Transcript: CBO director Doug Elmendorf’s testimony on discretionary spending before the Super Committee

Joint Committee on Deficit Reduction Hearing on Discretionary Spending, Security & Non-Security on Oct. 26, 2011

Transcript of Testimony by Doug Elmendorf, Director of the Congressional Budget Office: 

Doug Elmendorf, Director of the Congressional Budget Office. PHOTO SOURCE: deficitreduction.gov

“Thank you, Sen. Murray, Congressman Hensarling. I and the others folks at CBO are happy to be trying to help this committee in its very challenging task. To all the members of the committee, my comments today will focus on four questions that are addressed in the written testimony. First, what does discretionary spending comprise? Second, what has been the historical trend in discretionary spending? Third, how will discretionary spending evolve over the next decade under current law? Fourth, how might the path of discretionary spending be altered?

“Before digging into that substance though, let me briefly clarify some of the terms I’ll use. When I talk about discretionary funding, I’m adding together the budget authority that is appropriated for those programs and the so-called “obligation limitations” that govern spending for certain transportation programs. Those two types of fundings provide agencies with the authority to spend money. When the funds are actually dispersed, they become outlays.

“Also, through the testimony I will focus on defense and non-defense discretionary spending rather than security and non-security spending. Defense spending is a traditional category that includes all of the spending on military activities of the Department of Defense plus spending for the Department of Energy, atomic energy defense activities, and some defense-related activities of other agencies. Non-defense spending is everything else in the discretionary category.

“The Budget Control Act sets caps on discretionary spending for 2012 and 2013 using different categories, security and non-security, where security includes most but not all of defense and also includes appropriations for the Department of Homeland Security, the Department of Veterans Affairs, and international affairs budget category. However, in 2014 and beyond, the Budget Control Act specifies a single cap on discretionary funding.

“There is an entirely different set of caps in the law that would come into play if legislation from this committee does not generate sufficient deficit reduction. In that case, the further cuts in spending that would be required are based on the traditional defense and non-defense categories. Although to make the situation truly confusing, the act labels those security and non-security as well. We thought it would be most useful for this testimony to focus on the familiar defense and non-defense categories.

“Let me now turn to the first substantive question, which is what discretionary spending comprises. In fiscal year 2011, total funding for discretionary programs was about $1.3 trillion of which more than half went to defense and less than half went to non-defense programs.

“If you turn now to the second page of the handouts in front you, you’ll see a big doughnut that is labeled defense discretionary funding for 2011. Of total defense funding for 2011, 43% – the biggest piece on the right of the donut – went to operation and maintenance, which pays for the day-to-day activities of the military, the training of military units, the majority of costs for the military’s health care program, and compensation for most of DOD’s civilian employees. Another 22% of defense funding went to compensation of military personnel, including pay and housing and food allowances. Procurement, representing 18%, funds the purchase and upgrade of weapons systems. Appropriations for the wars in Afghanistan and Iraq and related activities accounted for about a quarter of total defense funding. They were distributed across the categories shown here and are included in the amounts reported.

“If you turn to the next page of the handout, it shows a comparable picture for non-defense discretionary funding for 2011. Seven broad categories accounted for about 80% of the total. Education, training, employment, and social services programs together claimed 16%. Transportation programs received 15% of the total, with about half of that going to highway programs. Income security programs, mostly for housing and nutrition assistance, represented 11%. That amount does not include employment compensation, food stamps, or temporary aid to needy families because they are all part of mandatory spending. Discretionary appropriations for veterans benefits, primarily for the Veterans Health Administration, were 10% of total non-defense discretionary funding last year. Health was another 10%, with about half of that amount devoted to the National Institutes of Health. International affairs and the administration of justice were each about 9%, and a collection of smaller categories makes up for the remaining 20%.

“Looking at non-defense discretionary spending as a whole, about one-third is dispersed in grants to state and local governments. Of those grants, about a third are devoted to education and training programs and a quarter to transportation programs with the remainder going to environmental protection, law enforcement, economic development, and various other purposes.

“Let me now turn to the second question in the testimony, which is the historical trend in discretionary spending. This is depicted in the next page in the handout. Discretionary spending declined noticeably as a share of GDP from the early 1970s to 2000, mostly because defense spending declined relative to GDP from about 8% in 1970 to a low of 3% between 1999 and 2001. Defense spending then climbed again. Outlays for non-defense discretionary programs have averaged about 4% of GDP during the past 40 years, with considerable variation as you can see but with no evident trend. Thus, on average, such outlays increased during that period roughly in line with the size and the income of the population. Non-discretionary outlays were elevated in the past few years in part, as has been noted, because of funding for the 2009 Recovery Act. All together, discretionary spending amounted to about 9% of GDP in the past two years, higher than the 6% in 2000 but lower than the 11% to 12% of the early 1970s.

“The third question addressed in the testimony is how discretionary spending will evolve over the next decade under current law. To illustrate the potential impact of the caps on discretionary appropriations set in the Budget Control Act and the automatic enforcement procedures contained in that act, we projected appropriations under several different assumptions, including the three listed on the next page of the handout.

