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This Congressional Budget Office (CBO) paper analyzes methods of controlling mandatory spending through the budget process. It catalogs both the methods that are now in place and mechanisms that have been proposed in recent years. In the case of the proposed mechanisms, it also examines how well they might perform according to certain criteria. The paper was prepared in response to a request from the Subcommittee on Legislative and Budget Process of the House Committee on Rules.
Neal Masia of CBO's Special Studies Division wrote the paper under the
direction of Robert Hartman and Marvin Phaup. James Blum, Gail Del Balzo,
James Horney, Philip Joyce, Richard Kasten, Constance Rhind, and David
Torregrosa offered helpful suggestions. Jeffrey Holland provided the data
for Table 1. Leah Mazade edited the paper, and Christian Spoor proofread
it. L. Rae Roy prepared the report for publication.
June E. O'Neill
Director
February 1996
SUMMARY AND INTRODUCTION
MANDATORY SPENDING: HOW MUCH WILL IT GROW, AND WHY IS IT MANDATORY?
MECHANISMS NOW IN PLACE FOR CONTROLLING MANDATORY SPENDING
RECENTLY PROPOSED CONTROL MECHANISMS
ISSUES IN CONTROLLING MANDATORY SPENDING
CONCLUSIONS
| TABLES | |
| 1. | CBO Baseline Projections for Mandatory Spending |
| 2. | CBO Baseline Projections for the Percentage Increase in Growth Rates of Total Spending for Mandatory Programs |
SUMMARY AND INTRODUCTION
The Congress has often enacted laws that entitle people, states, or other entities fulfilling certain eligibility requirements to receive payments or benefits from the federal government. (An example of such legislation is the Social Security Act of 1935, which authorized the Social Security program and was later amended to authorize the Medicare program.) In addition, other laws that do not technically establish entitlements nevertheless obligate the federal government to make specified mandatory payments. Spending of that nature is often referred to as mandatory spending because the law requires that the funds be made available. (Entitlements are a subset of mandatory spending.) In some cases, such as Social Security, payments take place without an annual appropriation; in other cases, such as Medicaid, the Congress by law must pass an appropriation bill. Spending that is not mandatory, such as spending for defense or for the Commerce Department, is usually called discretionary. The law does not require that funds for such programs be made available annually; however, most discretionary spending is provided for in 13 regular annual appropriation bills.
Over the past two decades, mandatory spending has been growing rapidly, both as an absolute amount and as a percentage of total spending. Federal spending for mandatory programs now accounts for about 12 percent of gross domestic product and over 54 percent of federal budget outlays. In recent years, policymakers have struggled to control such expenditures, but most observers believe that those efforts have fallen short. Although the Congress made (or proposed) significant cuts in mandatory programs in 1995 (as it did in the Omnibus Budget Reconciliation Acts of 1990 and 1993), the likelihood of continued high rates of growth has left many Members feeling frustrated. Therefore, legislators have also been considering changes in the way mandatory spending bills are considered in the legislative and budget processes.
Observers frequently note that it is difficult to link changes in the budget process with particular policy outcomes--the failure of the Balanced Budget and Emergency Deficit Control Act of 1985 (also known as Gramm-Rudman-Hollings) supports that observation. The budget process is much better at enforcing compliance with explicit changes in policy, as it has done under the Budget Enforcement Act of 1990, than at producing changes through indirect means. The attempt now under way to enact policies that would result in a balanced budget in seven years is an example of the former case, in which changes in policy precede changes in process. In fact, if the Congress implements the policies that it is now considering, the short-term search for mechanisms to control mandatory spending might end because the programs driving the large increases in that spending--Medicare and Medicaid--would exhibit lower rates of growth.
Yet in the light of past failures, many Members are concerned about the credibility, over the long term, of plans to balance the budget. As a result, they seek alternatives to ensure that spending will not increase in the future. Supporters of changes in the budget process contend that those changes can at least point policymakers in the direction of reducing spending and can help to frame politically sensitive issues in a way that might allow those issues to be considered in that context. Furthermore, proponents point out that well-designed process changes can introduce credible penalties for failing to act, which might encourage substantive legislative changes.
The Congress has several methods of controlling mandatory spending. Clearly, the most direct way is simply to change each underlying law that specifies who is to receive benefits and in what amounts. It is, however, politically burdensome to vote to cut previously enacted levels of spending. (In the extreme case, some mandatory programs--such as Social Security--cannot even be discussed without provoking controversy.) Tools now in place for controlling spending recognize that difficulty: for example, large deficit reduction packages (also known as reconciliation bills) combine cuts hi spending with other measures, requiring legislators to vote the entire package up or down; and the pay-as-you-go process raises the prospect of an across-the-board sequestration (that is, a cancellation of budgetary resources) if new spending is not offset by tax increases or spending reductions.
The current Congress has tried to control spending directly by converting some mandatory programs into block grants to the states or by embedding fail-safe provisions in spending legislation. (Fail-safe provisions specify actions that shall occur in the event of unexpected increases in spending.) Because, however, the Congress has not controlled mandatory spending using the tools that are now available, reformers have proposed new methods of control with certain goals in mind. Among them are to ensure the desired result (for example, lower spending); to apply the cuts flexibly, when needed; to maintain accountability as a characteristic of the mechanism; and to keep the approach relatively simple. All proposals may be evaluated on their ability to meet those goals; in addition, other aspects must be considered (such as the mechanisms' potential effects on the social safety net).
Proposals under consideration hi recent years include ending the mandatory status of all such programs, creating explicit caps on mandatory spending that are analogous to the caps on discretionary spending that are already in place, introducing targets for overall deficit reduction but with optional enforcement, and controlling spending by program area using automatic reductions when necessary. Most of the plans achieve some of the reformers' goals but not all of them. Some plans seem likely to control spending at the cost of reduced flexibility, whereas others are so flexible that nothing is assured. Some approaches look good in theory but would be so complicated that they could probably never be implemented; others are quite simple but would take away part of the social safety net. Some systems would ensure cuts in spending by threatening to sequester funds from all programs regardless of whether spending in only some of those programs was too high, whereas others plan to penalize only the programs with funding shortfalls--which increases accountability in theory but raises doubts about execution. This paper catalogs the methods for controlling mandatory spending that are now in place and discusses recent proposals for new ones. It also analyzes how those mechanisms might be assessed.
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