Mandatory Vs Discretionary Spending - The Full Guide

Federal spending is divided into two main categories, mandatory and discretionary spending. But what do these types of spending mean, and where does the money go? 

We take a look at the differences between them and examine other types of government spending and how the country’s budget works. 

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Mandatory Spending Explained

Mandatory spending is also known as direct spending and is authorized by existing laws. It provides funding for Social Security, Medicare, which are known as entitlement programs. It also provides payments to local and state governments, people and businesses. 

Mandatory or direct spending also includes the required level of spending of interest on the federal debt. This spending accounts for approximately two thirds or 66% of all federal spending. 

For the most part mandatory spending is ongoing and occurs every year unless there is a change in the law that authorizes the funding. 

As an example of mandatory spending, the government is required to provide funding to beneficiaries of Social Security as authorized by the Social Security Act. This Act determines the level of spending into the future until such time as it is amended. 

The term 'mandatory' is applied to this type of direct spending as the funding for these entitlement programs must be allocated every year as a result of the authorization laws. In many areas of the budget process, tax legislation is considered mandatory spending. 

Understanding Discretionary Spending

Discretionary spending is an optional part of fiscal policy, unlike the mandatory spending which funds the entitlement programs. 

The President submits recommendations for the following year’s budget. Congress reviews and in some cases revises the budget during the appropriations process. It will then vote on the budget and the President signs it into law. 

The discretionary spending goes to government agencies such as the Federal Bureau of Investigations, national defense funding via the Department of Defense and other federal programs. Over half of the discretionary budget is allocated to national defense. 

The funding from discretionary spending is determined by the number of eligible recipients. Examples of areas that are funded by this area of fiscal policy include foreign aid, transportation and education. 

These accounts are funded from discretionary spending annually and disbursements are made unless there is a change made to the existing authorization law. A third of government activities are funded through discretionary spending. 

Discretionary spending has been decreasing for the last several years as the level of mandatory spending increases. 

The projection for discretionary spending into 2022 is that it will equal or be less than the spending for each of the two biggest categories of mandatory programs. 

Discretionary spending unlike mandatory spending is subject to formal approval by Congress and the President as part of the appropriations process. 

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The Appropriations Process

The appropriations process is an annual event but applies only to discretionary spending. Congress sets a level of funding every year for all programs covered by the appropriations bill. 

The process starts with the President creating a budget proposal and sending it to Congress. The Senate and the House then draft budget resolutions. Congress has the right to change funding levels, eliminate programs, add taxes and other sources of revenue if needed. 

Once the budget resolutions are finalized, any differences are reconciled by Congress who then vote on the budget. Discretionary spending levels are separated out to twelve appropriations subcommittees. 

These subcommittees then draft bills to provide funding to the bureaus, departments, and agencies under their jurisdictions. When the Senate and House agree to a final level of funding for each bill, they are sent to the President who can either approve or veto them. 

If action on an appropriations bill is not complete by the beginning of the fiscal year, October 1st, a Continuing Resolution will need to be approved and signed by the President. This provides stopgap funding for these programs. 

If for whatever reason Congress does not approve or the President does not sign a Continuing Resolution the programs or agencies that will not then receive their annual appropriations will have to shut down their operations. 

These shutdowns have happened on a few occasions in the past twenty years. 

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Are There Other Types Of Government Spending? 

There is another type of spending that is called supplemental spending or supplemental appropriations. 

These are enacted after the normal annual appropriations and happen when there is a situation in which funding is urgently needed and cannot wait for the next regular appropriations. 

Emergencies which involve the safety of human life, protection of property and the immediate welfare of individuals are all examples of when supplemental spending is authorized. 

Congress must vote on legislation for supplemental appropriations and the President then enacts the law by signing it. The agencies which receive the funding then spend the money to address the emergency or urgent need. 

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How Does The Budget Work?

The twelve appropriations subcommittees are in charge of the funding for government agencies responsible for water, energy, the environment and as well as many others. 

If Congress approves and the President signs off on all twelve bills by September 30th then the country will have a budget for the beginning of the new fiscal year which begins on October 1st. 

With a lack of agreement on all twelve separate bills Congress can pass an Omnibus bill for funding to multiple areas. In the event that the budget is not in place by the start of the new fiscal year, Congress has to pass a Continuing Resolution.

This provides funding at the previous year’s level. The alternative is a government shutdown which can see many functions of government put on hold including issuing passports, NASA operations halted and national parks and monuments closed. 

When the budget process is completed the government returns to normal operations. 

Final Thoughts

We hope that this guide to mandatory versus discretionary spending has been informative and has helped clarify some of the questions you may have about government spending. They are both an important part of the American government’s fiscal policy. 

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