure credibility and effectiveness could be challenging.

Financial Crisis and Recession

The financial crisis that began in 2007 and subsequent recession that ended in June 2009 continue to color current fiscal policy debates. Recessions are said to end when the economy resumes growing.

The federal government took several measures to stimulate the economy, in addition to an extraordinary set of measures aimed at housing and credit markets. Some policy makers have called for expansion or continuation of programs intended to alleviate economic vulnerabilities of households and businesses, while other policy makers have argued that discretionary spending should revert to pre-crisis levels. Whether the federal government should take immediate steps to close the gap between spending and receipts or wait until the economy is more fully recovered has been subject to debate among economists.

While much of the funds made available by measures responding to the financial crisis or the subsequent recession were classified as mandatory or revenue reductions, discretionary spending also rose sharply. Most notably, Congress in early 2009 responded to weak economic conditions and dramatic job losses that sharply increased unemployment rates by passing a major fiscal stimulus package. The resulting measure, the American Recovery and Reinvestment Act of 2009 (ARRA; H.R. 1 , P.L. 111-5 ), enacted on February 17, 2009, included stimulus spending and tax cuts estimated at the time to total $787.2 billion, including about $300 billion in discretionary spending. ARRA included funds for discretionary spending on education initiatives, support for state governments, public housing, infrastructure, and health care. In 2012, CBO estimated the total budgetary effect of ARRA at $831 billion between 2009 and 2019.

The recovery that followed the 2007-2009 financial crisis and recession has been relatively slow. Economic growth in the United States, however, has been faster in recent years than in many other advanced economies. Economic recoveries following major financial crises can be much less robust than recoveries following more cyclical downturns. Some continue to call for a more expansionary fiscal policy to respond to high unemployment levels, which would entail larger budget deficits in the short run. Other economists are skeptical that such fiscal policies would ameliorate deeper problems caused by high personal and federal debt levels, and therefore call for fiscal restraint as a first step towards addressing longer-term fiscal challenges, or at least a transition to a less expansionary fiscal policy. A 2012 International Monetary Fund (IMF) survey found that the experience of advanced countries during the recent recession suggests that active fiscal policy can stimulate economic growth when economic resources are not being fully used and when the effectiveness of standard monetary policy tools is constrained by very low interest rates.

Faster Growth on the Horizon?

The U.S. economy in 2014, according to available data and projections for the 4 th quarter, will have grown slightly faster than the 2.2% growth achieved in 2013. Somewhat faster growth is expected in 2015. Recovery from the 2007-2009 recession continues to be slower than most previous downturns. Serious risks to economic recovery persist, such as those linked to the Eurozone and signs of decelerating growth in other countries such as China.

Discretionary Spending Limits Reimposed in 2011

Recent trends in discretionary spending have been controlled by statutory limits reestablished in the Budget Control Act of 2011 (BCA; P.L. 112-25 ), enacted on August 2, 2011. Those limits, which originally extended until FY2021, are expected to shape future trends in discretionary spending. Subsequent legislation has modified those limits in ways discussed below.

Budget Control Act of 2011 (BCA)

Provisions of the BCA are projected to bring discretionary spending as a share of GDP to levels well below that seen in recent decades. In terms of real dollars (i.e., adjusting for inflation but not for growth in population or the economy), discretionary base defense spending was slated to revert to a level slightly above its FY2007 level, while non-defense discretionary spending was slated to revert to a level near its 2002 level.

The BCA set limits on discretionary spending that were initially estimated to save about $900 billion over the next decade relative to a pre-BCA baseline. The BCA also established a Joint Select Committee on Deficit Reduction (JSC), known as the "Super Committee," to develop and present a plan to Congress and the President that would achieve an additional $1.2 trillion or more in savings. The BCA, in return, allowed a set of increases to the debt limit, subject to congressional disapproval, enabling the government to borrow through February 2013. The BCA tied the expected reduction in spending achieved through those discretionary spending limits and other budget enforcement measures to increases in the debt limit of the same magnitude.

FY2013 Sequestration Triggered

The Super Committee (JSC) reached a deadlock shortly before a key November 2011 deadline, thus triggering backup enforcement mechanisms set up in the BCA to reduce spending by $1.2 trillion. Those backup enforcement mechanisms have been modified by ATRA (more below). The original BCA caps were then superseded by revised caps , which imposed separate limits on defense (budget function 050) and non-defense spending. The sum of total discretionary spending under the original and revised caps was the same. Further reductions of $109 billion for each year from the revised cap levels, split between defense and non-defense, were slated to occur in each year from FY2013 through FY2021. Those reductions, along with interest savings, were designed to capture the $1.2 trillion in budget savings in the absence of a Super Committee plan.

For FY2013, the BCA had required a sequester on January 2, 2013—a cancellation of budget authority relying on pro-rata cuts to most discretionary budget authority, Medicare, and certain other mandatory outlays. Most mandatory spending was exempt from sequestration and Medicare patient care reductions are limited to 2%. Thus, the bulk of sequestration reductions applied to discretionary programs.

For later years—from FY2014 through FY2021—the BCA-specified mechanisms set lowered spending caps that would apply to discretionary funding levels. Within limits set by those caps, however, Congress would have flexibility to tailor the budget to suit its policy priorities. Amounts above those caps, according to budget law, would be subject to a cap enforcement sequester.

