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Are the Size and Reach of the Federal Government Exploding?
Non-Interest Spending Outside Social Security and Medicare Will Fall Well Below Prior 50-Year Average as Economy Recovers

Some political figures and commentators claim that the size and reach of the federal government are exploding, citing the fact that federal spending used to average less than 21 percent of the Gross Domestic Product (GDP) but has been at or above 24 percent in the last few fiscal years and is projected to remain significantly above the historical average over the next ten years, even after the economy recovers. In reality, however, the story is much more complicated than that.

Total federal spending indeed rose considerably in 2008 and 2009 as a share of GDP and remained high in 2010 and 2011, in part because GDP was unusually low as a result of the severe economic slump. But, as an examination of the latest Congressional Budget Office (CBO) data indicates, the claim that this indicates a very large, permanent expansion of the federal government is very dubious. Total expenditures have already fallen noticeably from their 2009 peak. Most importantly, the government outside Social Security and Medicare is set to shrink significantly below its historical average size as the economy recovers.

• 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 22.0 percent of GDP in the current year, 2012. They are projected to fall further, to 20 percent of GDP or lower in the latter part of this decade.
  
  While total federal spending will remain high throughout the coming decade under a continuation of current policies, that is because of a marked increase in interest payments. The increase in interest costs — which will more than double as a share of GDP between now and 2022 — is attributable in part to the large increase in debt that policymakers will incur if they extend the 2001 and 2003 tax cuts without paying for them.
• 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 average in the decade ahead. [1] By 2022 it will fall to 10.8 percent of GDP, compared to an average over the 1962-2011 period of 13.0 percent (see Table 1). The figures in the table do not count any spending cuts from the sequestration scheduled to start in January 2013; if those cuts are counted, non-interest spending outside Social Security and Medicare will fall even further below the historical average.
  

Data Show Expansion Is Modest and Results from Health Cost and Demographic Factors

Under a continuation of current policies,[2] total federal spending — including interest — will drop from 23.9 percent of GDP in 2011 and 23.5 percent in 2012 to 22.4 percent in the middle of the coming decade, then climb back up to 23.6 percent of GDP by 2022. All of the increase between mid-decade and 2022, 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. Moreover, a significant share of the projected increase in interest payments stems from the increase in the amount of debt on which interest must be paid that would result from extension of the 2001 and 2003 tax cuts. In other words, an important part of the increase in total federal spending as a share of GDP in the latter half of the coming decade will result from tax cuts. (Interest costs also will rise as interest rates return to normal levels after the economy recovers.)

To measure the size and reach of federal programs and activities, one consequently must examine total non-interest spending, or "primary outlays." Primary outlays stand at 22.0 percent of GDP in 2012; they are scheduled to decline somewhat as the economy recovers. Even with implementation of the Affordable Care Act, they are projected to average 19.9 percent of GDP under current policies during the final five years of the ten-year budget window (2018-2022) and to stand at 20.0 percent of GDP in 2022, significantly below today's level.

Non-interest spending of about 20 percent of GDP exceeds the historical average; over the past 50 years (1962-2011), primary outlays averaged 18.5 percent of GDP. This increase — about 1.5 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. Total U.S. health care expenditures as a share of GDP were more than twice as high in 2010 (17.9 percent) than they were in the 1970s (when they averaged 8 percent of GDP).

The data in the table vividly bear out the prominent role of population aging and rising health care costs. Once the economy recovers, primary outlays for all federal spending other than Social Security and Medicare will be significantly below the average for the prior 50 years. The 1962-2011 average was 13.0 percent of GDP; spending for programs other than Social Security and Medicare is at 13.8 percent in 2012 but is projected to fall back to the 50-year average level in 2013, as the economy recovers, and then below the average after that. It will decline to 11.6 percent of GDP in 2017 and 10.8 percent of GDP in 2022.

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 set to decline significantly as a share of GDP when the economy recovers. This is the case even though the continuing increase in health care costs will affect many programs other than Social Security and Medicare: especially Medicaid, veterans' health, military health, and subisidies 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, federal non-interest spending will climb significantly higher. 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. In addition, if the debt continues to rise faster than GDP, 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 costs are shrinking to levels well below their historical averages.

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