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Program Spending as a Percent of GDP Historically Low Outside Social Security and Medicare, and Projected to Fall Further

UPDATED
February 21, 2017

The Trump Administration and congressional Republicans are expected to unveil budget proposals in coming months that contain large cuts to a range of government programs aiding middle- and low-income families — and to justify that approach by claiming that the size and reach of the federal government have grown far too expansive.  The official data, however, do not support this claim.[1] 

TABLE 1
Program Spending as Percent of Gross Domestic Product Under Current Policies
  Average
1977-2016
2017 2027
Non-interest spending 18.4% 19.3% 20.7%
Minus Social Security 14.0% 14.4% 14.6%
Minus Social Security
and Medicare
12.0% 11.3% 10.5%

Note: Program spending includes all federal expenditures other than net interest on the debt. Source: Office of Management and Budget for 1977-2015; Congressional Budget Office for 2016-2027.

To be sure, total federal spending, including interest payments, rose considerably as a percent of the economy (gross domestic product or GDP) during the Great Recession and remained high in its immediate aftermath.  But it is much lower now, due to the ongoing economic expansion and the expiration of most of the 2009 Recovery Act.  In addition, policymakers have taken steps to reduce the deficit since 2010, primarily through program cuts required by the 2011 Budget Control Act. 

When only program spending (excluding interest payments on the debt) is considered:

  • Federal program spending outside Social Security and Medicare has fallen below its 40-year historical average, and it is projected to decline further under current policies.  Total spending on federal programs outside Social Security and Medicare will be 11.3 percent of GDP in 2017 — below the 40-year average of 12.0 percent and below its 11.7 percent level in 2008, the year before President Obama entered office — and the Congressional Budget Office (CBO) projects it will decline over the next ten years, to 10.5 percent of GDP in 2027.  (See Table 1 and Figure 1.)
  • The rise in Social Security and Medicare spending reflects an aging population and rising health care costs.  CBO projects combined spending for these programs will rise from 8.0 percent of GDP in 2017 to 10.2 percent by 2027, compared with an average over the past 40 years of 6.4 percent.  The large majority of this growth reflects the aging of the population as the baby boom generation retires.  In addition, growing per-person costs in the nation’s health care system (both public and private), stemming in part from new treatments and medications that improve health and save lives but increase costs, continue to put upward pressure on Medicare costs.
Figure 1
Non-Interest Spending Outside Medicare and Social Security Set to Fall in Coming Decade

 

Total federal spending, including interest payments, reached 24.4 percent of GDP in 2009, during the depths of the recession.  It now equals 20.7 percent of GDP.  CBO projects it will rise to 23.4 percent of GDP in 2027.  In addition to reflecting the rise in Social Security and Medicare spending, the increase from 2017 to 2027 also reflects a projected increase in net interest payments, from 1.4 percent of GDP to 2.7 percent.  This increase in interest costs occurs primarily because Treasury interest rates are expected to rise gradually to more normal levels over the decade.

The portrait of a rapidly growing federal government is at odds with reality.When Americans hear talk of the government growing in size and reach, they usually don’t 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 improvements in medical technology.  Yet outside of demographic and health cost factors, the portrait of a rapidly growing federal government is at odds with reality.  To the contrary, the rest of government — reflecting nearly three-fifths of program spending today, including the health insurance coverage expansions in the Affordable Care Act (ACA) — is projected to shrink in the aggregate, relative to the economy under current policies.

Modest Future Program Spending Rise Reflects Demographics and Health Costs

CBO projects federal program spending (i.e., spending outside of interest payments) will equal 19.3 percent of GDP in 2017 and 20.7 percent of GDP in 2027.  While these levels would exceed the 18.4 percent average over the past 40 years (1977-2016), the higher levels reflect two key factors:

  • The aging of the population as the baby boomers continue retiring.  The share of the population aged 65 and over rose from 10.6 percent in 1977 to an estimated 15.1 percent in 2017, which helps explain why total government spending is higher today than its four-decade average.  The elderly population is still growing and will reach 18.8 percent of the U.S. population in 2027.[2]  Based on CBO estimates, we calculate that the aging of the population alone will raise Social Security and Medicare spending by roughly 1.5 percentage points of GDP over the next decade — accounting for about two-thirds of the total increase in Social Security and Medicare spending (as a percent of GDP) between 2017 and 2027.[3]  Indeed, if the population were not aging, total program spending as a percent of GDP would essentially hold steady over the next decade.
  • Rising per-person costs throughout the U.S. health care system.  These costs are much higher today than in earlier decades and are expected to continue rising faster than GDP per person.  While health care cost growth continues to be a major budget challenge, it has slowed noticeably in recent years.[4]  In fact, overall costs for federal health spending — including the costs of the ACA’s coverage expansions — are now significantly lower than CBO had earlier projected those costs would be without those expansions.[5] 