Scaling Down Sequestration for FY2013

A continuing resolution (CR; H.J.Res. 117 ; P.L. 112-175 ) was enacted on September 28, 2012, to fund the federal government for the first six months of FY2013. In general, funding levels were set 0.612% above FY2012 levels, with exceptions for war funding and certain disaster relief programs. Discretionary spending in the CR was scored at $1,047 billion, which equaled the sum of the revised defense and non-defense caps. Base budget discretionary defense funding, however, was scored at $557 billion (in BA), or $11 billion above the revised BCA cap, while non-defense discretionary spending (BA) was scored at $490 billion, or $11 billion below its BCA revised cap. Funding in the CR above cap levels would have been subject to a cap enforcement sequester, absent subsequent changes. The American Taxpayer Relief Act (see below) delayed both the Super Committee sequester and the potential cap enforcement sequester, in addition to other changes in budget enforcement mechanisms.

The Fiscal Cliff Deal

The American Taxpayer Relief Act (ATRA; H.R. 8 ; P.L. 112-240 ) delayed the sequester triggered by the absence of a Super Committee (JSC) plan by two months, from January 2, 2013, to March 1, 2013. In addition, the size of those FY2013 sequestration cuts was reduced from $109 billion to $85 billion. The remaining $85 billion sequester, as before, was divided equally between defense and non-defense spending. Nearly all of the sequester reductions in defense spending fell within discretionary spending, while about a third of non-defense sequester reductions fell within the mandatory category.

Half of the $24 billion reduction in the size of the FY2013 sequester was offset by lowering discretionary spending limits for FY2013 by $4 billion ($2 billion in security spending; $2 billion in non-security spending) and lowering limits for FY2014 by $8 billion ($4 billion in defense; $4 billion in non-defense). The remaining $12 billion was offset by revenue changes affecting retirement accounts.

ATRA also altered discretionary spending limits on FY2013 discretionary spending. ATRA delayed a potential cap enforcement sequester to enforce discretionary spending limits from early January 2013 to March 27, 2013. The cap enforcement sequester was modified by ATRA to apply to security/non-security categories, rather than the defense/non-defense categories previously in effect. Because the full-year funding measure ( H.R. 933 ; P.L. 113-6 ) was designed to conform to these modified discretionary spending limits, the cap sequester was avoided. The discretionary spending limits enforced by that sequester, however, effectively set top-line totals for the FY2013 full-year funding measure.

The change in the FY2013 discretionary limits from defense/non-defense to security/non-security may have shifted the allocation of spending reductions. Because the security category is broader than the defense category, cap enforcement sequester reductions would have applied to a larger pool of programs. The cap enforcement sequester would have reduced spending within security programs by more than within non-security programs because the CR funded defense programs above BCA cap levels. Without changes in spending levels, the cap enforcement sequester, according to CBO estimates, would have reduced security spending by $7 billion and non-security spending by $1 billion.

ATRA also put in place a less restrictive fiscal policy by extending various expiring tax provisions and extended unemployment benefits, while postponing across-the-board sequestration until March 2013. Those increases in federal revenues and decreases in spending, often known as the "fiscal cliff," would have lowered the federal deficit dramatically, but could have led to a new recession in 2013, according to CBO and other forecasters. Others, however, had expected more modest macroeconomic consequences from those changes.

Attempts to Avoid the Effects of Sequestration

Many have objected to the consequences for federal programs and fiscal policy of the BCA's sequestration measures. The potential effects of defense and non-defense cuts resulting from BCA discretionary caps were also discussed in various committee hearings and remain a concern of many Members. In addition, various proposals to delay, replace, or modify sequestration were put forth. For example, the Reducing Flight Delays Act of 2013 ( P.L. 113-9 ), enacted May 1, 2013, authorized the Secretary of Transportation to transfer funds to Federal Aviation Administration (FAA) appropriations accounts in order to reduce delays due to furloughs of FAA personnel.

Numerous other measures to replace or modify the BCA sequester were also introduced in both the 112 th and 113 th Congresses. The House-passed FY2013 budget resolution ( H.Con.Res. 112 ; agreed to on March 29, 2012, on a 228-191 vote) called for the cancellation of the January 2013 sequester, conditional on achieving savings in domestic programs through reconciliation procedures. Such reconciliation procedures, however, would only come into play with the agreement of the Senate.

The President's FY2013 budget request essentially conformed to the original BCA caps, but argues that the January 2013 sequester and other backup enforcement measures should be cancelled because Administration proposals would achieve savings in other ways. In February 2013, President Obama called for avoiding sequestration by substituting tax increases and targeted spending cuts.

BCA Sequester Issued March 1, 2013

On March 1, 2013, the President signed a sequester order that cancelled $85 billion in budgetary resources, a measure triggered by the absence of a JSC ("Super Committee") plan to reduce the federal deficit. Reductions were split equally between defense and non-defense categories.

Nearly all the defense reductions were taken in discretionary programs because less than $1 billion in defense mandatory spending was sequestrable. The President chose to exempt Military Personnel accounts from sequestration, which required larger reductions in other defense accounts. Non-exempt defense discretionary accounts were reduced by 7.8% for a total reduction of $42.6 billion in budgetary resources. While war (Overseas Contingency Operations; OCO) funding was not subject to BCA caps, it was not exempted from sequestration. Former Defense Secretary Leon Panetta, however, indicated that the Defense Department would take steps to protect funding for war operations by finding other cuts. In addition, unobligated balances in defense accounts were also sequestered.

The sequester reduced non-defense discretionary program funding by 5.0%, which reflected a $25.8 billion reduction in budgetary resources. The remainder of non-defense reductions ($16.9 billion) was absorbed by non-defense mandatory programs. A 2% reduction in Medicare patient care accounted for most of the non-defense mandatory savings ($11.3 billion), while a 5.1% sequester was applied to other non-exempt mandatory programs, yielding another $5.5 billion in budgetary savings.

