Spending Steadily Increasing

Government spending in the United States has steadily increased from $1.5 trillion in the mid 1980s to over $6 trillion today. But as a percent of GDP it has kept in a range from 33 percent to 38 percent of GDP.

Chart 2.11: Government Spending in dollars

Government spending first reached $1.5 trillion in the mid 1980s, and then breached $2 trillion in the recession year of 1991. In the 1990s spending increases started to level off, reaching $3 trillion in 1999. But in the 2000s with the dot-com crash and 9/11 government spending began to accelerate, reaching $4 trillion in 2004 and $5 trillion in 2008. Then came the Crash of 2008 and government spending exploded to $6 trillion in 2010. After a few years of modest growth, spending is expected to resume regular increases by the mid 2010s.

Chart 2.12: Government Spending as Percent of GDP

Viewed as a percent of Gross Domestic Product (GDP) government spending in recent years has remained stable. At 35 percent of GDP in 1985, spending decreased as a percent of GDP until the recession of 1990-91 when it increased to over 37 percent of GDP. Then a steady decline in spending as a percent of GDP set in for the rest of the 1990s, declining to 32.8 percent of GDP in 2000. But spending increased in the 2000s to 35 percent of GDP under the influence of the recession of 2000-01 and increased defense spending after 9/11.

In the Crash of 2008 government spending increased sharply to bail out the banks and to provide "stimulus" to the economy. Spending reached 42.4 percent of GDP in 2009. But spending is expected to decline and plateau at about 38 percent of GDP in the next few years.

Recent Spending by Government Level

Federal spending as a percent of GDP has shown a decline in recent decades. But state and local spending have increased.

Chart 2.13: Government Spending by Level

Federal spending stood at 22.4 percent of GDP in 1985. State government spending was 6.4 percent of GDP and local spending was 9.2 percent of GDP. By the year 2000 federal spending had decreased to 18.1 percent of GDP, but state spending had increased to 7.7 percent of GDP and local spending had increased to 10 percent of GDP.

In the 2000s federal spending increased to 19.5 percent of GDP by 2007, state spending increased to 8.4 percent of GDP and local spending increased to 10.6 percent of GDP. Then came the Crash of 2008. In 2009 federal spending peaked at 23.8 percent of GDP, state spending stood at 9.5 percent of GDP and local spending peaked at 11.6 percent of GDP.

Chart Key:
- Transfer to state and local
- Federal direct spending
- State direct spending
- Local direct spending

In the near future, federal spending is expected to stabilize at 22.3 percent of GDP, state spending at 8.6 percent of GDP, and local spending at 10.7 percent of GDP.

Recent Defense Spending

Defense spending declined in the 1990s and increased in the 2000s.

Chart 2.14: Recent Defense Spending

Defense spending stood at 7 percent of GDP at the height of the Reagan defense buildup. But it began to decline after the mid-1980s, declining below 6 percent in 1990, below 5 percent in 1994 and bottoming out at 3.6 percent of GDP in 2001. The terrorist attack of 9/11 changed that, and defense spending began a steady increase, reaching 5.1 percent of GDP in 2008 with the "surge" in Iraq and 6.0 percent in 2011 with the stepped up effort in Afghanistan. Defense spending is expected to decline to 4.7 percent of GDP by 2015.

Pensions and Health Care Spending

Pensions and health care spending has increased steadily in recent years.

Chart 2.15: Pensions and Health Care

Government pensions, primarily Social Security, cost about 5.3 percent of GDP in 1985. Government healh care, primarily Medicare and Medicaid, cost 3.5 percent of GDP. Since then, pension expenditure has increased, by 2011, to 6.5 percent. But health care expenditure has more than doubled as a percent of GDP to 7.4 percent of GDP in 2011.

Chart 2.16: Health Care Increases

Health care is primarily a federal and state concern. In 1985 direct federal health care spending amounted to 2.4 percent of GDP with an additional 0.5 percent of GDP transferred to states for Medicaid. States spent 1.1 percent of GDP on health care in 1985, and local governments spent 0.6 percent of GDP on health care.

By 2000 the federal government was spending 3.6 percent directly on health care and sending 1.7 percent of GDP to the states. State health care spending had doubled to 2.3 percent of GDP. Local health care spending had increased to 0.7 percent of GDP.

By 2010 health care had jumped again. Federal health care spending had increased to 5.9 percent of GDP, with an additional 2.1 percent sent to the states. States were spending 2.7 percent of GDP on health care and local governments 0.8 percent of GDP.

Education Spending

Chart 2.17: Education Spending Trends

Education spending occurs primarily at the local level in the United States. In 1985 local governments spent 3.3 percent of GDP on education. The federal government spent 0.7 percent of GDP directly on education and transferred 0.4 percent of GDP to states and local governments. States spent 1.3 percent of GDP on education.

By 2000 local governments were spending 4.0 percent of GDP on education, and states were spending 1.4 percent of GDP. The federal government was transferring 0.5 percent of GDP for states and local governments to spend, and directly spending 0.6 percent of GDP on education.

Ten years later, in 2010, local governments were spending 4.3 percent of GDP on education, and states were spending 1.4 percent of GDP. The federal government was transferring 0.6 percent of GDP for states and local governments to spend, and directly spending 1.0 percent of GDP on education.

Welfare Spending

Chart 2.18: Welfare Spending Trends

Welfare spending in the United States tracks with the business cycle. Starting at 3.5 percent of GDP in 1985, welfare spending had declined to 3 percent of GDP by 1990. Then the recession of 1990-91 recession hit and welfare spending doubled to 4 percent of GDP by 1992. With the help of welfare reform in 1996, welfare spending declined back down to 3 percent of GDP by 2000, just in time for the recession of 2000-01.

In the early 2000s, welfare spending increased, reaching over 3.7 percent of GDP by 2003, and then declined back down to 3 percent of GDP by 2007. In the Great Recession of 2007-09 welfare spending exploded, reaching 4.5 percent of GDP in 2009 and 4.8 percent of GDP in 2010. Welfare spending is expected to decline sharply in the recovery from the Great Recession.