Discretionary spending refers to spending set on a yearly basis by decision of Congress and is part of fiscal policy. Fiscal policy is the economic term which describes the actions of a government in setting the level of public expenditure and how that expenditure is funded. ...

This spending is optional, and in contrast to entitlement programs for which funding is mandatory.

Discretionary spending

Discretionary spending is a term used by economists to talk about the amount of money spent on non-essential things or luxury goods like a holiday to the Bahamas.

Of course what you think is essential other people might think is a luxury. For example if you're a neoconsumer, you're likely to spend more money on things like holidays. But generally items like entertainment, travel, take-away food, luxury cars, cosmetics are not considered essential for your survival.

When the economy goes pear-shaped because of inflation, high petrol costs, terrorism or high levels of unemployment consumers usually cut down on their discretionary spending. If you're a small business that specialises in providing goods and services aimed at this market you're usually the first to get hit.

However, it all comes down to priorities. For example, a US survey showed that when the Iraq war started in 2003, consumers were less likely to cut back on cosmetics, skincare and apparel that made them feel good.

The term's also used in government to talk about spending on 'optional' programs.

source: http://www.abc.net.au/catapult/jargonbuster