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 federal spending: mandatory spending programs and discretionary programs.

Mandatory spending, also known as direct spending, is determined by pre-determined laws or tax legislation and cannot be changed without an act of Congress, unlike discretionary appropriations which are more flexible. Discretionary spending, on the other hand, is set by Congress and can be changed at any time through the annual appropriations process, involving both the House and Senate Appropriations Committees.

In this article, we will go over the key differences between mandatory vs discretionary spending, their inherent advantages and disadvantages, and provide examples of how tax expenditures fund discretionary programs.

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 federal 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 federal spending and includes essential projects, government services, and interest on 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 most mandatory programs is that they provide a safety net for the people who need it most, regardless of the budget deficit or federal debt. 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, similar to how federal programs assess eligibility for benefits. You can even create your 1099s to process these documents easily. 

The disadvantage of mandatory government spending is that it can contribute to the federal debt and budget deficit, especially when interest payments on borrowed funds increase. When the federal 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 entitlement programs like Social Security and Medicare are not subject to the annual appropriations process, 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 programs are not mandated by law and Congress can choose to fund or not fund them each year through appropriations bills. 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 process, but it has been shrinking in recent years. In the fiscal year 2020, discretionary spending by federal agency 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, particularly for low-income college students who rely on federal aid.

But it always comes down to how important the expenses are and what is a priority. Plus, legal requirements and spending 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 how the federal government spends money on discretionary programs, which are determined by budget authority granted through enacted appropriations. 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 through the appropriations bill process, sometimes requiring supplemental appropriations for unforeseen needs.

Examples of Mandatory Spending

The most notable example of a mandatory 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, often supported by tax breaks to ensure affordability.

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, which receive their budget authority through the appropriations committee.

Infrastructure spending includes things like roads, bridges, and airports, which are often funded by state and local governments in conjunction with federal agencies. 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, ensuring that federal civilian agencies have the resources they need.

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.

What are the Main Differences Between Mandatory and Discretionary Spending?

The key difference between mandatory and discretionary spending is that mandatory spending is governed by existing laws, while discretionary spending is determined through the annual appropriations process by Congress.

Here are some of the differences in detail:

Basis of Allocation:

  • Mandatory Spending: Determined by existing laws and regulations; cannot be altered without legislative action.

  • Discretionary Spending: Decided annually by Congress during the budget process; subject to change based on current priorities and available funds.

Examples of Programs:

  • Mandatory Spending: Social Security, Medicare, Medicaid, interest on the national debt.

  • Discretionary Spending: Defense, education, infrastructure, scientific research.

Flexibility:

  • Mandatory Spending: Fixed and less flexible; requires significant legislative effort to adjust.

  • Discretionary Spending: More flexible; can be adjusted more easily through annual budget negotiations.

Impact on Federal Budget:

  • Mandatory Spending: Makes up a larger portion of the federal budget and is consistently funded.

  • Discretionary Spending: Comprises a smaller and decreasing portion of the federal budget.

Economic Implications:

  • Mandatory Spending: Provides stability and a safety net for essential services, but can contribute to long-term national debt.

  • Discretionary Spending: Allows for targeted funding of programs that support growth and innovation, but can be subject to political fluctuations and inefficiencies.

Final Thoughts

In conclusion, mandatory spending is spending that has been predetermined by existing laws and must be done each year under current law, while discretionary spending is determined by the congressional budget office each year during the congressional budget process.

Both mandatory programs and discretionary programs 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 how the federal government spends money based on what society needs right now, whether through mandatory programs or discretionary appropriations. And, for the time being at least in the US, discretionary expenses are on a downward trajectory due to more and more mandatory spending programs taking priority.

Blog Post FAQ

A contractor pay stub is a document provided to independent contractors to detail payments received for services rendered. As it relates to discretionary spending, a business decides how much to pay an independent contractor based on various project requirements, budgets, and the scope of work. The contractor pay stub features earnings information total spending amount that contractors can use for budgeting.

Absolutely! Along with providing you knowledge on understanding the difference between mandatory and discretionary spending, Paystubsnow.com also has a feature where you can learn how to make a paystub. Instructions are provided step by step, making it an easy and hassle-free process for you.

A paycheck stub is a crucial document that outlines the income you receive from your employer. It shows details like gross pay, deductions, and net income. It's an essential tool for understanding and planning both your mandatory and discretionary spending. By reviewing your paystub, you'll observe your exact income and the mandatory withholdings, such as taxes and insurance premiums. The remaining money can be budgeted for your discretionary spending. Thus, a regular review of your paycheck stub can help you manage your financial life more effectively.

A check stub maker is a valuable tool for individuals and businesses to keep track of their mandatory and discretionary spending. By utilizing a check stub maker, you will have an organized record of your expenditures. In terms of mandatory spending, it helps you in detailing costs such as salaries, taxes, rents, and loans. For discretionary spending, it assists in documenting expenses on travel, entertainment, and professional development. Keeping meticulous records with a check stub maker will deliver a more precise understanding of your financial landscape.

It's easy to create a paystub online with our comprehensive and user-friendly tool. By using our services at PaystubsNow, you can quickly input your payment information and generate an accurate, professional paystub in minutes. This online document can be used as an excellent resource for tracking both your mandatory and discretionary spending. Remember, understanding the difference between these types of expenditures is crucial when planning your personal finances. Our service helps in easily delineating your income sources, allowing for clarity when budgeting your money. To create a paystub online, simply head over to our website and follow the step-by-step instructions.