WikiLeaks Document Release http://wikileaks.org/wiki/CRS-RS21756 February 2, 2009 Congressional Research Service Report RS21756 The Option of Freezing Non-defense Discretionary Spending to Reduce the Budget Deficit Gregg Esenwein and Philip D. Winters, Government and Finance Division March 23, 2005 Abstract. Congressional concern over the size of the federal budget deficit has prompted calls for a reduction in federal expenditures. One proposal would freeze non-defense discretionary funding at its FY2005 level. Since non-defense discretionary outlays constitute slightly under 20% of overall federal outlays, limiting their growth would produce a modest reduction in the federal budget deficit. Congressional Budget Office (CBO) estimates indicate that freezing non-defense discretionary funding at its FY2005 level would produce a cumulative savings of approximately $147 billion including reduced interest payments over the FY2006 to FY2010 time period. These savings would reduce the cumulative baseline budget deficit by approximately 12% over the period. Order Code RS21756 March 23, 2005 CRS Report for Congress Received through the CRS Web The Option of Freezing Non-defense Discretionary Spending to Reduce the Budget Deficit Gregg Esenwein Specialist in Public Finance Government and Finance Division http://wikileaks.org/wiki/CRS-RS21756 Philip D. Winters Analyst in Government Finance Government and Finance Division Summary Congressional concern over the size of the federal budget deficit has prompted calls for a reduction in federal expenditures. One proposal would freeze non-defense discretionary funding at its FY2005 level. Since non-defense discretionary outlays constitute slightly under 20% of overall federal outlays, limiting their growth would produce a modest reduction in the federal budget deficit. Congressional Budget Office (CBO) estimates indicate that freezing non-defense discretionary funding at its FY2005 level would produce a cumulative savings of approximately $147 billion including reduced interest payments over the FY2006 to FY2010 time period. These savings would reduce the cumulative baseline budget deficit by approximately 12% over the period. This report will not be updated. The Congressional Budget Office's (CBO's) FY2006 budget report shows a large estimated baseline deficit, $295 billion in FY2006, followed by declining deficits in subsequent years. Legislative language directs how CBO is to produce its baseline estimates, such that they "estimate the future paths of federal revenues and spending under current laws and policies."1 Hence these baseline projections of budget deficits do not include future policy changes, no matter how likely they are to be adopted by Congress. Examples of such policy changes might include continued funding for the 1 CBO, Budget and Economic Outlook: Fiscal Years 2006-2015, p. xiii. Congressional Research Service ~ The Library of Congress CRS-2 ongoing war on terrorism (including activities in Afghanistan and Iraq); extending certain expiring tax provisions; and adjusting the alternative minimum tax Discretionary Spending (AMT) for individuals. The Congressional Budget Office defines federal discretionary spending as When the cost of such policy changes budget authority that is provided and is included in the estimates, the budget controlled by appropriation acts and the outlays that result from the budget deficit grows rather than shrinks after authority. Hence, the discretionary FY2006.2 The prospect of large budget spending level can be changed through deficits extending far into the future has the appropriations process. prompted calls for a reduction in federal expenditures. One proposal for limiting Mandatory spending is budget future spending growth would freeze non- authority provided and controlled by defense discretionary funding at the FY2005 laws other than appropriation acts and level. Even if non-defense discretionary the outlays that result from the budget spending is held constant, other spending, authority. Hence, mandatory spending receipts, and the economy continue growing. can be altered only through changes in http://wikileaks.org/wiki/CRS-RS21756 substantive law. Nondefense discretionary spending would decline as a share of total expenditures, as a Non-defense discretionary spending percentage of GDP, in constant (inflation includes, among other things, funding adjusted) dollars, and per capita. Within a for the FBI, the National Park Service, few years of the freeze, non-defense the National Institutes of Health, NASA, discretionary spending would fall to most federal education programs, a broad unprecedentedly low post-World-War-II array of agricultural programs, the levels by all these measures. Centers for Disease Control and Prevention, EPA, transportation, most As can be