key term - Discretionary Spending

Definition

Discretionary spending refers to government expenditures that are not mandated by existing laws or entitlement programs. It is the portion of the federal budget that Congress has the authority to allocate and control through the annual appropriations process. This type of spending is distinct from mandatory or non-discretionary spending, which is determined by existing laws and entitlements. Discretionary spending is a crucial component in the government's use of fiscal policy to manage the economy, as it can be adjusted to stimulate or restrain economic activity. It is closely tied to the topics of government spending, using fiscal policy to fight recession and inflation, automatic stabilizers, and the question of a balanced budget.

5 Must Know Facts For Your Next Test

1. Discretionary spending accounts for approximately one-third of the federal budget, with the remaining two-thirds being mandatory spending.
2. The President proposes the annual discretionary budget, which Congress then reviews, amends, and approves through the appropriations process.
3. Discretionary spending can be used as a fiscal policy tool to stimulate the economy during recessions by increasing government expenditures on things like infrastructure, education, and research and development.
4. Conversely, discretionary spending can be reduced during periods of high inflation to help cool the economy and slow the rate of price increases.
5. Automatic stabilizers, such as unemployment insurance and progressive income taxes, can work in conjunction with discretionary spending to help stabilize the economy during economic downturns.

Review Questions

• Explain how discretionary spending is related to the government's use of fiscal policy to manage the economy.
  • Discretionary spending is a key component of fiscal policy, as it allows the government to directly influence economic activity through adjustments to its expenditures. By increasing or decreasing discretionary spending, policymakers can stimulate or restrain economic growth, respectively. For example, during a recession, the government may choose to increase discretionary spending on infrastructure projects or social programs to boost aggregate demand and employment. Conversely, during periods of high inflation, the government may reduce discretionary spending to cool the economy and slow the rate of price increases.
• Describe the role of discretionary spending in relation to automatic stabilizers and their combined impact on the economy.
  • Discretionary spending and automatic stabilizers work in tandem to help stabilize the economy. While automatic stabilizers, such as unemployment insurance and progressive income taxes, automatically adjust to changes in economic conditions without direct intervention, discretionary spending provides policymakers with the ability to actively intervene and supplement the effects of automatic stabilizers. For example, during a recession, automatic stabilizers would provide additional income to those who have lost their jobs, while discretionary spending on infrastructure projects or social programs could further boost aggregate demand and employment. This combination of automatic and discretionary fiscal policy tools helps to smooth out economic fluctuations and promote more stable and sustainable economic growth.
• Analyze how the balance between discretionary and mandatory spending can impact the government's ability to achieve a balanced budget.
  • The balance between discretionary and mandatory spending is a critical factor in the government's ability to achieve a balanced budget. Mandatory spending, which is determined by existing laws and entitlement programs, typically accounts for a larger portion of the federal budget than discretionary spending. This can make it challenging for policymakers to make significant adjustments to the budget, as mandatory spending is often difficult to reduce. Discretionary spending, on the other hand, provides more flexibility for policymakers to increase or decrease government expenditures in response to economic conditions. By carefully managing the balance between discretionary and mandatory spending, policymakers can work towards achieving a balanced budget while also using fiscal policy tools to stabilize the economy and promote economic growth. However, this balance must be struck carefully, as excessive cuts to discretionary spending can have negative consequences for the economy and the well-being of citizens.

Related terms

Mandatory Spending:

Mandatory spending, also known as non-discretionary spending, refers to government expenditures that are required by existing laws, such as entitlement programs like Social Security and Medicare. This type of spending is not subject to the annual appropriations process.

Fiscal Policy:

Fiscal policy is the use of government spending and taxation to influence the economy. It is a macroeconomic tool that policymakers can use to stabilize the economy, promote economic growth, and address issues like recession, unemployment, and inflation.

Automatic Stabilizers:

Automatic stabilizers are government programs that automatically adjust to changes in the economy without direct intervention. Examples include unemployment insurance and progressive income taxes, which help to stabilize the economy during recessions by providing additional income to those who have lost their jobs and reducing the tax burden on individuals and businesses.