The Super Committee sequester reduced federal outlays in FY2013 by considerably less than the total reduction applied to budgetary resources. This reflects the usual lag between reductions in budget authority and reductions in obligations and outlays, as well as the time agencies require to implement plans to reduce their spending. In addition, special budgetary rules delay the start of the sequester of Medicare patient care outlays by a month. CBO estimated that the BCA sequester would reduce FY2013 outlays by $42 billion in FY2013.

Full-Year Funding for FY2013

On March 6, 2013, the House passed a measure ( H.R. 933 ) to fund the government for the remainder of FY2013 by a 267-151 vote. The measure provided detailed appropriations levels for Defense and Military Construction-Veterans' programs. Other programs, with some exceptions, were funded near FY2012 levels before taking into account a series of across-the-board reductions. Spending reductions in the bill would not have affected the amount of reductions in spending made through the JSC/Super Committee sequester of March 1, 2013.

On March 11, 2013, a substitute measure for H.R. 933 was posted on the Senate Committee on Appropriations website. According to Senate Appropriations Chair Barbara Mikulski, defense and military construction-veterans provisions of the substitute measure matched those in the House-passed H.R. 933 . The measure would have provided more detailed spending adjustments in other areas.

Both H.R. 933 and the Senate alternative were scored as conforming with discretionary spending caps as revised by ATRA (totaling $1,043 billion for regular appropriations) and thus avoided a cap enforcement sequester. That scored total did not include war funding, emergency-designated spending, and program integrity funding.

The Senate passed an amended version of H.R. 933 by a 73-26 vote on March 20, 2013. The Senate version of H.R. 933 included detailed changes in spending levels for programs within the Agriculture, Commerce-Justice-Science, and Homeland Security areas, in addition to the changes in Defense, Military Construction-Veterans that the House measure had included. Most other programs received funding close to FY2012 levels. The House agreed to Senate changes the next day on a 318-109 vote. While some of the effects of sequestration were adjusted by reallocating spending reductions, the amount of the March 1 sequester cuts remained in place. The President signed the measure ( P.L. 113-6 ) on March 26, 2013.

Discretionary Funding for FY2014

Submission of the Obama Administration's FY2014 budget was delayed until April 10, 2013, due to substantial changes enacted by ATRA at the beginning of January 2013 and the demands of the March 1, 2013, JSC sequester. The President's FY2014 budget request proposed several modifications of BCA caps on discretionary spending. The Administration proposed that FY2014 spending limits be set at revised cap levels (i.e., $552 billion for defense and $506 billion for non-defense) rather than lowered cap levels (i.e., $498.1 billion for defense and $469.4 billion for non-defense), which would have allowed higher levels of discretionary spending while the economy is recovering from a major recession. Spending limits for the second half of the FY2013-FY2021 budget window, in the Administration's proposals, would have been lowered by $60 billion each for defense and non-defense. In addition, discretionary caps would have been extended to FY2022 and FY2023.

The Administration estimated that those spending cap modifications would reduce discretionary spending by $202 billion over FY2014-FY2023. Thus, projected discretionary spending for FY2014-FY2018 shown in the figures below, which presume the President's budgetary proposals are adopted, reflects an assumption that BCA constraints on discretionary spending would be loosened in FY2014 and tightened later, starting in FY2017. The Administration's FY2014 budget plan also includes $260 billion in unspecified reductions in discretionary spending, mostly slated for FY2015 through FY2023. If those reductions were carried out, discretionary spending levels would have been less than those shown in figures below.

During the FY2014 budget cycle, the House and Senate responded to the budgetary challenges presented by BCA caps in different ways. Just before the August 2013 recess, the gap between House and Senate totals for FY2014 discretionary spending stood at about $90 billion. The House Appropriations Committee set suballocations for its subcommittees that totaled $973.1 billion, slightly above total discretionary spending at BCA lowered caps levels ($967.5 billion) for FY2014. Senate Appropriations Committee guidance for its subcommittees, however, indicated a total for FY2014 consistent with BCA revised caps (i.e., a total of $1,058 billion split between a base defense subtotal of $552 billion and a non-defense total of $506 billion).

Differences between House and Senate discretionary spending levels were not resolved before the start of FY2014 on October 1, 2013, which resulted in a shutdown of most federal operations. Funding for federal operations was restored by passage of a continuing resolution ( H.R. 2775 ) on October 16, 2013, which was signed by the President the following morning (Continuing Appropriations Act, 2014; P.L. 113-46 ). The measure provides funding on an annualized basis of $986.3 billion before adjustments.

The Bipartisan Budget Act of 2013

The Bipartisan Budget Act of 2013 (BBA; H.J.Res. 59 ; P.L. 113-67 ) provided a reconciliation of House and Senate discretionary spending levels for the remainder of FY2014 and for FY2015 as well. Final House approval was obtained on a 332-94 vote on December 12, 2013, and the Senate approved the final version on December 18, 2013, on a 64-36 vote.

The BBA set discretionary defense spending caps at $520.464 billion for FY2014 and $521.272 billion for FY2015. Non-defense caps were set at $491.773 billion for FY2014 and $492.356 billion for FY2015. The mechanism for reducing the revised BCA caps to lowered caps levels in order to capture savings not attained by the Joint Select Committee on Deficit Reduction (JSC) was turned off for both FY2014 and FY2015. Both modified defense and non-defense spending limits for FY2014 were $22.4 billion above the lowered caps levels that would have applied in the absence of the Bipartisan Budget Act, while FY2015 levels were about $9 billion higher.

The BBA also extended sequestration of non-exempt mandatory account for FY2022 and FY2023, and contained provisions to reduce improper federal payments, to alter certain federal oil and gas programs, to raise certain transportation fees, and to modify funding for the servicing of federally guaranteed student loans. In addition, the BBA required higher retirement contributions by new Civil Service and Foreign Service employees and specified a 1% reduction in the cost-of-living adjustment for certain working-age military retirees.

