Reduce Nondefense Discretionary Spending

Background

Nondefense discretionary spending is controlled by lawmakers through appropriation acts, which specify how much money can be obligated for certain government programs in specific years. Those acts fund a wide array of federal activities that provide direct benefits to individuals, give grants to state and local governments and private entities, pay for federal employees' salaries, and fund contracts for goods and services provided by the private sector. Nondefense discretionary spending also includes outlays for certain highway and airport infrastructure and public transit programs whose funding is considered mandatory. The outlays for those programs are considered discretionary because annual appropriation acts limit the obligations that can be made from the mandatory funding.

Most nondefense discretionary funding is provided one year at a time; that funding translates to outlays when the money is spent, which can occur over one or more years. In its 10-year baseline projections, the Congressional Budget office projects nondefense discretionary spending in accordance with section 257 of the Deficit Control Act. That section requires projections of funding for discretionary programs to grow each year with inflation. For any program without an appropriation provided for future years, CBO projects funding in those years by applying an inflation factor to the most recently appropriated amount.

In 2019, nondefense discretionary funding (including obligation limitations for certain transportation programs) totaled $718 billion and outlays totaled $661 billion. Federal programs to address the effects of the coronavirus pandemic increased that funding to $1,204 billion and $938 billion in 2020 and 2021. Outlays also increased in those years, to $914 billion and $895 billion, respectively.

A broad range of federal programs are funded through nondefense discretionary appropriations, including the following:

• Air, rail, road, and maritime transportation programs of the Department of Transportation ($104 billion in 2019, including obligation limitations of $60 billion);
• Programs for early childhood, elementary and secondary education, and some post-secondary programs, including job training, administered by the Department of Education and other agencies ($99 billion in 2019);
• Health and other benefit programs for veterans provided by the Department of Veterans Affairs ($87 billion in 2019);
• Scientific research and space programs administered by the National Science Foundation, the National Institutes of Health, and the National Aeronautics and Space Administration ($67 billion in 2019);
• Diplomatic and consular programs and international aid programs administered by the Department of State and the Agency for International Development ($56 billion in 2019);
• Law enforcement programs in the Department of Justice and the Department of Homeland Security ($55 billion in 2019);
• Housing assistance programs for low-income tenants provided by the Department of Housing and Urban Development ($51 billion in 2019); and
• Management of the nation's natural resources and the environment, including activities of the National Park Service and programs of the Environmental Protection Agency ($45 billion in 2019).

In most years, transportation and education programs account for the largest shares of nondefense discretionary outlays. In 2019, for example, outlays for programs in those areas accounted for 29 percent of the total. In 2020 and 2021, a larger-than-usual share of nondefense discretionary outlays was for health care programs other than those for veterans (20 percent and 16 percent, respectively, compared with 10 percent in 2019). The difference is largely attributable to increased outlays for programs related to the pandemic.

Much of the federal government's discretionary spending for transportation and education programs takes the form of grants to state and local governments. Those federal grants are intended to contribute to the funding for construction of highways and public transit facilities and to the funding of education for children from low-income households and children with disabilities. In most cases, state and local governments have broad latitude in deciding how to use those funds as long as they meet the program's requirements.

Federal grants are rarely the only source of funding for the projects and programs they support; state and local governments also contribute funds for those purposes. Typically, state and local governments must meet certain spending requirements to receive federal money. For many highway and transit programs, grants from the federal government pay for 80 percent of the cost of funded projects. To receive federal funds, state and local governments must cover the remaining 20 percent with their own resources, such as state tax revenues or bond issues. For education grant programs, the requirements are different. Instead of matching requirements, many education grant programs include maintenance of effort requirements. For many programs, to avoid reductions in federal grant amounts, a local education agency must spend at least 90 percent of what it spent the previous year from nonfederal sources.

