Government Spending

What It Means

Government spending represents an enormous part of any modern economy. In 2006, for example, the U.S. government spent 36 percent of the country’s gross domestic product, or GDP (the monetary value of all the products and services that are bought and sold in an economy over the course of a year). Although a third of the economy might seem like a lot, other governments that year spent a much higher percentage of their country’s GDP. In Germany the percentage was 47 percent, and in Sweden it was 56.7 percent. Spending per GDP tends to be lower in developing, or poorer, countries.

All governments, regardless of size, must spend money in order to operate. Much of their money goes toward social programs, national defense, infrastructure, and other expenditures that contribute to the general well-being of its citizens. Because government spending is so large, its effect on the economy is profound. By spending money, the government makes important decisions about what products and services are provided in the economy and who benefits from these products and services.

In the United States more than half of government spending is at the national level, with the remainder done by state and local governments. The largest expense for state and local governments is typically education, followed by welfare (partially funded by the national government), highways, healthcare and hospitals, public safety (police, fire departments, jails, and prisons) transportation (roads, highways, and airports), sewer systems, and parks and recreation. Some expenses are large, such as funding a public university, and other are comparatively tiny, such as a fireworks display on the Fourth of July.

A third of all U.S. government spending at the national level goes toward taking care of the elderly. This is done through two programs: Social Security, which provides income to people generally over the age of 65, and Medicare, which reimburses the cost of much of their healthcare. National defense represents another fifth of the national government’s budget. Other large expenses at the national level are “income security” (for example, welfare and public pension benefits), Medicaid (healthcare for people with low incomes), and interest owed on the national debt (the government borrows money when it does not collect enough revenue through taxes, and it has to pay interest, or a fee, on that debt). Smaller but important expenditures include funding regulatory agencies, such as the Securities and Exchange Commission (which monitors financial markets), the Environmental Protection Agency (which addresses such environmental problems as pollution), and the Consumer Product Safety Commission (which tries to protect consumers against safety risks in consumer products).

Governments finance their spending largely through taxes. Whether it is a tax on income, property, or the sale of a product, the end result is the same: governments require citizens to send them money to pay for their spending. Although everyone benefits from some aspect of government spending, the government does not have the same competitive pressure to restrain costs that businesses do, and concerns about wasteful government spending are common.

When Did It Begin

Government spending is as old as the formation of government itself. The Code of Ur-Nammu, which is believed to have been written sometime between 2100 and 2050 bc in Mesopotamia (now in modern-day Iraq), is the oldest-known collection of laws. In the prologue carved onto the tablet, King Ur-Nammu of Ur (a city in southern Mesopotamia) invokes all of the deities that ruled the city before him and notes how one of those gods established a spending budget for the city’s temple, which was regarded as a part of the city’s governing body. After noting how many sheep and how much butter the members of the temple are permitted to barter (exchange), Ur-Nammu goes on to explain the units and subunits of the civilization’s exchange system.

As is the case with any modern government, the United States has operated on a budget since its foundation. Throughout most of its history, the country has maintained a high level of debt, which means that more often than not the U.S. government spends more money than it takes in. For example, by 1791 the national debt was reported to be almost $75.5 million. The debt grew for most of the early 1800s before it was eliminated in 1835, only to grow back up to $65 million by the start of the Civil War (1861–65). During the war the debt soared, eclipsing the $1 billion mark in 1863 and climbing all the way to $2.7 billion the following year. The debt grew steadily throughout the remainder of the century and climbed rapidly again during World War I (1914–18).

More Detailed Information

In the United States when the members of Congress draft the yearly budget, they separate expenditures into two categories: mandatory spending, which accounts for two-thirds of the U.S. budget, and discretionary spending, which accounts for the remaining third. Mandatory spending refers to the money that Congress is obligated by law to set aside each year for programs such as Social Security, Medicare, Medicaid, and national defense. Discretionary spending refers to the money that the government allocates on a yearly basis to other projects. For example, each year the government spends different amounts of money on intelligence (the FBI and CIA, for example) and highway repair. No laws commit the government to allocate a predetermined amount of funds for these projects; instead, members of Congress must appropriate the money (in other words, assign it to specific purposes) during the legislative session.

Recent Trends

One area of government spending that has risen dramatically in the early twenty-first century has been the funding of national security. Since the terrorist attacks on New York City on September 11, 2001, federal spending on the global “war on terror” has gone up significantly each year. Between 2003 and 2006 the rise in spending on the wars in Afghanistan and Iraq was particularly striking. In 2003 the federal government spent more than $70 billion on these overseas conflicts; after a slight decline in 2004, the figure rose to more than $100 billion in 2005 and nearly $120 billion in 2006. By the summer of 2007, a government report indicated that the projected cost of the wars would ultimately exceed $1 trillion.