On February 11, 2014, the House also passed a separate measure ( S. 25 ; P.L. 113-82 ) that ensured that the cost-of-living adjustment would not apply to those who joined the Armed Forces before January 1, 2014. That measure was passed on a 326-90 vote. The Senate agreed to the House changes on a 95-3 vote on the next day. The President signed the bill into law on February 15, 2014. The measure also extended non-defense mandatory sequestration from FY2023 to FY2024.

Final Appropriations for FY2014

The House and Senate Appropriations Committees announced an agreement on funding for the remainder of FY2014 on January 13, 2014. The resulting measure (Senate Amendment to H.R. 3547 ) was scored as conforming to caps set in the Bipartisan Budget Act of 2014. The House voted to accept the measure on January 14, 2014, on a 359-67 vote. On the following day, the Senate approved that version on a 72-26 vote. The President then signed the measure ( P.L. 113-76 ) on January 17, 2014.

A short-term continuing resolution ( H.J.Res. 106 ) was introduced by House Appropriations Chairman Harold Rogers to extend federal funding from January 15 to January 18, 2014, to provide more time for the consideration of final FY2014 appropriations. On January 14, 2014, that measure passed the House on a voice vote and the Senate on an 86-14 vote. The President signed the measure ( P.L. 113-73 ) on the following day.

Discretionary Funding Proposals for FY2015

The Bipartisan Budget Act ( P.L. 113-67 ; Sections 115 and 116) provides authority for budgetary enforcement "in the same manner as for a concurrent resolution on the budget for FY2015" if no budget resolution were agreed to by the House and Senate by April 15, 2014. In each chamber, the chairman of the Budget Committee would then be mandated to submit information normally contained in a budget resolution after April 15 but before May 15, 2014.

The Congressional Budget Office's budget and economic outlook, which contains updated economic and budgetary baseline projections through FY2024, was released on February 4, 2014. Discretionary spending as a share of GDP, according to CBO current-law baseline projections, would fall by about 20% over the next decade, absent changes in statutory caps on discretionary spending.

Administration's FY2015 Budget Proposals

The Obama Administration submitted the first part of its FY2015 budget on March 4, 2014. Additional materials were released on March 10, 2014. OMB attributed the delay in the budget submission to the late completion of FY2014 appropriations, which then pushed back budget formulation deadlines. The FY2014 budget, as noted above, was submitted on April 10, 2013. OMB had instructed federal agencies to submit plans that would reflect a 5% reduction in net discretionary funding, along with measures to reach a 10% reduction in net discretionary funding.

The Obama Administration's FY2015 budget proposal was designed to comply with BCA caps, as modified by the BBA, on discretionary spending, aside from an "Opportunity, Growth, and Security Initiative." Those caps require that defense spending be scored at less than $521.3 billion and that non-defense spending be scored at less than $492.4 billion. Scored budget totals include adjustments that cause them to vary from programmatic totals.

The Opportunity, Growth, and Security Initiative (OGSI) would provide an additional $56 billion in funding split equally between defense and non-defense spending, reflecting the Administration's view that BCA discretionary cap levels currently in place provide insufficient funding for many domestic policy initiatives and certain defense priorities. In particular, the Administration proposed increased funding for research, clean energy, education for young children, and efforts to mitigate homelessness. The Administration proposed $28 billion in mandatory program reductions and $28 billion in reductions in tax benefits enjoyed by certain high-value retirement savings accounts to offset costs of its initiative.

The Administration submitted a $65.8 billion war funding (Overseas Contingency Operations; OCO) request to Congress on June 26, 2014, to supersede placeholder amounts ("plugs") totaling $85.4 billion included in the March budget submission. BCA caps for defense and non-defense are adjusted upwards by the amount of war funding if Congress and the President agree on those amounts.

Congressional Action on the FY2015 Budget

House Budget Chairman Paul Ryan released a budget resolution proposal on April 1, 2014. Proposed levels for FY2015 discretionary funding conform to modified BCA caps. In future years, proposed levels for defense discretionary spending would be above existing BCA caps, while non-defense discretionary spending would be below cap levels. For instance, FY2016 base defense BA would be $43 billion higher than the current BCA limit and non-defense spending would be lower by the same amount. The House Budget Committee reported a budget resolution ( H.Con.Res. 96 ) on April 4, 2014. The House then approved the budget resolution ( H.Con.Res. 96 ) by a 219-205 vote on April 10, 2014.

The Senate has relied on provisions of the BBA that set levels for discretionary spending for consideration of the FY2015 budget. Senate Budget Committee Chairwoman Patty Murray has emphasized that budget totals set in the Bipartisan Budget Act will serve to frame FY2015 appropriation levels in the Senate, a statement that has been interpreted to imply that the Senate would not consider a budget resolution for FY2015.

By mid-July 2014, the House had passed 7 of 12 appropriations bills and Senate Appropriations Subcommittees had reported 8 of 12 bills. The Senate, however, did not pass any appropriations bills. The Senate began consideration of a "minibus" ( S.Amdt. 3244 to H.R. 4660 ), introduced by Senate Appropriations Chairwoman Barbara Mikulski on June 17, 2014, which combined funding provisions for three appropriations bills. No action, however, was taken on the measure after divergent views on the consideration of amendments were expressed.