It is important to note that the projected growth in Social Security and Medicare stems from the nation’s aging population and rising per-person costs throughout the health care system — not from increases in the generosity of benefits. Indeed, for the most part, benefits for both of these programs are modest. The average Social Security retirement benefit is only $1,360 a month, or $16,300 a year, and benefits will replace a smaller portion of pre-retirement earnings in the future as the full retirement age increases to 67.[6] Medicare households spend more than $5,000 a year on out-of-pocket health care costs, on average, which represents 15 percent of their budgets — over twice the share for non-Medicare households.[7]

The general spending picture changes substantially once Social Security and Medicare are removed.  At 11.3 percent of GDP, total program spending outside Social Security and Medicare is already below its 40-year average of 12.0 percent of GDP and CBO projects it will fall to 10.5 percent of GDP in 2027.

This decline reflects a substantial drop in annually appropriated, or “discretionary,” programs.  CBO projects discretionary spending will fall from 6.3 percent of GDP in 2017 to 5.3 percent of GDP in 2027.  In 2019 these programs will reach their lowest level on record as a percent of GDP, with data going back to 1962.

Discretionary funding is limited by the 2011 Budget Control Act (BCA) caps, as further reduced starting in 2013 under “sequestration,” which was triggered by Congress’ failure to enact the additional deficit reduction that the BCA mandated.  Policymakers have provided partial relief from sequestration each year since then, most recently in the fall 2015 budget agreement.  But that modest relief expires in 2017, and the BCA caps will continue pushing discretionary spending to historically low levels.  

CBO projects spending on entitlement programs outside Social Security and Medicare will be fairly steady over the next decade at around 5 percent of GDP.  Importantly, this spending category includes Medicaid and health care subsidies provided under the ACA.  It also includes military and civilian retirement, veterans’ compensation, refundable tax credits such as the Earned Income Tax Credit, and key safety net programs such as SNAP (food stamps).  CBO projects the costs of the three largest means-tested income-support programs — the refundable tax credits, SNAP, and Supplemental Security Income —  will decline over the next decade as a percent of GDP. [8]

Rising Interest Payments Will Add to Federal Spending

As noted, CBO projects net interest payments will rise from 1.4 percent of GDP in 2017 to 2.7 percent in 2027. 

Fully three-quarters of the projected increase over the decade in interest as a percent of GDP comes from CBO’s assumption that Treasury interest rates will rise to more normal levels as the economy recovers more fully from the recession.  The other one-quarter comes from a higher debt-to-GDP ratio, reflecting the mismatch between revenues and spending over the coming decade.  It is worth remembering that higher deficits and debt can result as much from tax cuts and revenue shortfalls as from program growth.

Interest is not like federal spending on budget programs.  While policymakers can choose to increase or decrease other spending, they cannot choose to pay more or less interest on the debt.  Nor can they choose the interest rates Treasury must pay.  They can affect interest costs only indirectly, as a byproduct of decisions they make that change the level of revenues and program spending.  For these reasons, this analysis largely focuses on program spending and generally excludes interest payments.

Nation Still Faces Long-Term Budget Challenge

The bottom line is that the projected growth in federal program spending over the next decade as a percent of the economy is due to the effects on Social Security and Medicare of an aging population and rising per-person health costs.  Outside these two programs, program spending is already historically low as a percent of GDP and will continue declining over the coming decade, despite the impact of rising per-person health care costs on Medicaid, veterans’ and military health programs, and federal subsidies to help people afford health insurance coverage.

To be sure, total federal program spending will continue growing slowly as a percent of GDP in subsequent decades as the population continues aging and health care costs continue rising.  CBPP’s long-term projections issued in August 2016 show total program spending rising by about 0.6 percent of GDP from 2027 into the mid-2030s, when the baby-boom retirement is expected to peak, and then leveling off.  Revenues are also projected to increase modestly from their current level of 17.8 percent of GDP, due to “real bracket creep” as incomes rise.  But the increase is not enough to cover program expenditures, so the resulting primary deficits (that is, deficits excluding interest costs) will likely push up the debt-to-GDP ratio.  This is the heart of the nation’s long-term fiscal challenge — debt that rises faster than the economy grows.[9] If the nation were to enact substantial tax cuts, the challenge would become even more daunting.

The nation will need to address these issues.[10] In doing so, policymakers should accommodate spending and revenue levels somewhat higher than the historical 40-year averages to better reflect the circumstances the country faces in future decades (see box). But the portrait of an oversized, rapidly growing federal government is not accurate.

Historical Spending and Revenue Levels Not Adequate Guides for Future

This paper uses historical averages to help provide context for the analysis. But this approach should not imply that historical levels of spending — and revenue — should serve as a guide for the future, as some commentators urge.  Neither is adequate to meet national needs in coming years. 

