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Balanced federal budgets have not been a regular occurrence since the 1950s, and this persistence of deficit spending has greatly influenced the debate about budget policy during the past four decades. However, the dynamics of deficit spending changed dramatically in July 1997 when Congress passed, and the President signed, legislation that slowed the growth of spending enough to allow the federal budget to reach balance by 2002. Thanks to the robust economic expansion, unexpectedly strong revenue collections are now allowing balance to be achieved as early as the current fiscal year (FY1998).
The purpose of this report is to review trends in congressional budget policy, measured here as changes in discretionary appropriations spending. Since it is the only portion of the budget that Congress revisits and directly sets each year, discretionary spending is the most immediate reflection of congressional budget policy. Two-thirds of federal spending is classified as entitlement or mandatory spending, which budget scholar Allen Schick defines as programs where "spending increases are not at the discretion of Congress but are prescribed by existing law and are built into baseline projections."1 Whereas the dynamics surrounding most entitlement programs make frequent changes to them politically difficult, the structure of the annual appropriations process grants Congress the initiative (though not the final say) in setting policy.2 For this reason, this paper limits its discussion of congressional budget policy to changes in discretionary spending.
In order to compare spending from different time periods, differences in inflation and the size of the economy must be taken into account. For example, $100 had much greater purchasing power in 1965 than it does today. Therefore, this analysis examines discretionary spending measured two ways: in real terms (adjusted for inflation) and as a share of gross domestic product (GDP). In addition, the analysis distinguishes between the three different kinds of discretionary spending: defense, international and non-defense domestic. A complete set of historical data is included in Table 2 through Table 5 at the end of the paper.3
As can be seen in Figure 1, recent congressional budget policy has successfully reduced the amount of discretionary spending, measured either in real-dollar terms or as a share of GDP. Between 1990 and 1998, total discretionary spending fell $77 billion, or 12 percent, measured in inflation-adjusted 1998 dollars.4 As a share of GDP, discretionary outlays have followed the same trend, falling from around 9 percent of GDP at the beginning of the decade to well below 7 percent in 1998. In 1996 alone, discretionary outlays were reduced by $32 billion, the largest single-year drop since 1969. Although there was an increase the following year, total discretionary spending in 1998 was still $38 billion below the 1995 level.
Figure 1 also indicates expected levels discretionary outlays for fiscal years 1998 to 2002. Under the Budget Act of 1990, discretionary spending is capped at levels specified by law. The Balanced Budget Act of 1997 implemented a new set of discretionary spending caps for fiscal years 1998 to 2002. Assuming lawmakers comply with the spending caps, real discretionary outlays will fall from current levels by an additional $38 billion by 2002.5 Relative to 1990, discretionary spending in 2002 will be down more than $115 billion or 18 percent.
The data in Figure 1 indicate the trend in total discretionary spending, but a related interest is how spending in specific categories has changed. As previously noted, discretionary spending generally falls into one of three categories: defense, international or domestic. To a certain degree, the amount spent on defense and international programs is dictated by international factors. As might be expected, the end of the Cold War has been accompanied by real decreases in spending on defense and international programs. In contrast, domestic discretionary spending has enjoyed relatively unrestrained real growth since.
Figure 2 presents the amount of discretionary spending for fiscal years 1990 to 1998 (in real 1998 dollars). As can be seen, domestic discretionary spending experienced real increases each year until it reached an all-time high in 1995. In 1996, domestic discretionary spending was cut by $9.3 billion, the largest single-year reduction in domestic outlays since 1982. Even with the $6 billion increase in 1997 and 1998, domestic discretionary spending is still $3.3 billion below the 1995 level.6
Since biannual elections reshape Congress every two years, an alternative way of identifying trends in congressional budget policy is to aggregate discretionary spending by congressional sessions. Doing so reveals that the 104th Congress (FY 1996-97) was the most fiscally-restrained session of Congress in the 1990s. Total discretionary outlays in the 104th Congress were $74 billion lower than in the previous Congress (Table 1), a reduction of more than 6 percent.7 As a share of GDP, discretionary outlays fell almost a full percentage point, from 7.8 percent in the 103rd Congress to 7.0 percent in the 104th Congress.
Although previous Congresses also reduced overall discretionary spending, large defense cuts allowed for real increases in domestic spending. In the last four Congresses (FY1990 to FY1997), defense spending fell $222 billion in real terms. In contrast, domestic discretionary spending enjoyed real increases during the 1990s. Domestic outlays climbed an average of $34 billion in each of the three Congresses prior to the 104th, totaling $102 billion. The 104th Congress reversed this trend: domestic outlays in the 104th Congress were $10.9 billion below what was spent in the 103rd Congress (Figure 3). The 104th Congress is the only Congress in the past 36 years to exact spending reductions in all three categories.