Continuing Resolution Provides Funding Until December 11, 2014

On September 17, the House passed on a 319-108 vote a continuing resolution ( H.J.Res. 124 ) to provide FY2015 funding for the government until December 11, 2014. The Senate approved the measure without amendment the following day on a 78-22 vote. President Obama signed the measure ( P.L. 113-164 ) into law on September 19, 2014. The FY2015 continuing resolution provides funding at nearly the same rate as for FY2014, except where otherwise specified. The act includes an across-the-board reduction of 0.0554%, which totals $571 million in budget authority. Table 2 presents a summary of FY2015 funding levels provided by the act.

Comparison of Discretionary Caps

Table 3 summarizes discretionary funding and modifications of statutory caps on discretionary funding for base defense and non-defense funding from FY2013 through FY2021. Levels are shown in terms of scored budget authority (BA) that excludes war (Overseas Contingency Operations/OCO), disaster, program integrity, and emergency funding.

The first two rows in both the defense and non-defense categories show revised caps before and after the fiscal cliff agreement (ATRA), which reduced the size of the JSC sequester. The next pair of rows show estimates of post-sequester funding in FY2013 and OMB estimates of lowered cap levels in subsequent years. Next, the modifications of the defense and non-defense caps enacted in December 2013 by the Bipartisan Budget Act are shown. That act turned off the mechanism that lowers caps to recapture savings not obtained by the JSC for FY2014 and FY2015, but did not change caps or the cap-lowering mechanism for later years. Finally, a pre-BCA Administration projection (CBO reestimate of the FY2012 plan) and the totals for the FY2014 budget submission are presented.

Long-Term Trends in Discretionary Spending

Discretionary Spending Now a Smaller Share of Federal Spending

The composition of the federal budget has changed dramatically since the early 1960s. As Figure 1 shows, discretionary spending as a share of the federal budget has fallen, while mandatory spending's share has steadily increased. Discretionary spending will thus have gone from comprising two-thirds of federal spending in FY1962 to only 33% of total outlays in FY2014. That share, according to CBO baseline projections, will decline to just under 24% in FY2024.

Mandatory spending, by contrast, has risen from 26% of total outlays in FY1962 to 60% in FY2014. Net interest accounted for 6% of federal outlays in FY1962 and 6.6% in FY2013. Net interest costs, according to CBO baseline projections, are expected to rise sharply to 14% in FY2024 as interest rates return to more normal levels and the federal debt continues to expand.

Discretionary Spending As a Share of GDP

Trends in discretionary spending as a share of gross domestic product (GDP) provide another perspective on how the composition of federal outlays has changed. Measuring budget components as a share of GDP compares their size to the economy as a whole, and implicitly incorporates inflation and population growth. When GDP falls, however, the percentage of outlays to GDP tends to rise. Figure 2 shows components of federal spending as a percentage of GDP since 1962.

Total federal outlays as a share of GDP peaked in FY2009 as a result of the current economic situation and federal interventions. While discretionary outlays declined as a percentage of total outlays in FY2009, they rose as a percentage of GDP because the economy shrank in 2008 and early 2009. Since 2010, discretionary outlays have been falling, both in current dollar terms and as a percentage of GDP. If caps on discretionary spending remain in place, discretionary spending will continue to fall as a share of GDP. CBO has projected that under current law discretionary spending would fall to 5.2% of GDP by FY2024. That share would be about 16% lower than its minimum share during the 1990s (6.2% in FY1999).

Because of the decline in discretionary spending as a percentage of total outlays and as a percentage of GDP and the resulting increase in the share of mandatory spending over time, reaching agreement on how to control the federal budget may become more difficult for Congress. Roughly speaking, discretionary defense and discretionary non-defense outlays each comprise about one-seventh of the federal budget. In other words, because net interest payments and mandatory spending are set automatically, less money is available to allocate to other government agencies and programs unless revenues rise or Congress modifies eligibility requirements and benefits of mandatory spending programs.

Because discretionary funding is provided through an annual budgeting process, this may have made it easier to target spending restrictions on discretionary programs. Most large mandatory programs are linked to people's retirement decisions, so abrupt changes in benefit levels or eligibility criteria could disrupt financial plans of those already retired or about to retire. In the past, mandatory programs such as Social Security and Medicare have enjoyed broad bipartisan support. Those considerations may complicate efforts to reduce funding for mandatory programs.

Costs linked to the retirement of the baby-boom generation, born in the years following World War II, are a major cause of rising mandatory spending. As the U.S. population has aged, the composition of federal outlays has evolved to reflect needs of the elderly. On the other hand, the current trajectory of federal spending on health care appears unsustainable, and could place heavy fiscal burdens on younger generations and generations not yet born.

Discretionary Spending and National Priorities

Discretionary spending can be categorized in several different ways. These divisions provide a rough indicator of national priorities as reflected in federal spending decisions. In addition, some of these categories play or have played a role in budget enforcement mechanisms.

Defense and Non-Defense Spending

One basic division of discretionary spending separates defense programs (budget function 050) from non-defense programs (everything else). Discretionary spending caps now in place due to the Budget Control Act, as modified, set separate limits for base budget defense funding and non-defense funding. Defense spending is typically divided between base budget and war spending, which supports activities within Overseas Contingency Operations (OCO) or Global War on Terror (GWOT). Figure 3 shows trends in discretionary defense and non-defense BA in real (i.e., inflation-adjusted) terms since FY1977.

Projections in Figure 3 reflect spending paths conforming to the original BCA caps. As noted above, ATRA and the Bipartisan Budget Act of 2014 reduced the scope of BCA spending constraints for FY2013 and FY2014.

