Federal Spending Growth

Crossposted at The Street Light.

David Wessel shows us the federal fiscal issue in one chart. The chart depicts an estimate of what the Obama administration’s budget proposal would mean for spending in each major category over the next five years. “The bottom line: Spending on interest, Medicare and Medicaid and Social Security go up – a lot. Spending on nearly everything else goes down.”

I prefer looking at it slightly differently. I think that when trying to understand the federal government’s fiscal situation, at least on the spending side, it is more informative to see how we got to where we are.

We now have an on-budget (i.e. excluding the Social Security program, which continued to run a surplus in 2010) deficit of about 9% of GDP. In the early 2000s, the budget deficit was about 4-5% of GDP. That’s deterioration in the on-budget deficit of about 4-5% of GDP between 2003 and 2010.

Now take a look at the following chart, which shows federal spending on actual goods and services broken into two pieces: spending related to defense, and spending related to everything else. Then I’ve added federal spending on the two Meds: Medicare and Medicaid. (Note that this latter category is actually a transfer payment, not spending by the government on goods and services, since it takes the form of the government reimbursing individuals for medical spending that THEY have done.)

Defense spending has gone up about 2 percentage points since the early 2000s. Med+Med spending has gone up by about 2 percentage points since the early 2000s. All other federal spending has meandered feebly between 2% and 3% of GDP. That slight lift in the green line in the last two years is the “massive” stimulus, or put another way, what “out of control government spending” apparently looks like.

If it weren’t for increased defense spending and the Meds over the past several years, the federal government’s budget balance would have been pretty close to unchanged. Despite the most severe economic downturn in 70 years.

I say again: what stimulus?

UPDATE: To clarify, Social Security is not included in any of the measures shown in the chart above. Social Security is classified as a “transfer payment”, not an actual purchase by the federal government of goods or services. The red and green lines above only show “government consumption expendistures and gross investment”, as it’s described in the National Income and Product Accounts; transfer payments are excluded. The blue line, on the other hand, does show a specific type of federal transfer payments: those related to health care. I think it’s more helpful to leave SS out of this sort of discussion since it’s basically an independent, self-funded program, and is neither the cause of our budget problems, nor an important part of any solution.

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