Understanding Federal Budget Categories
When it comes to the Federal budget, several terms are used and it is important to understand what they are in order to know how they are funded, and how they shape the overall Federal budget. So, if you are interested in understanding the Federal budget, understanding these terms is a must. Most federal spending fits into three categories. Understanding how and why these categories work can help you understand the Federal Budget process and what programs keep paying even during funding lapses, why others pause, and where most dollars are actually spent. They can also help you understand what constraints Congress is under, knowing each of these categories will help you understand how little discretion there is in the budget without legal changes. For a high level understanding of these three categories in FY2024: Mandatory Spending programs were a bit over $4.1 trillion (~60%), Discretionary Spending programs about $1.8 trillion (~26%), and Net Interest (i.e. interest paid on the National Debt) about $1.0 trillion (~14%), for roughly $6.8 trillion in total Federal outlays (spending). Net interest is shown as its own category in official presentations. [1][2][3]
What each Category Means
Mandatory Spending: This category of spending, as its name implies, is required by statute (law). Budget items in this category are automatically authorized for funding unless the law is changed. The statute (law) sets which programs are mandatory and the eligibility requirements and formulas for how much is authorized. Mandatory spending was about $4.1T in FY2024—roughly 60% of total outlays. [2][3]
Entitlements: This category is a subset of Mandatory Spending. Entitlements are Mandatory Spending programs that confer a legal right to benefits to citizens, for example: Social Security, Medicare, and Medicaid are Entitlements. Entitlements make up the bulk of Mandatory Spending; Social Security and Medicare alone account for more than half of mandatory outlays. [2]
Net Interest: The interest the U.S. pays on its National Debt. It’s authorized by permanent law (a permanent, indefinite appropriation) [4], which is why many sources describe it as “technically mandatory,” but it is shown as its own category in the budget, separate from both mandatory and discretionary. In FY2024 it was about $1.0 trillion (~14% of total outlays). [1][3]
Discretionary Spending: This is the remaining non-compulsory spending, everything Congress has not defined by statute (law). Short of changing the law on Mandatory Spending programs, this is the part of the budget Congress can adjust annually. Discretionary spending is just over one-quarter of total outlays (~26%). Congress decides discretionary levels each year during the Federal budget process in 12 separate appropriations bills produced by the Appropriations Committees. (See our Article on Federal Budget Process.) [1][5]
What’s inside each Category
Mandatory Spending
| Programs | Description | Entitlement | FY 2024 Budget Amount | % of Total Federal Spending |
|---|---|---|---|---|
| Social Security (Old-Age, Survivors, and Disability) | Provides benefits to retired workers, the disabled, and their spouses, children, and survivors. Funded by payroll taxes. | Yes | $1.45T | 21.4% [2] |
| Medicare | A federal health insurance program primarily for people age 65 or older and certain younger people with disabilities. | Yes | $0.9T | 12.7% [2] |
| Medicaid and CHIP | A federal-state health care program for low-income and needy individuals, including children, pregnant women, the elderly, and people with disabilities. | Yes | $0.6T | 9.1% [2] |
| Veterans’ disability compensation and pensions | Provides benefits to veterans who have a service-connected disability. Pensions are paid to low-income wartime veterans. | Yes | $0.2T | 2.8% |
| Federal civilian and military retirement | Provides retirement benefits to federal government civilian employees and military personnel, including pensions, disability, and survivor benefits. | No | $0.2T | 2.9% |
| Unemployment Insurance (federal share) | A joint federal-state program that provides temporary, partial wage replacement to unemployed workers. | Yes | $0.03T | 0.5% |
| SNAP and other nutrition programs | Provides benefits to low-income households to supplement their food budgets. Other programs include school lunch, and food assistance for seniors. | Yes | $0.09T | 1.3% |