As shown, the aging of the population and continuing increases in medical costs will necessitate higher levels of overall federal spending than over the previous 40 years, even when programs outside Social Security and Medicare are shrinking relative to the economy.  This, in turn, means that higher revenue will be needed to avoid drastic cuts in important programs.

An aging population and higher medical costs already influence spending levels and will do so beyond the ten-year period this paper describes.  The coming increase in the number of elderly people cannot be changed, and medicine should not be limited in the future to the technologies and treatments of 40 years ago, or even of today.  These two factors, by themselves, account for the need for federal spending to be several percentage points higher in the future, relative to GDP, than it has been in the past.  Between now and 2046, CBO estimates that the aging of the population alone will increase spending on Social Security and the major health care programs (including Medicare, Medicaid, and subsidies to purchase health coverage) by 3.3 percent of GDP.

In addition, interest payments on government debt are expected to rise in coming years, apart from the impact of any further deficits, as today’s exceptionally low interest rates return to more typical levels.

It is worth noting that historical levels of revenues were insufficient to match expenditures even when the population was younger and health care costs were lower.

  • Between 1977 and 2016, federal revenues averaged about 17.4 percent of GDP.  Revenues at this level would not have balanced the budget in any of the last 40 years.  Outlays averaged 20.5 percent of GDP over this period.
  • As a result of this mismatch between revenues and funding needs, deficits averaged 3.1 percent of GDP between 1977 and 2016.

Meeting rising national needs in coming decades while also placing the budget on a sustainable path over the long term will require both spending and revenue to be at levels above their historical averages.  When considering how to address the nation’s long-term fiscal challenges, policymakers should not use historical averages as a benchmark to guide their efforts.  Rather, they should establish meaningful principles to ensure, for instance, that deficit-reduction policies are designed in ways that do not increase poverty or inequality, shortchange investments important for future economic growth, reduce health care coverage or quality, or harm the economy. 

End Notes

[1] This report uses expenditure data from Office of Management and Budget, “Historical Tables,” February 2016, https://obamawhitehouse.archives.gov/omb/budget/Historicals; and Congressional Budget Office, “The Budget and Economic Outlook: 2017 to 2027,” January 2017, https://www.cbo.gov/publication/52370.

[2] Based on population assumptions in the 2016 Social Security Trustees Report, https://www.ssa.gov/oact/HistEst/Population/2016/Population2016.html.  

[3] This estimate assumes that all of the change in Social Security spending as a percent of GDP from 2017 to 2027 and 40 percent of the change in Medicare spending is due to the aging of the population, and is based on CBO estimates of spending in these programs.  See “The 2016 Long-Term Budget Outlook,” CBO, July 2016, p. 18, https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/51580-ltbo-2.pdf; and “The Budget and Economic Outlook:  2016 to 2026,” CBO, January 2016, p. 72, https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/51129-2016Outlook.pdf

[4] Health care cost growth slowed to historically low annual rates during the recession and recovery.  According to the National Health Expenditure projections from the Office of the Actuary at the Centers for Medicare and Medicaid Services, health spending growth will tick up slightly in the next few years but will remain well below pre-recession growth rates.  Sean P. Keehan et al., “National Health Expenditure Projections: 2015-25,” Health Affairs, July 2016, http://content.healthaffairs.org/content/early/2016/07/12/hlthaff.2016.0459.full.

[5] Paul N. Van de Water, “Projected Health Spending Falling – Even with ACA’s Coverage Expansion,” Center on Budget and Policy Priorities, February 13, 2017, http://www.cbpp.org/blog/projected-health-spending-falling-even-with-acas-coverage-expansions.

[6] Social Security Administration, Office of the Chief Actuary, “Benefits Paid By Type Of Beneficiary,” https://www.ssa.gov/oact/ProgData/icp.html.

[7] Kaiser Family Foundation, The Latest Trends in Income, Assets, and Personal Health Care Spending among People on Medicare, November 2015, Exhibit 29, http://kff.org/slideshow/the-latest-trends-in-income-assets-and-personal-health-care-spending-among-people-on-medicare/.

[8] For instance, SNAP spending rose considerably during the Great Recession, leveled off in 2012 and 2013 as a percent of GDP, and started declining in 2014.  CBO projects SNAP will decline further as a percent of GDP over the next decade, returning to its 1995 level by 2019.  For a detailed analysis of these trends, see Dottie Rosenbaum and Brynne Keith-Jennings, “SNAP Caseload and Spending Declines Accelerated in 2016,” Center on Budget and Policy Priorities, updated January 27, 2017, http://www.cbpp.org/research/food-assistance/snap-caseload-and-spending-declines-accelerated-in-2016.

[9] Kogan, Van de Water, and Cho.

[10] As discussed in Kogan, Van de Water, and Cho, for instance, assuring long-run solvency for the Social Security and Medicare Hospital Insurance trust funds through revenue increases, benefit reductions, or some combination would substantially improve the long-run budget picture.