Option

There are many possible paths to implementing reductions to nondefense discretionary spending. Policymakers could choose to make small reductions in many programs to achieve a targeted amount of savings. Alternatively, policymakers could opt to focus on fewer programs but reduce spending for those programs by a greater amount, perhaps eliminating some of them. Some changes would be straightforward, whereas others might have more complicated interactions with other federal programs.

Under this option, the reductions would be achieved by decreasing funding for two of the largest areas of nondefense discretionary spending: Specifically, funding for grants to state and local governments for certain transportation and education programs would be reduced by one-third of the amounts projected for those programs in CBO's baseline. Although reducing spending on grants would affect the budgets of state and local governments, those reductions would not have major interactions with other federal programs.

Effects on the Budget

Reducing spending authority (that is, budget authority and obligation limitations) for grants to state and local governments for certain transportation and education programs by one-third would result in funding reductions of $398 billion from 2024 to 2032. Those reductions would reduce the deficit by $332 billion over the same period. The reductions would amount to 2.1 percent of total discretionary outlays and 3.6 percent of nondefense discretionary outlays in 2032 in CBO's baseline; over the 2024–2032 period, they would equal 1.8 percent of total discretionary outlays and 3.3 percent of nondefense discretionary outlays in the baseline.

Obligation limitations for grants to state and local governments for highways and mass transit programs would be reduced by one-third, or $25 billion, in 2024; those reductions would increase to $29 billion in 2032. (Obligation limitations for those programs in CBO's baseline projections total $75 billion in 2024 and $88 billion in 2032.) Making such changes in each year over the 2024–2032 period would reduce outlays by $190 billion over that period.

Federal funding for elementary and secondary education would be similarly reduced by one-third; those reductions would amount to $16 billion in 2024 and would rise to $19 billion in 2032, resulting in a reduction in outlays of $141 billion over the 2024–2032 period. In CBO's baseline, funding for those programs increases from $48 billion to $56 billion over that period. Funding for the two largest discretionary grant programs for elementary and secondary education—Title I grants for the education of children from low-income households and special education grants for the education of children with disabilities—is projected to total $34 billion in 2024 and $40 billion in 2032 in CBO's baseline.

Funds for highway and transit grants may take up to five years from the year of obligation to materialize as outlays. That lag occurs because the federal government obligates all the funds necessary for covering its share of the cost of a highway project but reimburses states only after they incur eligible expenses. About one-quarter of the savings in outlays associated with a reduction in obligations in a given year are projected to occur in the same year, and less than half occur the following year. A small portion of obligation limitations is not used each year and therefore expires, and a small portion of obligations never results in outlays.

Federal grants to state and local governments for highways and transit are financed mostly through the Highway Trust Fund, which has separate accounts for each mode of transportation. Those accounts are funded through a variety of excise taxes on fuels and excise and use taxes on certain kinds of trucks and tires. In recent years, outlays from the trust fund have routinely exceeded revenues from those taxes. As a result, the Congress has transferred money from the general fund of the Treasury to the Highway Trust Fund. In CBO's current baseline, outlays continue to exceed revenues, and accumulated balances in both the highway and the transit accounts are exhausted in 2027. This option would delay the projected exhaustion of the transit account until 2029 and the highway account until after 2032. (CBO's projections of outlays from the Highway Trust Fund are unaffected by whether the fund is exhausted.)

Because school years typically span more than one fiscal year, appropriations for education grant programs generally include funding for both the current fiscal year and the following fiscal year. Under this option, outlays arising from grants to state and local governments for elementary and secondary education would decrease over multiple years after funding amounts were reduced.

Uncertainty About the Budgetary Effects

The main source of uncertainty in this option is the rate at which outlays would occur. If state and local governments adjusted their spending plans in response to smaller federal grants, the speed at which outlays occurred could change.

Uncertainty about future economic developments also affects uncertainty about the option's budgetary effects. For example, a recession could affect the speed with which outlays occurred. On the one hand, if state and local governments expanded highway construction projects to increase employment in a recession, outlays could occur more rapidly. On the other hand, if a recession reduced the resources available to state and local governments to spend as required under some grant programs, outlays could occur at a slower pace.

