Why is federal spending expanding as a share of the economy?
Excessive government spending fuels inflation, depresses growth, and lowers living standards.
U.S. government spending is growing at a faster pace than the ability of taxpayers to pay for it. As government spending outpaces economic growth, more resources are redirected from productivity-enhancing functions toward government-fueled consumption without commensurate increases in the ability of workers to pay for a larger government. Excessive government spending also fuels inflation, depresses growth, and lowers living standards.
Congress’ latest debt deal is woefully inadequate for addressing the drivers of growing spending and debt, primarily putting controls on less than one-third of the budget that is already projected to decline further as a share of the economy: discretionary spending.
The Congressional Budget Office’s (CBO) latest long-term budget outlook projects that U.S government spending will consume nearly 30 percent of the economy by 2053. At 29.1 percent of gross domestic product (GDP), federal spending will be 8 percentage points of GDP or almost 40 percent higher than the historical average.
As the figure above illustrates, interest costs are a main driver of spending increases, alongside expansions in major health care and Social Security spending. Other mandatory spending, which includes various welfare programs, retirement benefits for federal employees, and some veterans’ benefits, is projected to decline as a share of GDP. Discretionary spending growth also flattens out in CBO’s assumptions.
Interest costs are projected to triple as a share of the economy, assuming Treasury 10-year bonds at 4 percent – below average rates recorded over the past three decades. Interest cost increases are due to higher interest rates and the increasing size of the debt to which they apply. Publicly held debt borrowed in credit markets is projected to almost double from 98 percent of GDP in 2023 to 181 percent of GDP by 2053. The best way to address rising interest costs is to stabilize the debt as a share of the economy, which Congress can accomplish by reducing projected spending by at least 10 percent.
The only major category of federal spending expected to grow faster than interest on the debt is federal health care programs. Major health care programs include Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), and subsidies for private insurance purchased on the exchanges created by the Affordable Care Act (ACA). According to CBO, two-thirds of the increase in major health care spending will be due to the growth in per-person health care costs, meaning fixing the current subsidy, instead of allowing health care spending to grow ever more generous without budget controls, would fix most of the cost growth problem. Only one-third of the projected increase in total spending on the major health care programs is due to population aging. Unfortunately, President Biden’s initiatives to lower health care costs will be mostly futile, acting primarily as campaign talking points rather than addressing underlying cost drivers. As Jim Capretta with the American Enterprise Institute argues:
“President Biden’s latest plan to lower health care costs for American households…[is] far too trivial to matter much for most patients. If anything, the net effect is more likely to be an increase in overall costs rather than a reduction.”
The two largest federal programs, Medicare and Social Security, will face a fiscal cliff sometime in the next 10 or so years. CBO’s estimates assume that Medicare and Social Security spending will continue as if the fiscal cliff didn’t exist. Were Congress to let scheduled benefit cuts occur, Medicare providers would face 11 percent payment cuts as soon as 2031 and Social Security beneficiaries could see their benefits reduced by 20 percent as soon as 2033. Given the popularity of both programs, waiting until the 11th hour before the fiscal cliff hits will likely result in legislators adopting a short-term band-aid approach, such as papering over entitlement deficits with additional borrowing and tax increases, while any benefit reductions could be delayed a decade or longer. U.S. workers have the most to lose from this wait-and-see approach as they’ll get hit with the double whammy of higher taxes and a slower-growing economy.
Following current debates in Congress, legislators have moved on from worrying about passing a budget or addressing the debt to arguing over how much to increase recently agreed upon spending levels on defense and non-defense discretionary programs under the guise of emergency needs. Congress should have closed gaping loopholes in the debt limit deal to account and pay for emergency spending if legislators wanted to ensure their agreement held tight.
Unfortunately, raising the debt limit didn’t make the debt issue go away, it merely kicked the can down the road while Americans continue to struggle under the weight of ongoing inflation that’s in no small part driven by excessive government spending. Americans should ask those running for office how they will stop the government from eating up more of the economy. Without public questioning, Congress may just as well try to ignore the debt problem until 2025, when the debt limit suspension comes to an end.