By Bill Johnston
We have all heard the advice "follow the money" to understand a situation better.
In this election year, we may gain insights into our nation's financial priorities by following how the Federal Government spends its money.
Hopefully, we can use this insight to identify better the candidates for public office who most closely reflect our values.
Figure 1 below shows that about 66 percent of total federal spending is for mandatory programs not subject to regular budget review. Nearly 26 percent of expenditures cover discretionary programs for which Congress must regularly appropriate funds. Eight percent is spent on interest on government debt.
Mandatory spending covers outlays (actual expenditures) controlled by laws, not appropriations. Almost all Mandatory spending is for what is termed "entitlements." Mandatory expenditures depend on individual eligibility and participation and are funded at whatever level is needed to cover the resulting costs.
Figure 2 illustrates that mandatory spending has grown significantly from 26 percent of the budget in 1962 to 66 percent in 2022.
This growth is mainly because of new entitlements, including Medicare and Medicaid (1965), the earned income tax credit (1975), and the child tax credit (1997).
In addition, increased Social Security guaranteed income benefits during the 1960s and early 1970s and the rapid growth of older people and disabled populations have contributed to increased Social Security and Medicare outlays.
Figure 3 below highlights guaranteed income security spending, representing nearly half of mandatory spending in 2022. These expenditures include Social Security + "Income Security" programs such as the Child Tax Credit, food and nutrition assistance, and federal employee benefits. Most of the remainder of the mandatory spending is paid for the two major government health programs, Medicare and Medicaid.
Discretionary spending covers programs that require appropriations by Congress. Unlike mandatory spending, the programs and the authorized spending levels require regular renewal by Congress. The share of the budget going for discretionary spending has fallen from two-thirds in 1962 to 26 percent now.
Figure 4 shows that 45 percent of FY 2022 discretionary spending went towards national defense, and most of the rest went for domestic programs, including transportation, education and training, veterans' benefits, income security, and health care. About 4 percent of discretionary spending funded international activities, such as foreign aid.
Another view of "following the money" uses the 2024 year-to-date data below for more recent information.
The Top Five of all expense categories are illustrated to focus on the big picture. Although the Top Five does represent 72% of all outlays.
U.S. Government Outlays – First Three Months of 2024
Mandatory and Discretionary Outlays
Top 5 Categories | Outlays as a $ Amount | Outlays as a % |
Social Security | 761.5 billion | 16.8 |
Medicare | 738.1 billion | 16.3 |
Defense | 669.2 billion | 14.8 |
Medicaid | 540.3 billion | 12.4 |
Net Interest | 531.1 billion | 11.7 |
Observations
Providing healthcare, which accounts for almost 29% of total outlays, is the most significant outlay (Medicare + Medicaid).
Providing Social Security guaranteed income is the second largest outlay at almost 17%.
Providing National Defense is the third largest outlay at 14%.
Perhaps most surprisingly, we are paying almost 12% of our outlays on the interest on our debt.
Food For Thought
Medicare and Social Security Trustees have warned of solvency concerns in the next five and ten years.
If America decided to increase funding sufficient to avoid the insolvency concerns of both programs:
Would you favor increasing taxes or reducing outlays somewhere else?
If you would reduce outlays somewhere else, where would you explicitly mitigate them?
In the increasingly tumultuous global environment of more and more "hot spots," it is predictable the U.S. could get even more involved than now.
Would you increase taxes or reduce outlays elsewhere if you favor more U.S. involvement?
If you favor reducing outlays somewhere else, where would you explicitly reduce outlays?
Clarifications
The terms deficit and debt are often confused with one another.
The term "Deficit" refers to an annual situation. The Federal government borrows money from investors to pay for a deficit by selling Treasury bonds, bills, and other securities and paying interest.
"Debt" refers to the accumulation over the years of unpaid deficits and the associated interest owed to the investors. As the federal government experiences reoccurring deficits, the national debt grows.
Another source of confusion is the timing of the government's fiscal year, which begins on October 1 and ends on September 30. These dates have historical roots in the agricultural sector, providing time to prepare the budget, legislative tradition, and political considerations.
Summary
Election years allow us to rethink how we would reallocate our national spending priorities and our willingness to adjust tax levels. "Following the Money" provides us with some of the facts needed to consider reallocating our spending and taxing priorities, dialogue with our candidates, and vote accordingly.
References
USAspending.gov is the official open data source of federal spending information.
The Congressional Budget Office (CBO) provides budget and economic information to Congress.
Office of Management and Budget, Historical Tables
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