Spending trends can also be measured as shares of GDP, which reflects how federal spending compares with the size of the economy. Figure 4 shows trends in defense and non-defense discretionary BA as a share of GDP over the period 1976-2019. BA as a percentage of GDP reflects changes in population and growth in per-capita income, which may affect the costs of federal programs. How population changes affect federal spending may also depend on whether specific governmental services are subject to scale economies. For instance, a 10% increase in population might require resources devoted to individual health care services to rise by 10% in order to maintain the same level of service, other things equal. For many governmental services, one might expect to find substantial scale economies. For example, an increase in population would likely not be expected to raise the costs of information-generating activities, such as medical and scientific research, or national defense activities.

The Reagan Administration, when it took office in 1981, sought to increase defense spending and reduce spending on domestic programs. Budget enforcement measures were introduced in the mid-1980s to control rising federal deficits. In 1985, the Gramm-Rudman-Hollings (GRH) deficit control legislation and subsequent measures were enacted with the aim of constraining federal spending. In 1990, the Budget Enforcement Act (BEA; P.L. 101-508 ) set statutory caps on discretionary spending and imposed other budgetary enforcement mechanisms, which many analysts view as having helped constrain federal spending, increase federal revenues, and thus, reduce deficits. In the decade after the attacks of September 11, 2001, and the expiration of statutory spending caps at the end of FY2002, however, both defense and non-defense discretionary spending rose in real terms. Trends in defense and non-defense spending are discussed in more detail below.

Discretionary Defense Spending

Base budget defense spending in real terms has risen and fallen to reflect national security challenges and changes in policy priorities. Defense spending increased sharply in the mid-1960s as the United States' involvement in Vietnam deepened. After large-scale withdrawals of American troops from Vietnam began in 1969, defense spending as a share of GDP fell for the next decade. In the mid-1970s, when the United States took a less confrontational diplomatic stance towards the Soviet Union, termed détente, defense spending grew modestly. The Soviet invasion of Afghanistan in 1979, however, prompted the Carter Administration, and then the Reagan Administration during the early 1980s, to boost military expenditures. By the mid-1980s, however, concerns about large deficits helped constrain defense spending. After the fall of most European communist regimes in 1989 and the dissolution of the Soviet Union in 1991, defense spending declined. Costs of the first Iraq War (1990-1991) were shouldered by U.S. coalition partners.

After the attacks of September 11, 2001, defense spending rose sharply as the United States began military operations in Afghanistan, but also included dramatic increases in non-war or base budget funding. War in Iraq, which began in 2003, amplified demands for higher defense spending. War costs have fallen since the drawdown of troops participating in the 2007 surge of forces in Iraq and the withdrawal of combat troops from Iraq at the end of calendar 2011. Further reductions in war costs are expected as troops are withdrawn from Afghanistan. Decisions about major procurement programs and possible changes in Budget Control Act budget enforcement mechanisms could also affect trends in defense spending.

Ups and downs in defense spending have primarily reflected changes in investment funding for modernization of weapon systems and support equipment, and conducting Research, Development, Test & Evaluation (RDT&E) on new systems. Defense investment typically grows when support for defense spending is high, such as in wartime or the early 1980s, and then falls as support dips and other issues become more pressing, with peaks in investment offsetting later valleys. Trends in base defense spending over the past decade may not reflect the full extent of the growth in defense costs, because it does not include about $300 billion in war-related investment in weapon systems, which will likely remain in the inventory for many years to come. By contrast, wartime operating costs, such as training and support of personnel, do not contribute to modernization.

Defense Spending as a Percentage of GDP

Discretionary defense spending accounts for a much smaller share of GDP in recent years than during World War II, the Korean War, or the Vietnam War. At the height of the Vietnam War in FY1969, defense outlays were 8.7% of GDP. Moreover, with compulsory military service, which was in effect until 1973, the budgetary costs of war understated the full economic costs of national defense, because many draftees were prevented from pursuing other opportunities.

As noted above, defense spending fell during the 1970s, rose rapidly following the Soviet invasion of Afghanistan, and fell after the collapse of most of the USSR's Warsaw Pact allied governments in 1989 and the dissolution of the USSR itself in 1991. Discretionary defense outlays, which had fallen to 3.0% of GDP by the late 1990s, rose sharply to 4.0% of GDP in 2005, and reached 4.7% of GDP in 2011, divided between 3.6% for the base defense budget and 1.1% for war funding (Overseas Contingency Operations; OCO). Increased defense outlays accounted for 53% of the real increase in total discretionary outlays over the decade of 2000-2010, rising 6.8% per year on average in real terms.

Effect of Withdrawals from Iraq and Afghanistan

In FY2012 and FY2013 defense outlays as a share of GDP fell, due in large part to the withdrawal of combat troops from Iraq that was completed in December 2011. President Obama had announced that most U.S. troops would be withdrawn from Afghanistan by the end of 2014. In May 2014, President Obama said that about 9,800 U.S. troops would be in Afghanistan at the start of 2015, and roughly half that amount would be there in 2016. On September 29, 2014, the date that Dr. Ashraf Ghani was inaugurated as Afghan president, status of forces agreements (SOFAs) were signed between Afghanistan and the United States and between Afghanistan and the North Atlantic Treaty Organization (NATO), which provide a framework for counterterrorism and training operations.

The Obama Administration requested $12.8 billion in supplemental appropriations on November 10, 2014, to fund operations in Iraq and Syria against the Islamic State of Iraq and the Levant (ISIL).

How Much Defense Spending Is Appropriate?

The appropriate size of the defense budget has long been a lively topic of debate. In 2007, General Mike Mullen, then chairman of the Joint Chiefs of Staff, said that he considered 4% of GDP "an absolute floor" for future defense spending. Some analysts have expressed some doubts about the sustainability of current defense budget plans. Others contend that defense expenditures as a proportion of GDP should fall over the long term because the cost of defending the nation depends on factors that are largely independent of economic growth. Geopolitical challenges, wars, major procurement programs, and changes in national spending priorities have spurred swings in defense spending in past decades.

