Question

(a)What was the dollar size of the US total spending for 2018? (ii) What were its major components? (iii) Which component was largest?

(b) What was the average growth rate of federal spending as a share of US GDP during the 1960-2018 years?

(c) In dollar terms for 2014, how big was, and how fast increased, the state and local government spending in during the years 1960-2015?

(d) What was the largest component of state and local government spending?

Answer 1

a) Fiscal year 2018 (FY 2018) ran from October 1, 2017 through September 30, 2018. It was the first fiscal year budgeted by President Trump. The Treasury department reported on October 15, 2018 that the budget deficit rose from $666 billion in FY2017 to $779 billion in FY2018, an increase of $113 billion or 17.0%. The United States has the largest external debt in the world and the 14th largest government debt as % of GDP in the world. The annual budget deficit increased from $585 billion (3.2% GDP) in 2016 to $984 billion (4.7% GDP) in 2019, up 68%. Relative to a CBO forecast prior to President Trump's inauguration, the budget deficits for 2019-2021 roughly doubled, due to the Trump tax cuts and other spending legislation.

Due to the coronavirus pandemic, Congress and President Trump enacted the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES) on March 18, 2020. The Committee for a Responsible Federal Budget estimated that the budget deficit for fiscal year 2020 would increase to a record $3.8 trillion, or 18.7% GDP.

ii) Major Components are:

Mandatory/entitlement spending

Mandatory/entitlement spending is spending for programs with funding levels that are automatically determined by the number of eligible recipients in those programs. Mandatory programs are created under authorization laws, meaning that Congress must provide whatever funds are necessary to keep these programs functional. Funding for these programs cannot be adjusted in the annual budget process; on the contrary, the only way Congress can change funding levels for these programs is by amending the authorization laws directly. Each year, the Office of Management and Budget provides an estimate of required funds for these programs, which is included in the annual budget.

Mandatory programs include:

• Social Security: Financial support for the elderly.
• Healthcare: Medicare (health insurance for the elderly) and Medicaid (health insurance for low-income individuals).
• Income Security: Disability Assistance, Food and Nutrition Assistance, Supplemental Security Income, Earned Income Tax Credits, and Child Tax Credits.
• Veterans Benefits: Income Security for Veterans and Healthcare Assistance.
• Other: Agriculture, Energy, General Government Services, and International Affairs.

iii) Largest component was Mandatory Spending - Social Security will be the biggest expense, budgeted at $1.151 trillion. It's followed by Medicare at $722 billion and Medicaid at $448 billion. Social Security costs are currently 100% covered by payroll taxes and interest on investments.

Discretionary spending

Discretionary spending is optional spending that is determined by Congress each year through an annual appropriations process. After mandatory spending levels have been estimated by the Office of Management and Budget, discretionary spending is determined by both chambers of Congress and usually includes input from the current president of the United States. Subcommittees in both the House of Representatives and the Senate appropriate discretionary funds for their respective areas, and the two chambers reconcile their differences. Once a final spending bill has been created, passed and signed by the president, the bill becomes law.

Discretionary spending includes:

• Defense: Spending attributable to the maintenance and strengthening of the United States Armed Forces.
• Non-defense:
  • Transportation: Road improvements and repairs, air traffic control, Amtrak and other infrastructure investments.
  • Education: K-12 education grants, school choice programs, disability and special education programs, and lunch assistance.
  • Other veterans' benefits.
  • Public health, law enforcement, natural resources, and science.
  • Housing assistance and community services.
  • Foreign affairs and other expenditures.

National defense spending

National defense spending is any government spending attributable to the maintenance and strengthening of the United States Armed Forces, including the Army, Navy, Marines, and the Air Force. As of the fiscal year 2019 budget approved by Congress, national defense is the largest discretionary expenditure in the federal budget.

Key defense expenditures typically include:

• Power Projection: Spending on sea power and air power, including nuclear submarines, aircraft, and aircraft carriers.
• Munitions: Maintenance of existing ammunition inventory, as well as procurement of new ammunition.
• Nuclear Deterrence: Maintaining and expanding all nuclear systems.
• Overseas Contingency Operations: Funds available for unexpected warfare abroad. For example, these funds were used to pay for the wars in Iraq and Afghanistan.
• Missile Defense: Improvements in missile defense technology and integration of current technology at home and abroad.
• Space Systems and Cyberspace Operations: Communication control and radar technology.

