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In March 1999, the Congressional Budget Office (CBO) reported that the federal government ran a $69 billion budget surplus during fiscal year 1998.1 CBO further projected that federal surpluses will continue for the next ten years, with excess revenues totaling $2.6 trillion over 2000-2009. These large budget surpluses are largely attributable to tax revenue generated by the sustained economic expansion that began in early 1991. On the spending side of the ledger, significant savings have been realized by restraining the growth rate of federal outlays, in terms of both congressional appropriations and entitlement reform.
This report updates a 1998 Joint Economic Committee analysis of trends in congressional appropriations, also known as discretionary spending.2 That report concluded that congressional budget policy had successfully restrained the long-term upward growth of non-defense spending. This updated analysis reexamines spending trends and incorporates newer data.
The data presented in this analysis show that discretionary spending continues to grow at a restrained rate. Although appropriated spending increased in 1999, total discretionary outlays this year are still $16.5 billion lower than they were in fiscal year (FY) 1995 at the end of the 103rd Congress (all amounts are in inflation-adjusted 1999 dollars).3 Defense spending leveled off during the last four years, after a sustained decline during 1991-1995. Non-defense discretionary spending increased $6.2 billion, or 2.1 percent, between 1995 and 1999, and fell 0.4 percent as a share of gross domestic product (GDP). For the 105th Congress as a whole, non-defense discretionary spending reached a record low of 3.4 percent of GDP.
The overall pattern of discretionary spending has changed significantly during the last four years. During the first half of the 1990s, large increases in non-defense outlays were offset by even larger reductions in defense outlays. The data show that this pattern has been reversed in the 104th and 105th Congresses: defense spending has been held roughly constant in real terms, while non-defense outlays were limited to historically low growth rates.
The purpose of this report is to present data on discretionary spending in a straightforward manner. Although discretionary spending accounts for just one-third of total federal outlays (the remainder consisting of mandatory outlays), it is the only type of spending that requires new legislation each year. In contrast to mandatory spending in which outlays occur even if Congress passes no new legislation, discretionary spending is the most immediate reflection of congressional budget policy. A full set of historical tables is included at the back of the paper.
A comparison of discretionary spending levels over time should account for differences attributable to inflation and economic growth. The present analysis therefore examines discretionary outlays measured two ways: in real terms (adjusted for inflation) and as a share of gross domestic product.4 The analysis further distinguishes between two types of discretionary outlays: defense and non-defense.
Two trends are evident in the overall levels of discretionary spending, depicted in Figure 1. First, the level of outlays relative to the economy continues to decline. Total discretionary spending has fallen from around 9 percent of GDP in 1990 to just 6.6 percent in 1999. The current level of 6.6 percent is the lowest GDP share for discretionary spending on record.
The second trend is that after a sharp drop in 1996, discretionary outlays remained essentially flat for three years. Outlays for 1999 increased 2.1 percent over the previous year. Even with the $11.8 billion increase in 1999, overall discretionary outlays are still $16.5 billion, or 2.8 percent, lower than they were in 1995 at the end of the 103rd Congress.
The decline in total discretionary outlays in the first half of the 1990s is attributable to a relatively simple formula: large increases in non-defense spending were offset by even larger cuts in defense spending. The past four years have witnessed a deviation from this pattern.
After years of steady and significant decreases, defense spending has leveled off during the last four years (Figure 2). Defense outlays in 1995 were off $84 billion from the Gulf War peak of $381 billion in 1991. Between 1991 and 1995, real defense outlays dropped 22 percent. In contrast, there have been no major decreases in defense outlays during 1997-1999, and the $0.37 billion increase in 1999 was the first increase in eight years.
The other category of discretionary spending is non-defense outlays for international and domestic programs (Figure 3). Examples of non-defense spending include transportation outlays, AmeriCorps, the Federal Bureau of Investigation and the National Park system. Outlays for non-defense spending grew dramatically in the decade prior to the 104th Congress. Between 1987 and 1991, non-defense outlays grew 12.3 percent in real terms, and by more than 14 percent over the subsequent four years (1991-1995). As a share of GDP, non-defense outlays increased by 0.3 percent over these eight years. In the four years since the end of the 103rd Congress, however, non-defense outlays have increased by just 2.1 percent, and have actually fallen 0.4 percent as a share of GDP.
Thus, even with the remarkable slowdown in the growth rate of non-defense spending, the leveling off of defense spending has resulted in more moderated decreases in total discretionary outlays. This pattern is apparent in Table 1, which presents four-year changes in discretionary outlays. As the data show, between 1991 and 1995, fiscal restraint was achieved by dramatically reducing defense spending (-1.7 percent of GDP) while increasing non-defense spending (+0.2 percent of GDP). In contrast, over the last four years, savings have come from both defense and non-defense outlays (-0.7 percent of GDP and -0.4 percent of GDP, respectively).
Much attention has been paid to the increase in spending levels for fiscal year 1999. After adjustments for inflation, defense outlays rose $0.37 billion and non-defense outlays increased $11.4 billion between 1998 and 1999. However, as is true for most time series data, it is important to take into consideration not just single data points but trends over several periods. In the case of discretionary spending, it is worth noting that even with the combined increase of $11.8 billion in 1999, total discretionary outlays in 1999 were $16.5 billion (2.8 percent) below their 1995 level at the end of the 103rd Congress.
Of particular importance is the deviation from the long-term upward growth in non-defense outlays. Historically, non-defense spending has grown enormously, climbing 157 percent between 1962 and 1995 (in inflation-adjusted terms). Fiscal restraint enacted for 1996-1999 has made the last four years one of the slowest periods of growth in non-defense spending. For example, between 1990 and 1995, non-defense outlays grew at a real annual rate of 3.0 percent. In contrast, non-defense outlays grew at a real annual rate of just 0.5 percent between 1995 and 1999.
Although the difference between 3.0 percent growth and 0.5 percent growth may seem small, the resulting differences in outlays are not. As depicted in Figure 4, if the 104th and 105th Congresses had not imposed the spending restraint that they did, traditional spending policies would have resulted in an additional cumulative $107.4 billion in non-defense outlays during 1996-1999. In 1999 alone, this fiscal restraint amounted to nearly $31 billion, equal to roughly 28 percent of this year's budget surplus.
The evidence presented in this paper suggests that fiscal restraint has been achieved in the 1990s. Both in absolute terms and as a share of the economy, discretionary spending levels fell significantly between 1990 and 1999. Congresses at the beginning of the decade achieved this result by cutting defense spending and increasing non-defense spending. The past two Congresses held defense spending roughly level, while significantly reducing the growth rate of non-defense spending. Of particular importance is the remarkable fiscal restraint in the growth of non-defense spending in the last four years, which produced savings equal to nearly one-third of the current budget surplus.
Unfortunately, these hard fought savings are now put at risk by a congressional budget process which makes it easier to spend surpluses rather than return them to the taxpayers. Indeed, it is ironic that the very rules which helped enforce fiscal discipline now act to increase the size of government. The challenge now facing lawmakers is to prevent the dissipation of these budget savings through unwarranted increases in discretionary spending.
2 A few mandatory programs, however, are funded through the appropriations process. Joint Economic Committee, United States Congress, Trends in Congressional Appropriations: Fiscal Restraint in the 1990s, December 1998
Endnotes
1 Congressional Budget Office, An Analysis of the President's Budgetary Proposals for Fiscal Year 2000: A Preliminary Report (Washington, DC: Congressional Budget Office, 1999), 32.
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