Budget Basics: Spending

The budget is more than just a tally of numbers. It also expresses the policy priorities of our government. Each year, the President and Congress have the opportunity to set priorities for the federal government, determining how much to spend through appropriations for annually funded programs as well as reviewing entitlement programs and the tax code.

In 2022, after the temporary increase in federal spending due to the pandemic has wound down, federal spending is projected to total $5.5 trillion — about one-quarter of the economy and $16,000 for each person living in the United States. That spending can be divided into three categories: mandatory, discretionary, and interest.

Mandatory Spending

Programs governed by provisions of permanent law are referred to as “mandatory.” Put another way, spending on a mandatory program is essentially on “autopilot” unless policymakers change the laws governing the program.

Many programs that provide benefits to individuals are classified as mandatory spending, such as Social Security, Medicare, and Medicaid. Those programs are also often referred to as "entitlements" because individuals who meet the programs’ eligibility requirements are "entitled" to benefits.

Mandatory spending covers programs in six major areas:

• Major Health Programs refers to four programs: Medicare (for seniors and disabled people); Medicaid (for low-income people); health insurance subsidies and related programs (for low- and moderate-income people); and the Children’s Health Insurance Program (for low-income children and parents).
• Social Security provides payments to retired and disabled workers, as well as to their spouses, dependent children, and survivors.
• Income Security Programs make payments to individuals based on their income through programs such as the following: earned income, child, and other tax credits (refundable tax credits for the working poor); the Supplemental Nutrition Assistance Program (formerly known as food stamps); Supplemental Security Income (payments to disabled children and adults with limited incomes); unemployment compensation (time-limited payments for people who become unemployed); family support and foster care; and child nutrition.
• Federal Retirement Programs for federal civilian and military retirees.
• Veterans’ Programs that provide pensions, income support, and other benefits for those who previously served in the military.
• Other Programs consist of a diverse group of activities, including those that provide agricultural subsidies, student loan subsidies, healthcare benefits for retirees of the uniformed services, and deposit insurance.

Lawmakers do not provide specific funding levels for mandatory spending. Instead, they specify who is eligible for benefits as well as the type and level of benefits that each person can receive. For example, the unemployment insurance program has eligibility criteria that, once met, entitle an individual to receive a certain level of benefits. Total spending on the program depends on the number of people who file for unemployment, not on a fixed amount of funding set by lawmakers.

The term "mandatory" doesn’t mean that lawmakers are powerless to alter this spending. Elected officials can at any time adjust the eligibility criteria and benefit formulas that determine spending on mandatory programs, as they did with Social Security in 1983. However, if Congress and the president take no action, the current formulas and criteria for benefits remain in place year after year, and the spending flows as specified by the law without interruption.

Over time, spending for mandatory programs has increased more quickly than most other programs — primarily because of growth in Social Security, Medicare, and Medicaid. In 1970, only 31 percent of the federal budget was spent on mandatory programs, while the rest funded an array of discretionary programs and net interest. CBO estimates that in 2022, after the significant effects of the pandemic have wound down, 65 percent of federal spending will go to mandatory programs.

Discretionary Spending

Discretionary spending is determined on an annual basis by Congress and the President through enactment of appropriations. As opposed to the "automatic" nature of mandatory spending, discretionary spending must be revisited each year.

There are 12 separate appropriation bills that are supposed to be annually shepherded through the Congress by the appropriations committees. Defense spending represents more than half of all discretionary spending. Other major activities funded through appropriations include homeland security, education, transportation, research, food safety, science and space programs, disaster assistance, environmental protection, public housing, and federal law enforcement.

Historically, most federal spending was discretionary. In the 1960s, two-thirds of total federal spending went to fund discretionary programs. In 2022, discretionary spending is projected to be about 30 percent of the budget. Over the next decade, it will decrease to a historically low level relative to the size of our national economy.

Net Interest

The third major category of spending is interest on the national debt. Interest rates on our debt are currently low but are projected to increase. In fact, interest costs are the fastest-growing “program” in the federal budget — exceeding the growth of both Social Security and Medicare. Under current law, CBO projects that net interest costs will grow from 6 percent of the budget in 2022 to 12 percent in 2031, and to 27 percent in 2051. As a share of economy, that equates to 1.3 percent of gross domestic product in 2022, 2.7 percent in 2031, and 8.6 percent in 2051.