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The following is an analysis of the Spending Outlook section of the January 2001 CBO Budget and Economic Outlook. The text in *RED are comments included by the website host.

The Budget and Economic Outlook: Fiscal Years 2002-2011
January 2001
Section 6 of 15

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Chapter Four

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The Spending Outlook

The Congressional Budget Office projects that federal spending will total $1.9 trillion in 2001--a 3.6 percent increase from 2000 * (Actual 2001 spending was $1.863 trillion) Assuming that current policies remain unchanged * (What are the current policies? See below), CBO expects spending to rise to $2.6 trillion in 2011 (see Table 4-1). The rate of growth in spending will average 3.8 percent from 2001 through 2011 under baseline assumptions * (“Under baseline assumptions” includes compliance with deficit reduction laws.).

Table 4-1. CBO's Baseline Budget Projections of Outlays (By fiscal year)
			Actual 2000	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010	2011
In Billions of Dollars
Discretionary Spending			617	646	682	710	730	750	766	782	804	824	845	866
Mandatory Spending			1,030	1,089	1,157	1,219	1,296	1,378	1,441	1,520	1,614	1,713	1,820	1,934
Offsetting Receipts			-81	-87	-95	-108	-111	-107	-113	-119	-125	-131	-139	-147
Net Interest			223	205	179	163	142	116	90	72	65	58	53	51
Proceeds Earned on the Balance of Uncommitted Funds^a			n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	-1	-12	-38	-68	-104	-146
	Total		1,789	1,853	1,923	1,984	2,056	2,137	2,184	2,243	2,320	2,396	2,475	2,558
		On-budget	1,458	1,506	1,561	1,611	1,669	1,738	1,773	1,820	1,884	1,943	2,005	2,070
		Off-budget	331	348	361	373	388	399	411	423	437	453	470	489
As a Percentage of GDP
Discretionary Spending			6.3	6.3	6.3	6.2	6.0	5.9	5.8	5.6	5.5	5.4	5.2	5.1
Mandatory Spending			10.5	10.5	10.6	10.6	10.7	10.9	10.8	10.9	11.0	11.2	11.3	11.4
Offsetting Receipts			-0.8	-0.8	-0.9	-0.9	-0.9	-0.8	-0.8	-0.9	-0.9	-0.9	-0.9	-0.9
Net Interest			2.3	2.0	1.6	1.4	1.2	0.9	0.7	0.5	0.4	0.4	0.3	0.3
Proceeds Earned on the Balance of Uncommitted Funds^a			n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	*	-0.1	-0.3	-0.4	-0.6	-0.9
	Total		18.2	18.0	17.7	17.3	17.1	16.9	16.4	16.1	15.9	15.6	15.4	15.1
		On-budget	14.8	14.6	14.4	14.0	13.8	13.7	13.4	13.1	12.9	12.7	12.4	12.2
		Off-budget	3.4	3.4	3.3	3.3	3.2	3.2	3.1	3.0	3.0	3.0	2.9	2.9
Memorandum:
Gross Domestic Product (Billions of dollars)			9,828	10,319	10,880	11,477	12,059	12,656	13,279	13,932	14,619	15,338	16,109	16,922
SOURCE: Congressional Budget Office.
NOTE: n.a. = not applicable; * = between -0.05 percent and zero.
a. "Uncommitted funds" is CBO's term for the surpluses remaining in each year after paying down publicly held debt available for redemption.

* See schedule of actuals

Federal spending averaged about 19 percent of the country's gross domestic product in the 1960s, rising to about 22 percent in the 1980s. Under CBO's baseline, projected real growth in the economy outstrips the growth in federal spending, which falls from 18 percent of GDP in 2001 to approximately 15 percent of GDP by 2011.

* see schedule of actual percentages

Federal spending can be divided into categories based on its treatment in the budget process:

Discretionary spending--which pays for such things as defense, transportation, national parks, and foreign aid--accounts for about one-third of the budget. Discretionary programs are controlled by annual appropriation acts; policymakers decide each year how many dollars to devote to continuing current activities and funding new ones. CBO's baseline depicts the path of discretionary spending in accordance with the Deficit Control Act, which states that current spending should be assumed to grow with inflation in the future.^{(1) * (CBO projects spending to comply with the Deficit Control Act. Therefore, CBO apparently makes no assumptions for any event that might require an Emergency Spending bill.)}

Entitlements and other mandatory spending--which constitute more than half of the federal budget--consist overwhelmingly of benefit programs such as Social Security, Medicare, and Medicaid. The Congress generally controls spending for those programs by setting rules for eligibility, benefit formulas, and other parameters rather than by voting for dollar amounts each year. CBO's baseline projections of mandatory spending assume that existing laws and policies remain unchanged and that most expiring programs will be extended.

Offsetting receipts--fees and other charges that are recorded as negative budget authority and outlays--are collected without annual appropriation action. (Fees and other charges that are triggered by appropriation action are classified as offsetting collections, which are credited to discretionary spending.) Offsetting receipts differ from revenues in that revenues are collected as an exercise of the government's sovereign powers, whereas offsetting receipts are generally collected from other government accounts or paid by the public for businesslike transactions (such as rents and royalties from leases for oil and gas drilling on the Outer Continental Shelf).

Net interest--which includes interest paid on Treasury securities, other interest that the government pays (for example, on late refunds issued by the Internal Revenue Service), and interest that the government collects from various sources (such as from commercial banks for deposits in tax and loan accounts)--is driven by the size of the government's debt, annual budget surpluses, and market interest rates.