Former Secretary of Defense Robert Gates called for cost-cutting measures within the Department of Defense (DOD), although the stated aim is not to reduce the department's top-line budget number. Former Secretary of Defense Leon Panetta has raised concerns that cuts required by the Budget Control Act could have serious effects. On the other hand, the Budget Control Act would have brought discretionary base defense spending in inflation-adjusted terms back to its FY2007 level. With modifications made in the American Taxpayer Relief Act of 2012 (see above), real discretionary base defense spending after sequestration would revert to a level between its FY2007 and FY2008 levels.

In early 2013, DOD leaders issued guidance on budget strategies to handle uncertainties raised by sequestration and the FY2013 continuing resolution ( P.L. 112-175 ) that provides funding through March 27. DOD budget guidance includes protection of war operations and programs associated with new strategic priorities; reduction of administrative and civilian personnel costs; and deferring less critical maintenance. Some analysts argue that budgetary constraints may require a larger reconsideration of strategic goals of DOD.

In February 2014, Secretary of Defense Chuck Hagel outlined budget proposals that included reductions in troop strength and force structure across the military. Hagel said that even with those reductions, the U.S. military could decisively defeat aggression in one major war while also engaged elsewhere against another adversary. The Administration's FY2015 budget includes an additional $28 billion in security funding as part of its "Opportunity, Growth, and Security Initiative." Defense initiatives include weapon modernization, funding for enhancing readiness, support for maintenance of nuclear weapons facilities, and renovations of DOD installations.

Non-Defense Discretionary Spending

Non-defense spending supports the largest number of federal agencies and programs, including science and technology research, natural resources, energy, education, and numerous others. None of the individual programs within the non-defense discretionary category have approached 1% of GDP since 1962, and funding for most individual programs was less than 0.5% of GDP during that period.

Non-defense discretionary spending in recent decades has typically ranged between 3% and 4% of GDP. In 1969, during the Vietnam War, non-defense spending was 3.6% of GDP. After rising to a peak of 5.2% in 1980, non-defense discretionary spending's share of GDP fell during the Reagan Administration, reaching 3.5% of GDP in 1987. Since then it fluctuated between 3.2% and 3.8% of GDP until 2009. Non-defense discretionary spending rose to 4.6% of GDP in 2010, reflecting a decline in GDP (reducing the denominator of that share) due to the economic recession and policy responses such as the American Recovery and Reinvestment Act of 2009 (ARRA; H.R. 1 , P.L. 111-5 ). Since that year, non-defense discretionary spending has declined in real terms and as a percentage of GDP. According to CBO current-law projections, non-defense discretionary spending will fall to 2.7% in 2023.

The Obama Administration's FY2015 budget proposal included an "Opportunity, Growth, and Security Initiative" that would provide an additional $56 billion in funding split equally between defense and non-defense spending. Non-defense initiatives include more funding for pre-school education, K-12 teacher training, additional National Institutes of Health (NIH) research support, creation of advanced manufacturing institutes, neighborhood revitalization, education and training, and additional grants for local justice programs.

International Discretionary Spending

Some discretionary spending constraints in the 1980s and 1990s set separate caps for defense, domestic, and international (budget function 150) spending. Demands for funding international programs have varied dramatically with changing geopolitical conditions.

In the past decade, international spending (budget function 150) has been strongly affected by wars in Afghanistan and Iraq. Discretionary spending for international programs since 1969 has averaged 0.3% of GDP, reaching its peak of 0.5% of GDP in 1975. International spending had trended downward from the early 1980s until the start of the Iraq war in 2003. Between 2001 and 2010, spending on international programs rose from 0.2% of GDP to 0.3% of GDP. The majority of the funding in this category in recent times has been devoted to diplomatic missions, foreign aid, and international finance.

The future trajectory of international funding may depend on how the role of the United States evolves in Iraq, Afghanistan, and neighboring countries. As noted above, President Obama has stated that most U.S. troops would leave Afghanistan by the end of 2014.

Discretionary Security and Non-Security Spending

After September 2011, the categories of security and non-security spending have played an important role in federal budgeting. Unlike the division of discretionary spending into the categories of domestic, international, and defense, which has become routine in budget analyses, several ways of dividing security spending from non-security spending have been used. The George W. Bush and Obama Administrations each created their own division of security and non-security discretionary spending as a way of communicating their budgetary priorities. That division also appeared in some Budget Control Act discretionary spending limits. The Obama and Bush Administration budgets have presented summaries of discretionary funding that split out security spending from non-security spending.

The Budget Control Act of 2011 includes two definitions of security spending: an original definition (explained below) and a revised definition corresponding to the national defense budget function (050) and non-defense (all other programs). These BCA security categories set up "firewalls" to ensure that reductions in security spending cannot be used to fund increases in non-security spending, and vice versa. The American Taxpayer Relief Act of 2012 (ATRA) switched FY2013 caps to security/non-security from defense/non-defense.

What Is "Homeland Security" or "Security" Spending?

Any division of spending into security and non-security components would likely present conceptual and practical difficulties. Moreover, the widely used term "homeland security," which comprises some but not all non-defense security spending, does not already readily translate in budgetary categories. Figure 6 provides a schematic view of the relationship between defense spending (budget function 050) and security spending as defined in the Budget Control Act. That definition nearly coincides with the security definition used by the Obama Administration. The Obama Administration has defined security spending as funding for

Department of Defense-Military; Department of Energy's National Nuclear Security Administration; International Affairs (function 150; includes State Department and U.S. AID); Department of Homeland Security; and Department of Veterans Affairs.