| Refundable tax credits’ outlay portions (e.g., EITC/ACTC) | The part of tax credits that can be paid as a refund. | Yes | $0.16T | 2.4% |
| Affordable Care Act (a.k.a. Obamacare) | Provides tax credits and other subsidies to help eligible individuals and families afford health insurance. | Yes | $0.11T | 1.6% |
| Farm programs (e.g., crop insurance subsidies) | Provides subsidies and other support to farmers and agricultural producers. | No | $0.03T | 0.5% |
| Other Mandatory Programs | A collection of smaller, non-entitlement mandatory outlays not separately itemized, such as deposit insurance, payments for natural resources, and other government-wide programs. | No | $0.3T | 4.1% |
| Subtotal Mandatory Spending | $4.1T | ~60% |
Net Interest
| Program | Description | FY 2024 Budget Amount | % of Total Federal Spending |
|---|---|---|---|
| Net Interest | Debt Service – Interest payments on US National Debt | $1.0T | ~14% |
Discretionary Spending
| Programs | Description | FY 2024 Budget Amount | % of Total Federal Spending |
|---|---|---|---|
| National Defense | Funds for the Department of Defense (military operations, personnel, weapons procurement, research), and other defense-related activities in other agencies. | $0.9T | ~13% [1] |
| Health and Human Services | Discretionary funds for health research (e.g., NIH), public health, and human service programs, separate from Medicare and Medicaid entitlements. | $0.1T | ~2% |
| Education | Provides funding for federal education initiatives, grants, and programs at all levels. | $0.1T | ~1% |
| Transportation | Supports highway and airport construction, mass transit, and other infrastructure projects (note: highways/aviation have mandatory contract authority, but spend-out is shaped by annual limits). | $0.1T | ~1% |
| Veterans’ Health Care | Funds health care services provided through the Veterans Health Administration (separate from mandatory disability compensation). | $0.1T | ~2% |
| Homeland Security | Funds for agencies responsible for homeland security, including border patrol and immigration enforcement. | $0.06T | ~1% |
| Housing & Urban Development | Public housing, community development, and housing assistance programs. | $0.06T | ~1% |
| Energy & Environment | Department of Energy, Environmental Protection Agency, and other natural resource and environmental programs. | $0.06T | ~1% |
| International Affairs | State Department, USAID, and foreign aid. | $0.06T | ~1% |
| Other Discretionary | Various government agencies and programs, including general government administration, science, and space exploration (e.g., NASA/NSF). | $0.3T | ~5% |
| Subtotal Discretionary | ~$1.8T | ~26% |
Summary
Knowing Federal Budget terms is useful for understanding how and where Federal money is spent. In FY2024 the Federal Government spent ~$6.8 trillion and took in ~$4.9 trillion, with a deficit of ~$1.8 trillion. The majority of the spending goes to Mandatory programs, most of which are Entitlement programs providing services and benefits to citizens. Net interest—about $1.0T—is reported as its own category and paid under permanent law. As the Mandatory components grow, there is less room for Discretionary items that Congress can administer without reductions in mandatory spending, increases in tax revenue, or additional borrowing. When you look at discretionary spending, many people would consider those categories essential – Education, Environment, Transportation, National Defense – core services of government. Understanding these components clarifies the difficult trade-offs between fiscal sustainability and key government services. [1][2][3][4][5]
Citations
[1] Congressional Budget Office (CBO), The Federal Budget in Fiscal Year 2024: Infographic; and Discretionary Spending in FY2024: Infographic (discretionary ≈ $1.8T; composition; total outlays context).
[2] CBO, Mandatory Spending in Fiscal Year 2024: An Infographic (mandatory ≈ $4.1T; Social Security + Medicare > half of mandatory).
[3] CBO, Monthly Budget Review: Summary for Fiscal Year 2024 (total outlays ≈ $6.8T; net interest ≈ $0.95T, rounded to $1.0T).
[4] 31 U.S.C. § 3123, Payment of obligations and interest on the public debt (interest paid under permanent, indefinite appropriation).
[5] CBO primers on budget categories and the annual appropriations process (12 appropriations bills produced by the Appropriations Committees).