Two findings emerge from an analysis of discretionary spending over the long run. The first is that the fiscal restraint achieved in the 1990s reverses the long-term upward trend in discretionary spending (Figure 4). Between 1962 and 1990, growth in discretionary spending outpaced inflation by more than 46 percent, reaching an all-time high of $641 billion in 1991. Although actual expenditures have been increasing over time, discretionary spending as a share of GDP has fallen steadily. After peaking at 13.6 percent of GDP in 1968, discretionary outlays fell to an all-time low of 6.6 percent in 1998.
The second conclusion about discretionary spending is that while defense and international spending have remained at relatively stable levels over the past 36 years, domestic spending has sky-rocketed (Figure 5). In real terms, both defense and international outlays in 1998 were actually below their 1962 level. International outlays have consistently remained below their 1962 level and were down 43 percent in 1998. Spending on defense has experienced expansions as well as contractions, although total defense outlays have never been 30 percent greater than the 1962 level. In 1998, defense spending was down 15 percent from its level 36 years ago.
The most dramatic trend visible in Figure 5 is the large growth in domestic spending. Spending on non-defense domestic programs increased by approximately 228 percent between 1962 and 1998. The only extended period during which domestic spending growth was interrupted was during the early 1980s, a period during which increases in defense spending more than offset the savings from reductions in domestic spending. The cumulative long-term impact of this surge in domestic spending growth is considerable. Over the period 1962-1998, if domestic spending had grown at the same rate as defense spending, the federal government would have spent $4.3 trillion less than it actually did (measured in 1998 dollars), an amount larger than the entire federal debt held by the public. The fact that domestic programs have enjoyed relatively unrestrained growth, even in the face of rising budget deficits, suggests that curbing domestic spending can be an extremely difficult task.
Two conclusions about congressional budget policy are evident from the data presented in this paper. First, recent efforts to curb discretionary spending have successfully stemmed, at least for the time being, the long-term upward trend in spending growth. The 104th Congress became the first Congress on record to impose real reductions in all three categories of discretionary spending. In addition to continuing the long-term downward trend in defense and international spending, the 104th Congress reversed the upward trend in real domestic spending. Whereas each of the three previous Congresses increased domestic spending by an average of $34 billion each, the 104th Congress cut domestic discretionary outlays by close to $11 billion. Even with the increase in fiscal year 1997 and 1998, domestic spending in 1998 was down still $3.3 billion from the all-time high reached at the end of the 103rd Congress.
The second conclusion is that all types of discretionary spending need to be kept in check in order to preserve the savings achieved thus far. As indicated above, most of the long-term growth in discretionary spending is attributable to increases in domestic expenditures. If the growth in domestic outlays had been limited to the same growth rate of defense outlays, the federal government would have spent $4.3 trillion less over the past three-and-one-half decades. However, this trend has not been fully apparent in overall discretionary spending totals due to reductions in defense and international spending. If Congress desires to avoid a return to deficit spending, then fiscal restraint must be applied to all types of spending.
1 Allen Schick, The Federal Budget (Washington, DC: Brookings Institution, 1995), 192.
2 For authority on the dynamics of both discretionary and mandatory spending policy, see Aaron Wildavsky, The New Politics of the Budgetary Process, 2nd ed. (New York, NY: Harper Collins, 1992).
3 Nominal outlays were adjusted to 1998 dollars using the implicit price deflator for each type of spending. Figures indicate outlays by fiscal year. The sum of the components may not equal the total for a given year because each series is deflated separately and then rounded to the nearest decimal point. Figures for 1998 are estimates for current year outlays and do not include any supplemental appropriations. All data are from Office of Management and Budget, Historical Tables and Analytical Perspectives, Budget of the United States Government, Fiscal Year 1999 (Washington, DC: Government Printing Office, 1998).
4 Because all figures have been rounded to the nearest decimal point, some rounding error may be evident.
5 Of course, if the spending caps are broken then these projected savings will not materialize.
6 Since the new discretionary spending caps make no distinction between domestic non-defense and international outlays, projected amounts for 1999-2002 are not included.
7 The figures in Table 1 indicate the net change in outlays relative to the previous two-year budget cycle. Thus, legislation enacted by one Congress that affected spending in a different fiscal year is not credited to the relevant Congress. For example, 104th Congress rescinded $9.1 billion in budget authority for the fiscal year 1995. The resulting outlay reductions, however, are included in the spending totals for the 103rd Congress. Figures for the 105th Congress are not included because appropriations for 1999 have not been completed.
Tables 2, 3, 4 and 5
Click here to see Table 2.
Click here to see Table 3.
Click here to see Table 4.
Click here to see Table 5.
Endnotes
