Contents
What’s it: Government discretionary spending is an item in government spending where the allocation is at the government’s discretion and is implemented through an appropriation bill. The government decides what to spend in the next fiscal year and must get congressional or legislative approval. For example, expenditures on national defense, education, transportation, and foreign aid are discretionary spending.
In the United States, discretionary spending is one of three categories of expenditure in the fiscal budget. The other two are mandatory spending and interest. Mandatory spending will continue to exist from year to year unless policymakers change the laws governing the program.
Meanwhile, net interest is influenced by government debt. Interest spending will be higher when the budget deficit increases yearly, forcing the government to increase debt. In addition, inflation and, therefore, interest rates also affect interest spending by the government.
Government discretionary spending vs. mandatory spending
Broadly speaking, two types of government spending are:
- Discretionary spending
- Mandatory spending
Government discretionary spending
Discretionary spending is at the government’s discretion, which is then submitted to the legislature or congress for approval. So, the government intends to allocate it based on relevant needs and considerations.
For example, the government allocated a budget for non-physical education infrastructure even though there was none or the nominal amount was small in the previous year. Last year, the government allocated more physical infrastructure for education. The allocation is complementary to building an advanced education program with adequate facilities. Thus, discretionary spending depends on the government’s needs and priorities.
Examples of government discretionary spending
Some items in government spending are categorized as discretionary expenditures. However, what items fall into this category will vary between countries.
In the United States, discretionary spending reached $1.6 trillion in 2020. It consists of $714 billion of the national defense budget and $914 billion of the non-defense budget. The defense budget includes expenditures for:
- Operation and maintenance: Keeping existing military equipment and facilities running smoothly.
- Military personnel: Salaries, benefits, and training for active-duty troops.
- Procurement: Buying new weapons, vehicles, and other military hardware.
- Research, development, testing, and evaluation (RDT&E): Funding for developing new military technologies and capabilities.
Meanwhile, the non-defense budget includes expenditures for:
- Health: Funding for programs like disease control, medical research, and some healthcare services (not including mandatory programs like Medicare).
- Transportation: Investments in infrastructure like roads, bridges, and public transportation systems.
- Education, training, and social services: Funding for schools, job training programs, and social safety net programs (excluding mandatory ones).
- Veterans’ benefits and services: Supporting veterans with healthcare, education, and other benefits.
- Community and regional development: Investments in local infrastructure, economic development projects, and housing initiatives.
- Foreign aid: Financial assistance to other countries for various purposes.
- Housing loan program: Supporting homeownership through government-backed loans.
Mandatory spending
Mandatory spending is determined by pre-determined laws or regulations. In the United States, it can only be changed through changes to the laws or regulations governing it.
Government discretionary spending can change at any time, depending on government priorities. If there is a change in discretionary spending, the government submits it to the legislature or Congress for approval.
In contrast, mandatory spending rarely changes. And if it changes, it requires the legislature or congress to change the relevant rules or laws. For this reason, changes in mandatory spending can take more time than discretionary spending.
Examples of mandatory government spending
If government discretionary spending is optional in the fiscal budget, then mandatory spending is not. Instead, its funding is mandatory, like spending on social programs.
In the United States, administrative spending on social security is generally a discretionary expense. However, benefit checks sent to beneficiaries of social security programs are mandatory spending.
In 2020, US mandatory spending reached $4.6 trillion, of which about $1.9 trillion was allocated to Social Security and Medicare. Social Security provides monthly payments to retired workers and their dependents, while Medicare provides health insurance coverage for seniors and people with disabilities.
Examples of another mandatory spending in the United States in the year are:
- COVID-19 unemployment compensation: Temporary financial assistance for those who lost jobs due to the pandemic (not a permanent program).
- Supplemental Security Income (SSI): Provides monthly payments for low-income individuals with disabilities and elderly individuals.
- Supplemental Nutrition Assistance Program (SNAP): Provides assistance with purchasing food for low-income households.
- Paycheck Protection Program (PPP): Forgivable loans to help businesses retain employees during the Covid-19 pandemic (emergency program).
- Coronavirus relief fund: This is a broad fund for various COVID-19 relief efforts, which may include unemployment benefits, healthcare support, etc. (It is a temporary program).
- Student loan programs: Government-backed loans for higher education (ongoing program).
Funding sources for government discretionary spending
Government discretionary spending requires a steady stream of income. Here’s the breakdown:
- Taxes: This is the primary source of revenue for discretionary spending. Governments collect various taxes, including income taxes (levied on individual and corporate earnings), sales taxes (applied to the purchase of goods and services), and property taxes (based on the value of real estate).
- User fees: In some cases, specific government services may be funded by user fees. For example, tolls collected on highways or fees associated with permits for businesses contribute to discretionary spending.
- Asset sales: Occasionally, governments may sell off state-owned assets to generate one-time revenue for discretionary spending. This could involve privatizing a public utility or selling off excess government land.
The balance between these funding sources can influence economic policy. For instance, relying heavily on tax increases might dampen economic activity, while user fees can potentially discourage the use of certain services. Understanding these funding mechanisms sheds light on how government spending decisions are made.
Economic impact of government discretionary spending
Government discretionary spending isn’t just about allocating funds; it can significantly impact the nation’s economic well-being. Here’s how:
- Job creation: When the government invests in discretionary spending, it often translates into job opportunities. Construction projects for infrastructure like roads and bridges create jobs in those sectors and related industries like steel production. Similarly, funding for education can create jobs for teachers, researchers, and support staff.
- Innovation and productivity boost: Government discretionary spending plays a crucial role in fostering innovation and productivity. Investments in research and development (R&D) can lead to groundbreaking discoveries and technological advancements. Additionally, funding for education equips the workforce with the skills and knowledge needed to be productive and competitive in the global marketplace.
- Stronger infrastructure, smoother trade: Investments in infrastructure are crucial for economic activity. Well-maintained roads, bridges, airports, and ports facilitate the movement of goods and people, reducing transportation costs and boosting trade. This efficient flow of resources strengthens the overall economy.