Federal governments spend more money than they collect in tax revenue in a given year. When the government spends more than it brings in, it runs a Budget Deficit that year. In order to pay for the extra spending, governments issue debt. Government debt is the amount of money credited from individuals, firms, foreign entities as well as the federal government itself through the federal reserve system. Debt accrues over time. Most public debt is held in the form of treasury bills and bonds, and the government has to pay down debt over time. In order to provide an incentive for individuals, businesses and other entities to lend money, the government must also pay these parties interest on the debt. The interest expense for fiscal year 2019 is $363 billion, or 7.9% of the total budget. According to estimates from the Office of Management and Budget, interest on government debt is expected to more than double by 2028 and account for a larger percentage of total expenditures.

iii) Avegare growth rate of federal spending as a share of US GDP during the 1960-2018 years is 17.8%.

b) There are, of course, numerous reasons for the attention paid to the fiscal health of state and local governments. First and foremost is the sheer size of the state and local government sector. In 2015, state and local governments, in the aggregate, spent slightly more than $3.0 trillion (National Income and Products Accounts basis) somewhat less than $25,000 per U.S. household, as of December 2014, employed more than 19 million persons both full-time and part-time and approximately 16 million full-time equivalent employees. State and local government compensation of employees, purchases of intermediate goods and services, and other purchases directly affect gross domestic product (GDP), the broadest measure of economic output. In 2015, the latest complete year available, state and local expenditures on consumption and gross investment accounted for 13.4 percent of U.S. GDP.

State and local governments also contribute indirectly to economic output by providing social benefits to households, such as employee retirement, medical assistance, and income support. Governments also affect the economy through taxes and by providing incentives for various business activities. In addition, governments affect the economy through their collective saving, the difference between their revenue and spending. Similarly, state and local tax revenues were slightly more than 10 percent of net domestic product. Government consumption and gross investment expenditures show the direct effect of state and local government fiscal activities on the total economy, and tax revenues illustrate the relative level of resources extracted from the private sector by state and local governments.

Current Economic Conditions - The fiscal conditions of state and local governments are imperfectly correlated with changes, past and projected, in the economic conditions of the states. A number of organizations and researchers regularly and irregularly monitor and report on the fiscal and economic conditions of state and local governments. For example, the Urban Institute publishes a quarterly State Economic Monitor which contains state-by-state data on earnings, employment, taxes, and other indicators.

Expenditures - The most salient finding is that the methods by which state and local governments provide services and the functional composition of the expenditures have changed dramatically during the last 50-plus years. In the early years, a significant portion of state and local government spending was for the purpose of expanding infrastructure-highways, bridges, tunnels, sewerage, health facilities, and public buildings. Conversely, spending for social welfare benefits, especially expenditures for health has increased considerably. The reason for focusing on capital spending is that it underpins spending on the nation's infrastructure.

According to the American Society of Civil Engineers, the nation faces a funding gap for infrastructure between 2016 and 2025 of $1.44 trillion (in 2015 dollars), and a projected lost GDP between 2016 and 2025 of nearly $4.0 trillion.17 Although state and local governments are not solely responsible for the estimated gap in infrastructure spending, the long-term decline in capital spending by these governments surely has been a contributor to this gap. Other groups or individuals may have different estimates of infrastructure funding gaps but the probability is that the gap is substantial. This will be presented in a subsequent section.

All Expenditure

In 1960, business receipts totaled $5.1 billion, or 10.0 percent of state and local revenues and 11.4 percent of state and local government revenues from their own sources.27 In 2015, business receipts were $432.7 billion i.e. 15.3 percent of state and local government revenues and 19.3 percent of state and local government revenues from their own sources. Other non-tax receipts accounted for about 4.0 percent of state and local own-source revenues in 1960 and slightly less than 14.0 percent in the late 1980s. In 2015, the other non-tax revenues other than business receipts were approximately $220 billion, or slightly more than 10 percent of state and local government revenues from their own sources. One measure of the resources extracted by state and local governments is shown in Exhibit 11—the ratios of taxes and revenues from own sources to Net Domestic Product (NDP) from 1960 to 2015.28 Both taxes and own-source revenues, as a percent of NDP, rose sharply between 1960 and 1972, but especially rapidly between 1967 and 1972. Taxes rose from about 8.6 percent of NDP in 1967 to 10.8 percent in 1972. The corresponding rise for own-source revenue was from 11.2 percent in 1967 to 13.4 percent in 1972. Between 1979 and 1991, tax revenues as a percent of NDP rose modestly from 9.5 percent to 10.5 percent. Conversely, own-source revenues, as a percent of NDP rose fairly sharply—from 13.0 percent to 15.4 percent during the same period. The ratios of tax revenues and own-source revenues to NDP were fairly constant from 1992 to the "bump" between 2007 when both taxes and own-source revenues peaked at 10.9 percent and 15.9 percent respectively. Since 2007, taxes as a percent of NDP have fallen to 10.4 percent and own-source revenues have fallen to 15.2 percent.