Proceeds earned on the balance of uncommitted funds--another category that offsets outlays--is the return that CBO assumes will be earned on surplus funds that are not used to redeem debt held by the public. CBO's baseline assumes that the surpluses projected for the 2002-2011 period will initially be used to pay down debt. But because some debt will not yet have matured or will be unavailable for repurchase, the projected surpluses may exceed the amount of debt that can be paid off in a particular year.⁽²⁾ CBO's projections thus assume that those uncommitted funds will be invested at a rate of return equal to the average rate projected for Treasury bills and notes. However, CBO makes no explicit assumptions about how much of the funds the Treasury would invest through its current arrangements with banks and the Federal Reserve or through any other investments that might be chosen (for example, debt or equity instruments, in the public or private sector, or in the United States or abroad).

The mix of federal spending has changed significantly over time. Today, the government spends more--as a proportion of GDP--on entitlement programs and less on discretionary activities than it did in the past. Spending on entitlements and other mandatory programs (net of offsetting receipts) increased from 4.9 percent of GDP in 1962 to 9.7 percent in 2000. Over the same period, discretionary spending fell from 12.7 percent to 6.3 percent of GDP (see Figure 4-1). (For detailed annual data on each of the broad categories of spending since 1962, see Appendix F.)

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Figure 4-1.
Major Components of Spending as a Percentage of GDP, Fiscal Years 1962-2000

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SOURCE: Congressional Budget Office based on data from the Office of Management and Budget.

Under CBO's baseline projections, mandatory spending (net of offsetting receipts) will climb to 10.5 percent of GDP by 2011 as discretionary spending falls to 5.1 percent of GDP. CBO estimates that mandatory spending (net of offsetting receipts) will continue to grow faster than the economy--at a rate of 6.0 percent a year--led by the spending for the two major health care programs, Medicare and Medicaid, which are projected to grow at an average annual rate of 7.2 percent and 8.6 percent, respectively (see Table 4-2).

Table 4-2. Average Annual Rate of Growth in Outlays (By fiscal year, in percent)
		1991-1996	1996-2000	Projected 2000-2001	Projected^a 2001-2011
Discretionary		*	3.7	4.8	3.0
	Defense	-3.6	2.6	2.2	2.8
	Nondefense	4.7	4.6	7.2	3.1
Mandatory^b		5.6	4.9	5.6	6.0
	Social Security	5.4	4.0	5.8	5.3
	Medicare	10.9	3.2	10.5	7.2
	Medicaid	11.9	6.3	10.6	8.6
	Other	-0.1	7.3	-1.4	4.1
Net Interest^c		4.4	-1.9	-8.2	-13.0
Total Outlays^c		3.3	3.5	3.6	3.8
Total Outlays Excluding Net Interest		3.2	4.4	5.3	4.9
Memorandum:
Consumer Price Index		2.8	2.4	2.9	2.6
Nominal GDP		5.4	6.3	5.0	5.1
SOURCE: Congressional Budget Office.
NOTE: * = between zero and 0.05 percent.
a. Using the inflators specified in the Deficit Control Act (gross domestic product deflator and employment cost index) for discretionary spending after 2001.
b. Includes offsetting receipts.
c. Includes proceeds earned on the balance of uncommitted funds.

Although total discretionary outlays were virtually unchanged from 1991 through 1996, defense spending declined 3.6 percent, while nondefense spending rose 4.7 percent. * (Defense spending was cut from 1991 to 1996 and nondefense spending increased.) From 1996 through 2000, total discretionary outlays increased 3.7 percent, although defense spending grew more slowly than nondefense spending. From 2000 to 2001, CBO estimates, discretionary budget authority will increase by 8.5 percent, while discretionary outlays will grow by 4.8 percent. Under CBO's baseline projections, total discretionary outlays will rise at an average annual rate of 3.0 percent from 2001 to 2011.

Discretionary Spending

Each year, the Congress starts the appropriation process anew. The annual appropriation acts it passes provide new budget authority (the authority to enter into financial obligations) for discretionary programs and activities. That authority translates into outlays when the money is actually spent. Although some funds are spent quickly, others are disbursed over several years. In any given year, discretionary outlays include spending from both new budget authority and from amounts appropriated previously.

Trends in Discretionary Spending

As a percentage of GDP, discretionary spending has dropped from 9.0 percent in 1991 to 6.3 percent in 2000. In nominal (or dollar) terms, total discretionary outlays were only $1 billion higher in 1996 than in 1991. After 1996, discretionary spending began to rise; outlays were $83 billion higher in 2000 than in 1996.

Focusing only on total discretionary spending, however, masks significantly different and sometimes offsetting trends in defense and nondefense outlays. Defense outlays fell from $320 billion in 1991 to $266 billion in 1996, while nondefense spending jumped from $214 billion in 1991 to $269 billion in 1996 (see Table 4-3).⁽³⁾ Since 1996, both defense and nondefense outlays have grown, although the rise in nondefense spending has continued to outstrip that for defense. From 1996 through 2000, nondefense outlays grew at an average annual rate of 4.6 percent, compared with a 2.6 percent average annual rise in defense spending (see Table 4-2). Despite the apparently rapid surge in spending for nondefense programs (relative to defense programs), economic growth has exceeded the growth in nondefense outlays, which at the end of 2000 were below their 1991 level as a percentage of GDP.

* Defense spending cuts occurred while nondefense spending program spending increased from 1991 to 1996. After 1996 nondefense grew faster than defense spending.

Table 4-3. Defense and Nondefense Discretionary Outlays, Fiscal Years 1991-2001
	Defense Outlays		Nondefense Outlays		Total Discretionary Outlays (In billions of dollars)
	In Billions of Dollars	As a Percentage of Total Discretionary Outlays	In Billions of Dollars	As a Percentage of Total Discretionary Outlays
1991	320	60	214	40	533
1992	303	57	232	43	535
1993	292	54	249	46	541
1994	282	52	262	48	544
1995	274	50