The Rising Tide of U.S. Federal Spending: Causes and Solutions

By Arun Dahal Khatri

Federal spending in the United States has reached unprecedented levels, with expenditures far outpacing revenues, generating a fiscal imbalance that has persisted for over two decades. By 2023, the government was spending nearly $2 trillion more than it collected in tax revenues, a gap that underscores the growing problem of overspending. This widening deficit threatens to undermine economic growth, push costs onto younger generations, and increase the risk of a financial crisis. The primary drivers behind this surge in spending include growing transfer payments, aid to states, rising interest payments on the national debt, and federal purchases. Addressing these issues will require policymakers to focus on cutting spending across various sectors of the federal budget while ensuring long-term fiscal sustainability.

Since the last balanced federal budget in 2001, government revenues have grown at an average annual rate of 3.9%, higher than the 2.5% average inflation rate over the same period. However, the real problem lies in the faster rate of spending growth. Since 2001, federal expenditures have increased at 5.5% per year, significantly outstripping revenue growth. This imbalance was exacerbated by the COVID-19 pandemic, which led to a dramatic spike in federal spending. Between 2019 and 2021, federal expenditures surged by more than $2 trillion as the government enacted emergency relief measures to address the health and economic impacts of the pandemic. While spending declined briefly in 2022, it rose again in 2023 to nearly $2 trillion higher than before the pandemic (Bureau of Economic Analysis [BEA], 2023). Projections from the Congressional Budget Office (CBO) suggest that federal revenues will continue to grow at an annual rate of 4.2% over the next decade. However, without significant reforms, spending is expected to increase even faster, leading to ever-larger deficits and a growing national debt. This trend is unsustainable and highlights the need for comprehensive fiscal reform. Policymakers must address the key drivers of spending to prevent further deterioration of the nation's fiscal health (CBO, 2023).

Federal spending in 2023 can be broken down into five main categories: transfers (benefit and subsidy payments), aid to the states, federal purchases, federal worker compensation, and interest on the national debt. Together, these categories account for the $6.7 trillion federal budget. Transfers to individuals and businesses, including programs such as Social Security, Medicare, and food stamps, represent the largest spending category, totaling $3.19 trillion in 2023. These programs do not directly contribute to GDP or national income but serve as mechanisms for redistributing wealth from taxpayers to recipients. In 2023, transfers accounted for 48% of all federal spending, reflecting the growing role of redistribution in the federal budget (BEA, 2023).

Aid to state and local governments is another significant component of federal spending, accounting for 17%, or $1.15 trillion in 2023. This aid is delivered through more than 1,300 programs that subsidize various state and local government functions, including healthcare (Medicaid), infrastructure (highways), education, housing, and transit. Medicaid is the largest of these programs, representing a substantial federal budget. Like transfers, aid to the states does not generate new economic activity but reallocates resources from federal taxpayers to local governments. This growing reliance on federal aid to finance state and local services has ballooned the federal budget (BEA, 2023). Federal purchases, which include the government's procurement of goods and services, accounted for 13% of total spending in 2023. This category includes everything from fighter jets to office supplies, with national defense being the most significant single component. Defense spending comprised 57% of all federal purchases, while non-defense purchases comprised 43%. Although federal purchases are a minor part of the budget compared to transfers or aid to the states, they still represent a significant portion of government expenditures (BEA, 2023).

Federal worker compensation, including wages and benefits for the 3.8 million federal employees (defense and non-defense), accounted for 8% of total spending in 2023. Compensation for defense workers, including both uniformed and civilian personnel, comprised 56% of this category, while non-defense employees comprised 44%. While federal worker compensation has remained relatively stable as a percentage of the budget, it still represents a significant cost to taxpayers (BEA, 2023). Finally, interest payments on the national debt have become a growing burden on the federal budget. In 2023, interest payments accounted for 14% of total spending, or $0.95 trillion. This figure is higher than the net interest measure in the government's official budget, reflecting the actual cost of servicing the national debt. As federal debt rises, so will interest payments, creating additional pressure on the budget and limiting the government's ability to finance other priorities (BEA, 2023).

The growing imbalance between federal spending and revenues highlights the need for comprehensive fiscal reforms. Transfers and aid to the states, which account for 65% of total federal spending, have been the fastest-growing components of the budget and should be targeted for significant cuts. However, the federal deficit is so large that savings must be found across all spending categories, including federal purchases and worker compensation. Policymakers must adopt a "whole-of-government" approach to fiscal downsizing, focusing on reducing expenditures in every area of the budget to bring spending under control (CBO, 2023).

In conclusion, the rapid growth of federal spending, driven by transfers, aid to the states, and rising interest payments, severely threatens the nation's fiscal health. Without significant reforms, the federal deficit will continue to grow, increasing the burden on future generations and threatening economic stability. To address this issue, policymakers must focus on cutting spending across all federal budget categories and pursuing long-term fiscal sustainability. By doing so, they can prevent a financial crisis and ensure a stable economic future for the country.

References

Bureau of Economic Analysis. (2023). National Income and Product Accounts. U.S. Department of Commerce.

Congressional Budget Office. (2023). The Budget and Economic Outlook: 2023 to 2033.