“I apologize for those who don’t have the handout. I think that members of the committee should have it in front of them. For other people, I am referring to figures and tables that are in the written testimony, and there are a couple slides that are words that are also in the written testimony. Nothing I’m saying is new or is not in that testimony.

“The largest numbers that we looked at – about $12 trillion over the next decade – would come from extrapolating funding for 2011 adjusted for inflation. That’s the way CBO constructed its baseline projections in recent years before the caps in the Budget Control Act.

“The next set of numbers I’ll talk about assumes that funding is equal to the new caps set in law, about $11.3 trillion over the decade. For illustrative purposes, I’ll focus in a moment on the scenario under which the caps are met through proportional reductions in defense and non-defense spending but many other accommodations are possible. The written testimony offers a range of possibilities.

“The third and smallest numbers I’ll talk about totaling $10.4 trillion incorporate the sequestration and reduction in caps that we estimate would occur if no savings resulted from the work of this committee.

“The next page of the handout is table 3 from the written testimony and deals with defense spending. I’ll focus on just the two rows of numbers near the bottom highlighted in blue. I want to emphasize that the caps on defense spending do not constrain appropriations for the war in Afghanistan or for similar activities, and the automatic enforcement procedures would not affect funding for such purposes either. So what you’re seeing here are the numbers for the base defense budget. The upper of those two blue rows shows the reduction in defense spending moving from the path where the amount of funding in 2011 is grown with the rate of inflation to a path of proportional reductions in defense and non-defense spending funding to meet the caps. Between 2012 and 2021, such reductions would total $445 billion – the number shown at the far right end of the blue bar – or about 7%. The lower of the two blue rows shows the larger reductions in defense funding and moving from the path where the amount of funding jumped off 2011 and grew at the rate of inflation to the path that would occur if this committee’s work resulted in no savings. Between 2012 and 2021, the cumulative reductions on this path would total $882 billion or 14%. In 2021 alone, defense funding – excluding war funding – would be $110 billion or 16% lower than it would be if such appropriation kept pace with inflation.

“If you skip the next page of the handout which is a continuation of the table, the figure beyond that shows defense spending as a share of GDP. The light blue line on the left-hand side shows the history of funding for the base defense budget. The middle line on the right with the short dots shows our projection assuming proportional cuts in defense and non-defense spending to meet the caps. The lowest line shows our projection if the maximum automatic reductions are triggered. Under those two assumptions, in 2021 funding for defense excluding war funding would represent 2.7% or 2.5% of the GDP compared to an average of 3.4% during the past decade.

“The next page of the handout is table 4 from the written testimony and deals with non-defense spending. Again, I’ll focus on just the two rows of numbers highlighted in blue. The upper of the two blue rows shows the reduction in non-defense funding, again, in moving from where 2011 funding grew at the rate of inflation down to the path that would result if the caps were met through proportional reductions on the defense and non-defense sides. Between 2012 and 2021, such reductions would total $418 billion or 7%. The lower of the two blue rows again shows the larger reductions in this time non-defense funding, moving from this inflation-adjusted path to the path if no savings resulted from the work of this committee. Between 2012 and 2021, the cumulative reductions would total $794 billion. In 2021 alone, non-defense budget authority would be $99 billion or 15% lower than it would be if such appropriations kept pace with inflation.

“The next page of the handout shows non-defense funding as a share of GDP, again figure 6 from the written testimony. The line on the left side shows the history of such funding. You can see that non-defense discretionary fundings spiked upward in 2009 but fell back sharply in the past couple of years to roughly its average share of GDP during the preceding decade. The upper line on the right shows our projection assuming proportional cuts in defense and non-defense funding to meet the caps. The lower line shows our projection if the maximum automatic cuts are triggered. Under those two assumptions, in 2021 non-defense funding will represent 2.8% or 2.6% of GDP compared to an average of 4.1% during the past decade.

“The fourth and last question addressed in the testimony is how the path of discretionary spending might be altered. Let me make two quick points, which are summarized on the last page of the handout.

“First, for some programs reductions may be particularly challenging because funding increases that are greater than the rate of inflation would be necessary to maintain current policies or plans. For example, implementing the administration’s multi-year defense plans would require nearly $500 billion more defense funding over the coming decade than would occur if current funding increased at the rate of inflation. Other examples where an inflation-adjusted extrapolation of current funding would be insufficient to fund current policies include veteran’s health care and Pell grants for higher education. Moreover, some observers believe that policies in some areas are insufficient to meet the nation’s future needs. For example, many analysts believe that current national spending on infrastructure is inadequate to provide enough roads, bridges, and other capital assets to maintain the current level of services or to fund all the projects for which benefits exceed costs. Of course, the spending on certain programs that grow faster than inflation allow even less room under the cap available for other discretionary activities.

“Secondly, CBO assumes in its baseline projections that funding subject to the caps will be equal to the amounts currently specified in law for those caps. That means that legislations that reduce the funds available for a particular discretionary activity or that achieves savings by undertaking a particular activity would only reduce projected total appropriations if the legislation also lowers the caps. Without a reduction of the caps caps, funding for other discretionary activities would probably fill the gap created by any specific reduction or savings.”

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