All revenues

When taking an extremely broad view of state and local government finances, it is clear that the sources of revenue of state and local governments have changed significantly over the period studied. In 1960, tax revenues plus contributions to government social insurance accounted for 74.2 percent of state and local government revenues. Since 1992, tax revenues plus contributions to government social insurance have provided less than 60 percent of all state and local government revenues. Conversely, non-tax revenues, excluding federal grants-in-aid, accounted for less than 13 percent of all state and local revenues in 1960. In 1997, these revenues had nearly doubled in relative importance for state and local government providing over one-fourth of state and local government revenues. Since 1997, this ratio has dropped slightly, providing somewhat more than 23 percent of all state and local government revenues. Business receipts accounts for the bulk of non-tax revenues, excluding federal grants-in-aid. As noted previously, sales to other sectors consist primarily of hospital room charges and tuition and other charges at state and local institutions of higher learning. These revenues have become increasingly important for state and local governments. In 2012 and 2013, these revenues accounted for slightly less than 16 percent of state and local government revenues from all sources and about 80 percent of non-tax revenues, excluding federal grants-in-aid. Conversely, these revenues provided between 10 and 12 percent of all state and local revenues from 1960 to 1985. The relative importance of income receipts on assets (interest and miscellaneous receipts and dividends) plus net transfers from businesses and individuals grew from 3.4 percent of revenues in 1960 to about 11.0 percent in 1986 and 1987. In 2015, these receipts accounted for less than 8 percent of state and local government revenues. Federal grants-in-aid grew at an average annual rate of 8.3 percent between 1960 and 2015 significantly faster than all state and local government revenue (7.7 percent) and own-source revenues (7.6 percent) and tax revenues (7.3 percent). Between 1960 and 2015, federal grants-in-aid provided nearly 19 percent of all state and local government revenues, and were the largest source of revenue, in the aggregate, after taxes plus contributions for social insurance.30 Grants-in-aid, as a percentage of state and local government revenue, rose rapidly between 1960 and 1971—from 13.2 percent of all revenues to 18.7 percent of all revenues.

Summary and Conclusion

The fiscal systems of state and local governments have undergone major changes over the past 55 years as a result of changing demographics, costs of providing certain services, and shifting priorities. The composition of state and local spending has changed dramatically, both in terms of the type and the functional breakdown during this period. The most noticeable change in the type of spending has been the growth of spending for social welfare benefits and health, which has far outstripped the growth in spending on infrastructure (measured by growth in net investment spending). Consumption spending (labor compensation, purchases of intermediate goods and services) has remained fairly constant as a proportion of total spending, and total spending on consumption and gross investment, in current dollars, has outstripped the growth of GDP. However, when both state and local spending on consumption and GDP are deflated by their respective price deflators, a totally different picture emerges—state and local spending, as a share of real GDP, has generally fallen each year since 1975. Despite the falling share of GDP represented by constant dollar spending on consumption and gross investment, state and local spending accounts for about 15 percent of U.S. GDP. However, to some observers, the major change in the focus of state and local governments away from investment and toward social welfare benefits has resulted in inadequate roads, bridges, and water supply systems. The most important change in the functional breakdown of state and local spending is the growth of spending on health care, primarily Medicaid. In 2015, health care spending constituted somewhat less than 24 percent of state and local spending; in contrast, health care spending constituted about 8 percent of spending in 1960. Conversely, spending for economic affairs—highways, airports, port facilities,

c) COMPONENTS OF STATE AND LOCAL GOVERNMENT SPENDING

Although federal government spending often gets most of the media attention, state and local government spending is also substantial—at about $3.1 trillion in 2014. Figure 3 shows that state and local government spending has increased during the last four decades from around 8% to around 14% today. The single biggest item is education, which accounts for about one-third of the total. The rest covers programs like highways, libraries, hospitals and healthcare, parks, and police and fire protection. Unlike the federal government, all states (except Vermont) have balanced budget laws, which means any gaps between revenues and spending must be closed by higher taxes, lower spending, drawing down their previous savings, or some combination of all of these.