The Fiscal Responsibility Act, signed into law earlier this month, imposes two years of statutory caps on discretionary appropriations. These caps, which would reduce appropriations by 0.8 percent in 2024 before hiking them by 1 percent in 2025, were dismissed by critics after the White House and congressional leaders immediately promised to evade them when passing the spending bills. The White House claims a bipartisan handshake agreement exists to add as much as $40 billion in extraneous spending, and Republicans agreed to insert a slush-fund account to evade the caps. In short, the new spending caps do not truly cap spending.
That does not mean that discretionary spending caps should be broadly abandoned. In fact, when well-designed and implemented by committed lawmakers, such caps have proven to be a vital component of fiscal responsibility. My new report for the Manhattan Institute analyzes the history of discretionary spending caps and their optimal design moving forward.
Discretionary spending is not the leading driver of long-term budget deficits. After exceeding 10 percent of GDP until the mid-1980s, discretionary appropriations have generally fluctuated between 6 percent and 9 percent of GDP outside of temporary emergencies. By contrast, mandatory spending—excluding net interest costs on federal debt—has leaped from 5 percent to 15 percent of GDP since 1962. And it is projected to keep rising indefinitely, driven entirely by escalating Social Security, Medicare, and Medicaid costs. Increasingly crowded out by mandatory spending growth, discretionary spending has fallen from 67 percent of federal outlays in 1962 to 27 percent today.
But that does not mean that lawmakers should set no limits on discretionary spending. The 23 percent rise in such spending over the past two years added nearly $3 trillion to projected ten-year deficits. While discretionary spending cannot realistically be cut deeply enough to accommodate surging mandatory costs, Congress should still approach this spending with a “do no harm” principle, ensuring that it does not increase as a share of the economy and further deepen surging baseline budget deficits.
Recent experience has shown that discretionary caps can constrain spending. The past 44 years have split evenly between 22 years with caps and 22 years without them. Average annual appropriations went up 2.7 percent during capped years, versus 6.4 percent during uncapped years. Total discretionary appropriations averaged 6.7 percent of GDP in capped years and 8.8 percent in uncapped years.
The capped years were split across two eras: 1991 through 2002 and 2012 through 2021.
In 1990, President George H. W. Bush and congressional leaders negotiated the Budget Enforcement Act, which, among other provisions, capped annual appropriations through 1995. These caps were subsequently extended with bipartisan votes through 1998 and then through 2002. Consequently, discretionary appropriations expanded by just 1 percent annually for the first eight years, before the balanced budgets beginning in 1998 induced Congress and the White House to bust the caps. Still, total discretionary spending fell from 8.4 percent to 6.8 percent of GDP during this 12-year period, driven mostly by defense savings following the collapse of the Soviet empire.
But then the 2002 expiration of caps brought a spending spree, with 5.9 percent average annual appropriations growth through 2011. This pushed total discretionary appropriations up to 8.5 percent of GDP by 2010—exceeding the 1990 level that motivated the earlier round of spending restraints.
In response to surging spending and deficits, President Barack Obama and Congress in August 2011 enacted the bipartisan Budget Control Act (BCA). Cap levels were initially intended to reduce discretionary spending by $841 billion over the decade, relative to a baseline spending growth at the rate of inflation. However, the failure of Congress to enact additional savings as required in the BCA automatically lowered the discretionary caps to require instead $1.656 trillion in total ten-year savings.
The BCA mandated an unrealistic level of immediate cuts that were quickly pared back, and the cap levels were hiked every subsequent year. The caps also exempted nearly $1 trillion in costs for operations in Iraq and Afghanistan and were eventually bypassed almost completely. However, they still produced $855 billion in ten-year discretionary savings relative to the inflation-growth baseline, while an additional $285 billion in discretionary savings were replaced with mandatory spending savings. Total discretionary appropriations expanded by an average of 1.8 percent, reducing their share of the economy back down to 6.3 percent.
And then, as soon as the caps expired, Congress expanded discretionary appropriations by 23 percent in just two years, before imposing the latest round of two-year caps.
The clear lesson to draw from this story is that discretionary spending caps do restrain spending. At the same time, spending caps must be realistic to be effective. Once their constraints become politically untenable, they can easily be adjusted, or even cancelled. Caps can steel Congress’s will for spending restraint, but they cannot force huge spending cuts where no congressional will exists. Caps should get set at levels that are modestly uncomfortable but not drastically ambitious.