seen in Table 1, non-defense homeland security, and most other discretionary outlays accounted for 19.3% of total outlays in FY2004. Although non- defense discretionary outlays have increased over the last decade, from 17.7% to 19.3% of total outlays, they still represent less than $1 out of every $5 the federal government spends. In contrast, mandatory spending and net interest payments currently account for almost 61% of total outlays. Their percentage of total budget outlays is expected to increase over the next few years as Social Security and Medicare expenditures rise in response to demographic changes and medical cost pressures and as net interest payments rise as a result of a growing federal debt. 2 See CRS Report RS22045, Baseline Budget Projections Under Alternative Assumptions, by Gregg Esenwein and Marc Labonte. CRS-3 Table 1. Components of Federal Outlays FY1994-FY2004 (as percentage of total outlays) Fiscal Mandatory Net Discretionary Year Spending Interest Defense Non-defense 1994 49.1% 13.9% 19.3% 17.7% 1995 48.7 15.3 18.0 17.9 1996 50.4 15.4 17.0 17.1 1997 50.6 15.2 17.0 17.2 1998 52.0 14.6 16.4 17.1 1999 52.9 13.5 16.2 17.4 2000 53.2 12.5 16.5 17.9 2001 54.1 11.1 16.4 18.4 2002 55.0 8.5 17.4 19.2 2003 54.7 7.1 18.7 19.5 2004 53.9 7.0 19.8 19.3 Source: OMB, Budget of the United States Government for Fiscal Year 2006, Historical Tables, Feb. 2005, Table 8.3. CBO provides estimates of the annual budgetary effects of a selection of alternative http://wikileaks.org/wiki/CRS-RS21756 policy scenarios.3 One of these scenarios is that discretionary non-defense funding is frozen at FY2005 levels. The dollar difference between the baseline paths for nondefense discretionary spending and the one assuming a funding freeze produces an estimate of the savings resulting from freezing discretionary spending. Table 2 contains this measurement (calculated from CBO data) from freezing non-defense discretionary outlays at their FY2005 levels. The savings from freezing non-defense discretionary outlays begin relatively small, $7 billion in FY2006, and grow to $51 billion in FY2010. The cumulative savings over the FY2006 to FY2010 period are approximately $141 billion (excluding interest payment savings). Table 2. Freeze Calculations, FY2005-FY2010 (in billions of dollars; outlays) Non-defense Total Savings Discretionary Non-defense from Freezing Non-defense Funding Frozen at Discretionary Non-defense Discretionary FY2005 Levels Savings Net Interest Discretionary FY (A) (B) (A-B) Savings Outlays 2005 $466 $466 $0 $0 $0 2006 476 469 7 0 7 2007 485 468 17 1 18 2008 493 466 27 2 29 2009 502 463 39 4 43 2010 511 460 51 6 57 Cumulative Totals, FY2006-FY2010 141 13 154 Source: CBO, Budget and Economic Outlook: Fiscal Years 2006-2015, Jan. 2005. CRS calculations. 3 See pp. 7-9 in the CBO report The Budget and Economic Outlook: Fiscal Years 2006-2015, Jan. 2005. CRS-4 However, because freezing non-defense discretionary spending reduces the size of the expected deficit, which in turn slows increases in federal debt held by the public, net interest payments will be smaller than they otherwise would be during this period. The estimated savings in net interest payments from freezing non-defense discretionary spending grow from $1 billion in FY2007 to $6 billion in FY2010. The cumulative net interest savings are $13 billion.4 Hence, the estimated total deficit reduction from freezing non-defense discretionary outlays would be $154 billion over the period. The CBO baseline budget deficit projection for the FY2005 through FY2010 period is shown in Table 3. As mentioned earlier, it seems very likely that an alternative deficit estimate that includes likely future action, such as additional expenditures for the Iraq and Afghanistan campaigns and the extension of at least some if not all of the expiring tax provisions, would make the deficit estimates larger. Table 3. CBO Baseline Deficit Projections (in billions of dollars) http://wikileaks.org/wiki/CRS-RS21756 Fiscal Cumulative 2005 2006 2007 2008 2009 2010 Year Total Deficit -$365 -$298 -$268 -$246 -$219 -$201 -$1,232 Source: CBO, An Analysis of the President's Budgetary Proposals for Fiscal Year 2006, March 2005. The cumulative baseline budget deficit estimate over the FY2005 to FY2010 period is $1.2 trillion. The savings in both outlays and debt service payments from freezing non- defense discretionary outlays at their FY2005 levels is $147 billion over the same period. This would produce a cumulative reduction in the baseline budget deficit of just over 12%. 4 This report assumes that approximately half of the debt-service adjustment associated with CBO's projection of freezing all discretionary funding at FY2004 levels would accrue if the freeze in funding was limited solely to non-defense discretionary funding.