Federal spending can be divided into three main categories. The first category is mandatory spending, which is spending that operates on autopilot based on benefit formulas approved by lawmakers in years past. Mandatory spending makes up about two-thirds of the budget and includes major entitlement programs such as Social Security and Medicare.
The second category is interest on the debt, which, like mandatory spending, is largely on autopilot. The cost of interest is determined by both the amount of debt incurred by the federal government to finance deficits in past years and the cost of that borrowing as determined by the interest rate.
The final category of spending is discretionary spending, which is comprised of all the programs that Congress appropriates money for on an annual basis. This includes most defense spending as well as all domestic spending on non-entitlement programs. Discretionary spending is the one policymakers have the most control over, and as such, it draws the most attention in annual policy debates.
The problem is that discretionary spending is shrinking as a share of the total budget. As recently as 1974, discretionary programs comprised a majority of federal spending. But today, discretionary spending accounts for less than one third of the federal budget – and under current law, it is projected to fall to just one quarter in less than a decade.
This phenomenon is partially due to the fact that the first two categories of federal spending (mandatory and interest) are projected to grow faster than the third. As these programs grow in size, they are also consuming a greater share of federal spending. But discretionary spending is not just falling relative to mandatory spending, it is also falling relative to the size of the economy. In fact, discretionary spending is on track to fall below its lowest level as a share of GDP in just a few years.
Policymakers are increasingly focused on how to divide up this shrinking third of the pie, pitting smaller programs against each other for resources, instead of addressing the real drivers of our nation’s long-term fiscal challenges. Such shortsightedness threatens important government functions like national defense and investments in our future, such as infrastructure, education, and scientific research.