Paradoxically, discretionary spending caps that are too tight have resulted in excessive spending hikes. When Congress and the president decide that cap limits simply cannot be met and must be adjusted, they often decide to get their money’s worth by going all-in on a spending bonanza. When the 1990s caps finally proved too tight for a balanced budget, Congress raised the caps by 18 percent in 2001, 24 percent in 2002, and then an additional 16 percent the next year, when the caps were allowed to expire. Similarly, when Congress gave up on the BCA in 2018, it raised the caps 13 percent over their original level, and when the caps officially expired in 2022, non-emergency appropriations immediately jumped by another 13 percent. Overall, a small handful of years accounted for the vast majority of the permanent expansions of discretionary spending over the past four decades.
Had Congress enacted more realistic spending caps, it would have been less likely to disregard them entirely and pass double-digit expansions. After all, each annual expansion becomes part of the permanent spending baseline, often costing trillions of dollars over the long term. Spending caps typically only slow the growth rate of spending. The only proven method to cut spending is to avoid aggressively expanding it in the first place—and that means avoiding those years when tight caps are discarded and replaced with hikes often exceeding 10 percent.
Since the fall of the Soviet Union, which significantly reduced defense spending, discretionary appropriations have, as noted, tended to fluctuate between 6 percent and 9 percent of GDP, with a relatively even split between defense and nondefense appropriations. The current level of appropriations is 6.6 percent of GDP. Given that mandatory spending as a share of the economy will continue to rise substantially, it is reasonable to keep discretionary appropriations limited to their current share, or even get them closer to 6 percent over the long term.
The encouraging news is that such a target does not require a politically unrealistic overhaul of government operations. Discretionary spending as a share of GDP will decline indefinitely as long as it grows slower than nominal GDP, which the Congressional Budget Office forecasts to grow annually by 4.1 percent over the next decade and 3.8 percent over the next three decades. Thus, even caps allowing 3.5 percent annual growth—if Congress abides by them—would gradually reduce discretionary appropriations to 6.2 percent of GDP by 2050. More ambitious caps allowing 2.5 percent annual growth would push discretionary appropriations down to 4.8 percent by 2050.
History suggests that discretionary appropriations may not be sustained below 6 percent of GDP. Defense appropriations have not fallen below 3 percent of GDP in the post-World War II era, and the few nondefense dips below that threshold were quickly reversed. Nondefense appropriations will continue to face substantial upward pressure from veterans’ health costs, which have expanded 10 percent annually since 2018 and make up the largest portion of the nondefense category. Nor are future lawmakers likely to slash funding dramatically for popular spending such as K–12 education, health research, highways, disaster aid, national parks, environmental remediation, or housing.
A more realistic long-term path would entail Congress limiting appropriations to the inflation rate plus population growth—estimated at about 3 percent annually over the long term—perhaps by balancing larger expansions for veterans’ health with more oversight and reform of remaining programs. Even that outcome would reduce discretionary appropriations to 6 percent of GDP in a decade and to 5.4 percent by 2050.
As long as discretionary spending is capped such that it grows no faster than the economy, the specific cap level is less important than ensuring that Congress holds to it. Even occasional short-term appropriations spikes in the wake of major emergencies can be accommodated, as long as they prove temporary and spending caps continue to push the long-term appropriations path in a responsible direction.
Sustainable spending caps contain other ingredients. Their levels should be revisited every few years to maintain their credibility with current lawmakers. In order to bend but not break, cap levels should be modestly adjustable for dramatic inflation, recessions, and scoring re-estimates. On the flip side, caps should cover all discretionary spending (including an emergency fund), avoid gimmicks, and require a legislative supermajority to bypass for larger emergencies. Finally, sub-caps for defense and non-defense spending have proven effective in avoiding partisan raids and maintaining credibility with Republicans and Democrats.
Discretionary spending is not the main cause of deficits, yet it can significantly deepen the fiscal hole if not restrained. Past discretionary spending caps have successfully limited appropriations and, if designed correctly, can reduce discretionary spending as a share of the economy without starving popular programs. The latest caps for 2024 and 2025 will bring an opportunity in two years to design stronger and more sustainable limits. Congress and the White House should seize that opportunity.
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