Distributional Effects

In CBO's distributional analysis, spending on highways and transit benefits all households, whereas spending on education benefits households with school-aged children. Within those groups, certain households are more likely to be directly affected by the reductions in grants to state and local governments for highways, transit, and education. Those reductions would also have broader effects on the economy over time.

Highway and transit grants are distributed to state and local governments on the basis of a variety of factors, including population, highway miles, tax payments to the Highway Trust Fund, and the amount of local transit infrastructure. The distributional effects of the reductions in highway grants would depend on how state and local governments adjusted their spending to account for the smaller amounts. Reductions in transit grants would be felt largely in urban areas because almost all public transportation trips are taken on urban transit systems serving areas with at least 50,000 residents.

Grants to state and local governments for education supplement state and local funding for the education of children from low-income households and children with disabilities. They are largely distributed according to formulas that include both the population of children and the population of children in low-income households in a community. Additionally, eligibility for early childhood education funded by federal grants is generally limited to young children from families with low income, so, in the near term, children in lower-income households would be more likely to be affected by this option. Over time, a reduction in spending on education would have broader effects on the economy.

Economic Effects

Reducing spending on highways, transit, and education would have effects on economic output that are not reflected in conventional budget estimates such as the ones shown above. Federal grants to state and local governments for highways, transit, and education are an investment in infrastructure and human capital. That investment contributes to future productivity and economic output as new capital is put in place and the labor force becomes more skilled. Reducing those grants to state and local governments would slow the pace at which new transportation capital was put in place and the labor force became more productive. The lower amount of investment under this option would contribute to slower economic growth in the long term.

Reductions in spending on education programs would, over the long term, slow the rate at which the skills of the U.S. workforce grew, resulting in smaller increases in average earnings and output over time. Because federal education grants to state and local governments primarily support the education of children who will not enter the labor force for many years, some of those effects would occur well into the future. In the short term, reductions in grants for early childhood education programs would increase the cost of child care, affecting parents' employment decisions. On average, parents' employment would decrease slightly and their consumption of goods and services other than child care would probably decrease as well. That reduction in parents' employment in the short term would slow their accumulation of work experience and so also would reduce their employment and wage growth in the long run.

Other Considerations

Some of the reduction in federal grants to state and local governments for highways, transit, and education could be offset by greater spending by state and local governments for those purposes. A study of federal highway grants suggests that state and local governments would increase per capita spending on highway capital projects from their own revenues by 26 cents for every one dollar reduction in federal highway grants. Although there are no similar estimates of the rate of substitution for other types of federal grants, some substitution would be likely as state and local governments continued to operate grant-funded programs with reduced federal funds. State and local governments might also change the way they spent their funds for those purposes as the reduced federal support would weaken state and local governments' incentives to align their spending priorities with those of the federal government.

Reducing grants to state and local governments for transportation and education is just one possible way to decrease funding for nondefense discretionary programs. Instead of focusing reductions on those programs, policymakers could focus cuts on other areas of the budget or reduce funding for a broader set of programs. Such alternative paths to reducing nondefense discretionary funding would have different distributional and economic effects than those presented here. In addition, reducing funding for some nondefense discretionary programs would increase outlays in other areas of the budget; for example, reducing discretionary funding for veterans' health care programs would cause increases in outlays for mandatory health care programs such as Medicare. As a result, alternative paths to reducing funding by about $400 billion would not necessarily have the same effect on the deficit as the path considered in this option.

Enacting these or any other reductions of a similar size to nondefense discretionary funding would require policymakers to make difficult choices. For example, this option focuses on reductions to transportation and education grants to state and local governments, but the Infrastructure Investment and Jobs Act (Public Law 117-58) enacted in November 2021 recently boosted funding for programs that would be affected by this option significantly. (Other nondefense discretionary programs also received funding under that law.) Cutting nondefense discretionary outlays might require policymakers to cut back some of those recent increases, just as they would have to examine other programs that have seen funding boosts in recent years.