Government Spending as a Proportion of GDP

Running with the US Government spending theme of the last few posts, I grew curious to see the total US Government expenditure over time, which is publicly available via the St. Louis Fed’s FRED database. Going back to 1947, one can see the growth of US government spending over time (in nominal dollars) to 2010. Because we only have data for the first half of 2010, the full spending for 2010 is estimated as twice the recorded spending in the first half of 2010.

Here is the chart of government spending based on the FRED data. Federal non-defense spending comes from FRED series FNDEFX, federal defense spending is series FDEFX, and total government spending (including state and local) is series GCE.




Woah! That looks like spending is going way out of control, rising exponentially (except for the recent decline in state and local government spending). No wonder it looks like spending is running away like wildfire.

But, of course, the entire economy has been growing at the same time, also exponentially. So what is really more important is not so much the total dollar amount of spending, but the proportion of GDP that government is responsible for. Spending may be going up, even in real terms, but that doesn’t necessarily mean that the government is taking over the economy, socialism, and all that fun stuff the Tea Partiers like to crow about. Now, I don’t claim that this is a unique insight; government spending as a proportion of GDP is a fairly common measurement in comparative political economic analysis. As a note, measuring spending as a proportion of GDP also helps control for the effects of inflation, since both nominal GDP and federal spending will track inflation at more or less the same rate.

Here is the growth of government spending as a percent of gross domestic product since 1947.



This view presents some very interesting information for trendwatchers, in part because it doesn’t show government spending spiraling out of control. In fact, it shows that most government spending is growing more or less in line with the economy as a whole. The most volatile part of current government spending is the defense budget. The FRED data shows that non-defense federal spending has been fairly steady at 2%-3% of GDP. Defense spending registers as larger (often substantially larger) than non-defense spending, and state-and-local-governments are responsible for almost 2/3 of total government spending.

Both federal non-defense and state-and-local spending have been relatively steady proportions of total GDP, not growing markedly over time as one might think from the electoral debates. The main driver of changes in terms of expenditures has been federal defense spending, which has basically trended downwards except for the defense buildup under Ronald Reagan and another for the Global War on Terror, Afghan, and Iraq wars.

There are two things that are not covered on this chart, however. The first is the present value of Medicare and Social Security liabilities that the US Government is currently committed to pay as the baby boom (and later) generations retire. Ideally one would want to make an estimate of those liabilities and then pay them out as an annuity discounted at a rate that reflects the uncertainties in life expectancy, morbidity, inflation, and costs. We shall save that for another post.

The key point here is that normal federal government activities are not a particularly large share of the economy, despite what Tea Partiers say. The largest share of total government spending is done by state and local governments, who are precisely the governments that are strapped for cash and cutting services right now. Remember that these figures include the current fiscal stimulus spending to 2010.

Comparison to other Countries?

How does United States government spending compare to other countries in the world, as a percentage of GDP? If we look to World Bank Public Data available and look at government expenditure as a percent of GDP comparatively, we get the following histogram (prepared in the R statistical environment). The data is for 2007, which is the last year for which this dataset has reasonably complete figures for most countries.



The dotted red line in the middle represents the US, which the World Bank records as having consumption expenditures of 15.8%, making the US just slightly higher than the average country in the dataset.

If we compare spending to only the advanced industrial countries, the US is actually one of the lowest spending countries in the dataset, topped out only by the financial centers of Switzerland and Luxembourg.



What this shows is that our spending is not particularly excessive either on a historical basis or on a comparative, cross-sectional basis.

The main concern, then, is how to plan for retirement and health care coverage for the retiring baby-boom generation. But as much as the Tea Partiers want to slash government spending, few seem to venture out and suggest cutting grandma off from her social security payments or denying her medicare. Yet these are the plans that will eventually explode the budget, and no amount of cutting unemployment benefits or reigning in public education expenses or police forces will solve that issue. I will take up the question of how “entitlements” are likely to expand in a future discussion.