Estimates by the Congressional Budget Office place total funding for operations of the Iraq and Afghanistan War on Terrorism at $651 billion as of December 2007. This amount includes $87 billion of the $188 billion requested by the President for 2008. If Congress approves the remaining $101 billion for 2008, this will bring the seven-year total for the war to $752 billion. As can be seen from the chart, while these numbers have contributed to the deficits for the past seven years (just like all other forms of spending have contributed to the deficits), they were clearly not the difference between a deficit and surplus situation for the time period.

For more detail, see
  [1] Analysis of the Growth in Funding for Operations in Iraq, Afghanistan, and Elsewhere in the War on Terrorism.
  [2] Historical Tables, Budget of the United States Government, Fiscal Year 2009

This chart illustrates how the $162 billion dollar deficit was created during the fiscal year that ended September 30, 2007. Simply put, spending exceeded taxes by $162 billion for the year. The federal government borrowed the additional $162 billion from the public during 2007, which brought the balance of the national debt held by the public to slightly over $5 trillion by the end of the year.

All of the broad spending categories of the 2007 federal budget have previously been mentioned or discussed in one or more of the budget charts. This chart assembles the major components to illustrate the actual spending for the fiscal year that ended September 30, 2007 during which the U.S. Government spent $2.73 trillion.

This chart illustrates the broad categories of spending for the Non-Defense portion of the Discretionary Spending category. [Discretionary Spending consists of two major components: Defense ($549 billion for 2007) and Non-Defense ($493 billion for 2007)]. Said another way, these are the amounts that the federal government spends on items other than entitlement programs, interest on the national debt and defense. Many of these categories are discussed separately in the Challenges section of this web site.

In this chart the blue line, Total Discretionary Spending, is the sum of the red line, Defense Spending plus the green line, Non-Defense Spending. For example, in 2007 Defense Spending was 3.9% of GDP while Non-Defense Spending was 3.6%. Therefore, Total Discretionary Spending was 7.5% of GDP as shown in the chart.

Non-Defense Spending has remained remarkably stable at an average of 3.9% of GDP—fluctuating in a very narrow band between 3.3% and 5.2% during the previous 46 years. As a result of the relatively flat line for Non-Defense spending, it easy to see that Defense Spending has been the victim of the “crowding out” effect of the increase in Mandatory Spending.

Over the past 40 years defense spending as a percentage of GDP has trended downward, although there have been peaks and valleys along the way. From a high of 9.5% of GDP in 1968 to the current level of 3.9%, defense spending has always been a hot topic of debate both inside and outside Washington. The so-called “Peace Dividend” beginning in the early 1990s at the end of the Cold War is clearly evident on this chart as is the increased military spending after the terrorist attacks of September 11, 2001.

Discretionary Spending is typically analyzed in terms of Defense Spending and Non-Defense Spending. The general pattern of the past 40 years finds that as Mandatory Spending has taken a larger proportion of the budget—and therefore, reduced the size of Discretionary Spending—the Defense Spending segment of the budget has absorbed much of the increased Mandatory Spending. This pattern will become clearer in the next two charts: Discretionary Spending: Defense vs. Non-Defense and Defense Spending as Percentage of Gross Domestic Product

The percentage of the federal budget devoted to mandatory spending has increased markedly over the past 40 years. Mandatory spending has doubled during the period, while discretionary spending has almost been cut in half. The increase in mandatory spending is due primarily to the growth of the three major entitlement programs. These programs are growing for several reasons:

1. New programs have been added to provide benefits to individuals deemed to be in need of assistance who were previously not covered by other programs.
2. Existing programs have been expanded to provide more benefits deemed to be necessary to fulfill the primary mission of the programs.
3. The retirement of the Baby Boomers (those born from 1946 through 1964) are beginning to swell the ranks of the entitlement programs.
4. Medical and prescription drug costs have outpaced the growth of the economy.
5. Improved medical procedures and healthier lifestyles have increased life expectancies to all-time highs, thereby extending the coverage period of many beneficiaries.

Note: The percentage of the budget devoted to interest on the national debt was abnormally high in 1985 (14%) due to higher interest rates that were prevalent during the 1980s.

Mandatory Spending encompasses a broad range of social programs implemented by the U.S. government primarily over the past 70 years. The projected growth of three of these programs—Social Security, Medicare and Medicaid—has had and will continue to have a profound effect upon the composition of the federal budget. The consequences of this growth will be explored in greater detail in upcoming charts.

The preceding charts have explored the budget in terms of total dollars spent without regard to the components of that spending. The next few charts focus on how the money gets spent, using the budget for the fiscal year of the federal government that ended September 30, 2007. Congress and the Administration divide spending into three categories:

Mandatory Spending
Interest on the National Debt
Discretionary Spending

Mandatory Spending includes items that, by law, must be paid to individuals who meet certain requirements. Those individuals in the top categories (Social Security, Medicare and Medicaid) are said to be entitled to receive the payments, and these payments have become known as entitlements. Other items included in the mandatory category include retirement programs for military and federal civilian employees, veteran’s benefits, and welfare-related programs.

Interest on the National Debt is the net interest paid out after subtracting interest paid to the “trust funds” mentioned in Chart 6. The interest expense amount shown here is essentially interest paid by the government on debt held by the public (See chart The Growing National Debt Held By Public).

Discretionary Spending includes all other items on which the federal government spends money. The use of the word discretionary seems unusual at first glance because there are certain functions of the federal government that are absolutely necessary for maintaining national security and commerce. The word simply implies that the president and congress have the discretion to increase or decrease spending during the budgetary process each year for any item included in this category.