The Budget Control Act of 2011 (BCA), in addition to items on that list, includes the Intelligence Community Management Account, which is far smaller than the other items. The BCA "revised security" category for discretionary spending, as noted above, is national defense (budget function 050) and non-defense (everything else).

Activities within budget subfunction 053 (Atomic Energy Defense Activities), aside from the National Nuclear Security Administration (NNSA), by this definition are classed as non-security. While the Bush Administration defined parts of the Department of Homeland Security within its "security" classification, the Obama Administration includes all of that department's funding.

The George W. Bush Administration defined security funding as spending on the "Department of Defense, Homeland Security activities Government-wide; and International Affairs." The Obama Administration includes funding for the Department of Veterans Affairs and excludes Justice Department agencies such as the Federal Bureau of Investigation (FBI) under its security rubric, while the Bush Administration's definition included the FBI and other law enforcement bureaus and excluded the Department of Veterans Affairs.

Most homeland security spending, by either definition, takes place in the Department of Defense, the Department of Homeland Security, and the Department of Energy. Many other federal agencies spend at least some portion of their budget on what are arguably homeland security tasks, so that a significant amount of homeland security spending takes place in agencies and programs whose primary focus is not security oriented. Some federal activities, such as Coast Guard patrols and research at the Centers for Disease Control and Prevention, advance interests clearly linked to security objectives as well as those which are not. Moreover, some federal programs tasked with non-security aims in normal times may respond to specific homeland security challenges. These issues complicate budgetary analyses of homeland security spending.

The President's budget submission must report homeland security spending. This definition, drawn more narrowly than "security," can exclude some DOD activities not closely tied to security concerns, such as military bands, while including certain non-DOD activities such as National Institutes of Health research on countermeasures against chemical or biological weapons. OMB's security spending estimates are based on reports from 32 agencies with homeland security responsibilities. Those agencies provide OMB with budget reports that provide a level of detail unavailable in publicly available data.

Trends in "Security" and "Non-Security" Discretionary Spending

Figure 7 shows trends in discretionary spending, divided into defense, non-defense security, and non-security categories in terms of budget authority, while Figure 8 shows the same categories in terms of outlays. Because budget authority can translate into outlays that stretch over several years, changes in outlays tend to be more gradual. For example, a spike in non-defense security spending for 2005, reflecting disaster spending following Hurricane Katrina and other catastrophic events, appears in the budget authority figure, but not in the outlays figure. Similarly, the spending spike reflecting Recovery Act spending is narrower for BA than for outlays.

Trends in non-defense security spending can also be decomposed to show how its components have changed over time. Figure 9 shows outlays for non-defense security spending programs since 1976.

Non-defense security programs have been affected by a wide range of policy developments. International program spending fell in the 1980s and 1990s, but rose sharply after the events of September 11, 2001. Spending on federal operations now contained within DHS also increased dramatically after that date. The costs of discretionary veterans' programs also have risen rapidly in the past decade, although more driven by the aging of Korean War and Vietnam War era veterans and expanded access to VA medical care. Only a small part of the increase in VA discretionary costs is due to the costs of treating veterans from the wars in Afghanistan and Iraq.

Discretionary Spending by Functional Category

Federal activities are classified among budget functions. Analyzing trends by budget function provides a more detailed view of how federal spending has evolved. Figure 10 shows average annual changes in discretionary spending for the last three decades and for FY2011-FY2017.

Spending in some policy areas, such as community and regional development, agriculture, natural resources and environment, and general government, has grown very slowly or has been cut. Spending in other areas, such as war costs, veterans' programs, international affairs, and Medicare administration, has expanded rapidly in the last decade. Unless this trend is restrained or reversed, security-related non-defense spending could displace funding for other non-defense programs. Similarly, protecting non-defense programs that have benefited from broad bipartisan support could lead to deeper reductions in less prominent programs.

Conclusion: Is the Declining Share of Discretionary Spending a Problem?

While discretionary spending, which chiefly funds the operations of federal agencies, accounts for about two-sevenths of federal outlays, it has been at the center of efforts to restrain federal spending. In addition, long-term trends—to a large extent baby-boom demographics and health care costs—have helped tilt federal spending towards mandatory programs. Under current law, discretionary spending is projected to shrink to 23% of federal outlays by FY2024. In that year, discretionary spending is projected at $1.4 trillion (current dollars).

While the federal deficit is projected to fall in FY2014 and FY2015, higher interest costs and mandatory spending are expected to increase fiscal pressures in later years. Federal deficits, according to CBO current-law baseline projections, are projected to rise each year after FY2015, reaching $1.1 trillion in FY2024. Closing the gap between federal spending and receipts through reductions in discretionary spending, therefore, may be difficult.

The shift toward mandatory spending and away from discretionary spending may raise concerns for two reasons. First, as the portion of the federal budget controlled on a year-by-year basis shrinks, making adjustments in spending levels may become more difficult. Mandatory spending, which requires changes in authorizing legislation, is not normally considered on an annual basis. Moreover, existing budget enforcement mechanisms are largely designed to constrain discretionary spending, while measures that can be used to reduce mandatory spending have been more difficult to apply in recent years.

Second, the rise of mandatory programs' share of federal spending reflects an aging population. Policy makers may choose to adapt the structure of the federal budget to reflect the needs of a growing segment of retired or elderly Americans. Such shifts in resource allocation, however, could affect intergenerational equity and the federal government's ability to respond to the needs of future generations.

Appendix. Defense and Non-Defense Spending, FY1977-FY2012

Table A-1 shows National Defense (budget function 050) and Non-Defense (all other) spending (BA) in current dollars and in constant FY2012 dollars (i.e., adjusted for inflation). These figures exclude funding for the Iraq and Afghan wars and related activities.