How To Understand Difference Between Mandatory VS Discretionary Spending?
Government budgeting is a complex process that can be difficult for the average person to understand. Simply put, there are two main types of government spending: mandatory vs discretionary spending.
Mandatory spending is determined by pre-determined laws or regulations. It cannot be changed without an act of Congress. Discretionary spending, on the other hand, is set by Congress and can be changed at any time.
In this article, we will go over the key differences between mandatory vs discretionary spending, their inherent advantages and disadvantages, and give examples of each to better understand them. Each type of spending is important, but due to its nature there can be some major differences in how you acquire and spend the money. Doing that wisely can be very helpful, and it can help convey an excellent result in the long term. That’s why reading below to understand the meaning of mandatory and discretionary spending can be extremely important.
What is Mandatory Spending?
Mandatory spending–simply put–is government spending that is required by law. This could include programs such as Social Security, Medicare, and Medicaid. Taxes funded these programs, which are not subject to the annual budget process.
These programs are called "mandatory" because they are required by law, and Congress cannot change the requirements without passing or legislating a new law to amend it. This type of spending makes up most government spending and includes essential projects, government services, and interest in the national debt. It’s important to understand that these mandatory expenses are at the backbone of our society. We need them in order to fund special institutions and ideas that benefit the entire country or region. These investments come with a lot of regulations and you can’t easily change their purpose.
Instead, they are backed by legislation, and obviously you will need to ensure that you follow all the guidelines and information. Doing that is certainly efficient and it helps boost the power of our society, while encouraging growth in the long term.
The advantage of mandatory government spending is that it provides a safety net for the people who need it most. Having a safety net in place helps ensure people do not fall into poverty or go without essential services such as medicine, insurance programs, and social security. Of course, the safety net still has its own requirements and guidelines. But it can be very efficient for people with spending issues or those that don’t have enough money. It’s a very good system to have in place because it can’t be adjusted unless there are severe regulatory changes. Having such a system is incredibly helpful and it’s simple stuff like that you need to think about as much as possible.
These insurance programs require a better understanding of a person’s various forms of income, as seen in their form 1099. You can even create your 1099s to process these documents easily.
The disadvantage of mandatory government spending is that it can contribute to the country’s debt burden. When the government spends more money than it takes in, it must borrow money to make up the difference. This increases the country’s debt burden, which can have negative consequences for the economy.
These problems have become more prevalent in the countries where poverty has taken its toll and the country has to borrow money. That’s incredibly helpful, but it does show the efficiency of these programs. Yes, even if the country has to borrow money, the residents get to have the assistance and help they need. Although getting the country in more debt also has its downsides.
Too much debt can burden the country and it can lead to many financial issues down the line. Then again, helping those in dire need of assistance is extremely helpful and it can certainly provide a great benefit down the line.
Another disadvantage of mandatory vs discretionary spending is that it can lead to inefficiencies and waste. For example, when programs like Social Security and Medicare are not subject to annual budget reviews, it's difficult to make changes that would improve their efficiency. A lack of efficiency is always going to bring in downsides. The way you address that is by having a great and powerful solution in place to circumvent the problems and pushing the boundaries of your investments.
Changing the destination of those investments and implementing them in a highly reliable manner can be extremely helpful here. With that in mind, at the end it’s all about having a way to spread funds evenly. Having too many funds for one thing and not integrating funds for other things is definitely a problem. That’s why you want to implement that accordingly and sometimes there is a lack of efficiency when it comes to handling these funds.
What is Discretionary Spending?
Discretionary spending is government spending that is approved by Congress as part of the annual budget process. This could include things such as defense spending, education, subsidies for small and local businesses, and infrastructure. Discretionary spending is funded by government borrowing or tax revenue.
Discretionary government spending is spending that is not mandated by law and that Congress can choose to fund or not fund each year. It includes things like defense, infrastructure, education, and scientific research. Many times, such spending is warranted by a multitude of things, including the necessity of certain categories, what can bring growth and value to the society, along with a multitude of other requirements. It can vary a lot depending on how much discretionary budget is available. And this is where you can encounter a few challenges.
Discretionary spending used to be a much more significant portion of the federal budget, but it has been shrinking in recent years. In the fiscal year 2020, discretionary spending is projected to make up just 30% of the total federal budget, and this is expected to continue to shrink over the next few years. Why does it shrink though?
The reason is always related to how many legal aspects are in play here. Mandatory expenses have become more prevalent and they take priority. Don’t dismiss the importance of mandatory spending, these expenses are just as important and in many cases they can make a huge difference. But it always comes down to how important the expenses are and what is a priority. Plus, legal requirements and laws will obviously make some things a lot more important when compared to others, and that is certainly a thing to keep in mind.
There are two types of discretionary spending: defense and non-defense. Defense spending is funding for the Department of Defense and other related agencies, which makes up a bulk of the entire budget. Non-defense discretionary spending is everything else, such as education, transportation, and environmental protection.
There are pros and cons to discretionary government spending. On the one hand, it allows Congress to fund important programs that may not be mandated by law. On the other hand, it can lead to wasteful spending and pork-barrel politics. Ultimately, it is up to Congress to decide how much money to allocate to discretionary spending each year.
Examples of Mandatory Spending
The most notable example of a mandatory government spending program is Social Security. Social Security is a social insurance program that provides benefits to retired workers, their spouses, and their children. Benefits are based on a worker’s earnings history, which can easily be seen in W-2 forms that can easily be generated online.
Other examples of mandatory spending include Medicare and Medicaid, which are health insurance programs that require more immediate and necessary funding.
Examples of Discretionary Spending
There are a number of important programs that are funded by discretionary government spending. One of the most important is defense. The Department of Defense is the largest single discretionary spender, and it accounts for more than half of all discretionary spending from the federal government.
Other important programs that are funded by discretionary government spending include infrastructure, education, and scientific research. Infrastructure spending includes things like roads, bridges, and airports. Education funding goes to funding public schools, student loans, and teacher salaries. And scientific research funding goes to organizations like NASA.
You can easily see that discretionary spending is also great for the overall functionality and growth of our society. Implementing these changes rightfully and knowing how to address issues can be just as crucial in a situation like this. Yet at the same time, you do want to focus on crucial, mandatory and extremely important expenses that can sometimes arise. Addressing those will always matter immensely, and that’s where most of the focus goes. But as you can see, discretionary spending certainly helps the society and it eliminates many challenges and downsides.
Final Thoughts
In conclusion, mandatory spending is spending that has been predetermined by existing laws and must be done each year, while discretionary spending is what Congress decides each year how much to spend on different programs.
Both mandatory and discretionary spending are important and play a role in the overall health of the economy. However, it is essential to understand the difference between the two in order to better understand how the government operates. Once you know that, it becomes much easier to figure out why some categories and projects receive more funds. There will always be a discrepancy mandatory vs discretionary spending, and that’s by design. It can still feel challenging, but at the end of the day you always see differences in spending based on what the society needs right now. And, for the time being at least in the US, discretionary expenses are on a downward trajectory due to more and more mandatory expenses taking priority.