Size and Reach of Federal Government Are Not Exploding
Non-Interest Spending Outside Social Security and Medicare Will Fall Well Below Prior 50-Year Average as Economy Recovers
Revised October 28, 2013
As a new budget conference committee seeks agreement on spending and tax priorities for the next decade, some policymakers and commentators who believe that future deficit reduction must come solely from spending cuts will likely repeat the claim that the federal government is exploding in size. The data do not support such a claim.
To be sure, total federal spending as a share of gross domestic product (GDP) rose considerably in 2008 and 2009 and remained high in 2010 and 2011, in part because GDP was unusually low due to the Great Recession and its aftermath. But spending dropped significantly in 2012 as a share of GDP and, as the latest Congressional Budget Office (CBO) data indicates, this downward trend is expected to continue over the next five years. Total spending has already fallen dramatically from its 2009 peak, in part because most of the 2009 Recovery Act was designed to be temporary. Most importantly, the government outside Social Security and Medicare is already significantly below its historical average size and will continue to shrink as the economy recovers.
|Table 1 |
Program Spending as a Share of GDP Under Continuation of Current Policies
|Avg 1963- |
|Less Social Security||14.5%||15.1%||14.1%||14.0%|
|Less Social Security and Medicare||13.0%||12.0%||11.1%||10.5%|
Note: Program spending includes all federal expenditures other than net interest on the debt.
- If we continue current policies, federal expenditures outside of interest payments on the debt are projected to decline in the decade ahead as the economy recovers. In fact, these expenditures (which analysts call “primary outlays”) have already fallen from 23.9 percent of GDP in 2009 — at the bottom of the recession — to a projected 20.2 percent of GDP in 2013. They are projected to fall further, to 19.5 percent of GDP or lower in the latter part of this decade.
While total federal spending will rise modestly as a percent of GDP during the latter part of the decade under a continuation of current policies, that is mostly because of a marked increase in interest payments. In particular, as the economy recovers, interest rates will also rise, simultaneously increasing the interest we must pay on any given amount of debt.
- Total non-interest spending outside of Social Security and Medicare — two programs whose costs are being driven up by the aging of the population and the rise in health care costs throughout the U.S. health care system — will fall well below its 50-year historical averagein the decade ahead. By 2023 it will fall to 10.5 percent of GDP, compared to an average over the 1963-2012 period of 13.0 percent (see Table 1). The figures in the table do not count any spending cuts from the sequestration required under the Budget Control Act after fiscal year 2013; if those cuts are counted, non-interest spending outside Social Security and Medicare will fall even further below the historical average.
Future Spending Increases Are Modest and Result From Demographic Factors and Health Costs
Under a continuation of current policies, total federal spending — including interest — will drop from 24.1 percent of GDP in 2011 and 22.8 percent in 2012 to 21.5 percent in 2013, before starting to rise in the middle of the coming decade, climbing back up to 22.7 percent by 2023. At least three-fourths of the increase between mid-decade and 2023, however, will come from higher interest payments on the debt. Interest payments are not a federal program, and increases in interest costs do not themselves represent an expansion of the government’s activities or reach. It should also be noted that interest costs rise when taxes are cut, because the tax cuts add to deficits and debt just as spending increases do.
- To measure the size and reach of federal programs and activities, one consequently must examine total non-interest spending, or “primary outlays.” Primary outlays stood at 20.2 percent of GDP in 2013; they are scheduled to decline somewhat as the economy recovers. Even with implementation of the Affordable Care Act, they are projected to average 19.4 percent of GDP under current policies during the final five years of the ten-year budget window (2019-2023) and to stand at 19.5 percent of GDP in 2023, significantly below today’s level.
- Non-interest spending of 19.5 percent of GDP exceeds the historical average; over the past 50 years (1963-2012), primary outlays averaged 18.6 percent of GDP. This increase — about 1 percent of GDP — is relatively modest, however, considering that: 1) the baby-boom generation was not retired in the prior 50-year period but has begun retiring in the last few years and will retire in increasing numbers in the years ahead; and 2) health care costs throughout the U.S. health care system are far higher today than in earlier decades. At 17.9 percent of GDP, total U.S. health care expenditures — public and private costs taken together — were more than twice as high in 2011 (the most recent year for which we have actual data) than they were in the 1970s, when they averaged 8 percent of GDP.
- The data in Table 1 vividly bear out the prominent role of population aging and rising health care costs. In fact, primary outlays for all federal spending other than Social Security and Medicare are already below the average for the prior 50 years, and once the economy recovers, they will continue to decline (see Figure 1). The 1963-2012 average was 13.0 percent of GDP; spending for programs other than Social Security and Medicare was at 12.0 percent in 2013 and will fall to 11.1 percent of GDP in 2018 and 10.5 percent of GDP in 2023.
Claim of Explosion in Government’s Size and Reach Is At Odds With Reality
The bottom line is that if one measures the size and reach of the government by non-interest spending as a share of GDP, one finds that the government has indeed expanded, but modestly rather than explosively — and that all of the expansion is the result of the impact on Social Security and Medicare of rising health costs and the aging of the population. Federal program spending outside of those two programs is already declining significantly as a share of GDP and will continue to do so as the economy recovers. This is the case even though the “rest of government” also includes considerable health spending, which will necessarily grow as health care costs increase: e.g., Medicaid, veterans’ health, military health, and subsidies to help low- and middle-income people afford health coverage under the Affordable Care Act.
To be sure, in subsequent decades, as the population continues to age and health care costs continue to rise, total federal non-interest spending will climb somewhat. One key factor is that average health care costs are considerably greater for people in their 80s and 90s than for people in their late 60s and early 70s, and the baby boomers will become very old in future decades. The long-term projections we issued in July 2013 show total non-interest spending rising from 19.5 percent of GDP in 2023 to 20.7 percent by the mid-2030s, when the baby boom retirement is at its peak, and then leveling off. In addition, if the debt continues to rise faster than GDP because revenue are not adequate to cover government costs, interest costs will continue to swell. We will have to tackle these issues.
But when Americans hear talk of the government exploding in size and reach, they don’t usually think this means that more people will receive Social Security and Medicare because the population is growing older or that Medicare will cost more because of factors like the aging of the baby boomers and advances in medical technology that improve health and prolong life but at significant cost. Outside of those demographic and health cost factors, the portrait of a rapidly growing federal behemoth is simply at odds with reality, since all other costs are already below their historical averages and are projected to continue shrinking.
 We calculate the continuation of current policies by starting with the current-law baseline prepared by the Congressional Budget Office in May 2013 and then adjusting it. Specifically, relative to CBO’s current-law baseline, we assume that program expenditures are a) increased to reflect continuation of relief from scheduled Medicare cuts associated with the “sustainable growth rate”; b) increased to reflect continuation of the expansions of refundable tax credits enacted in 2001 and 2009; c) increased to reflect sequestration’s not taking effect after 2013; d) decreased to reflect a phase-down in war costs; and e) decreased to reflect an assumption that we will not have a hurricane Sandy to rebuild from every year.