Government spending

Macroeconomic fiscal policy

For fiscal policy, increases in government spending are expansionary, while decreases are contractionary. John Maynard Keynes was one of the first economists to advocate government deficit spending (increased government spending financed by borrowing) as part of the fiscal policy response to an economic contraction. According to Keynesian economics, increased government spending raises aggregate demand and increases consumption, which leads to increased production and faster recovery from recessions. Classical economists, on the other hand, believe that increased government spending exacerbates an economic contraction by shifting resources from the private sector, which they consider productive, to the public sector, which they consider unproductive.

Current use: final consumption expenditure

Government acquisition of goods and services for current use to directly satisfy individual or collective needs of the members of the community is called government final consumption expenditure (GFCE.) It is a purchase from the national accounts "use of income account" for goods and services directly satisfying of individual needs (individual consumption) or collective needs of members of the community (collective consumption). GFCE consists of the value of the goods and services produced by the government itself other than own-account capital formation and sales and of purchases by the government of goods and services produced by market producers that are supplied to households - without any transformation – as "social transfers" in kind.

Infrastructure and investment: gross fixed capital formation

Government acquisition intended to create future benefits, such as infrastructure investment or research spending, is called gross fixed capital formation, or government investment, which usually is the largest part of the government. Acquisition of goods and services is made through production by the government (using the government's labour force, fixed assets and purchased goods and services for intermediate consumption) or through purchases of goods and services from market producers. In economic theory or in macroeconomics, investment is the amount purchased per unit of time of goods which are not consumed but are to be used for future production (i.e. capital). Examples include railroad or factory construction.

Infrastructure spending is considered government investment because it will usually save money in the long run, and thereby reduce the net present value of government liabilities.

Spending on physical infrastructure in the U.S. returns an average of about $1.92 for each $1.00 spent on nonresidential construction because it is almost always less expensive to maintain than repair or replace once it has become unusable.

Likewise, government spending on social infrastructure, such as preventative health care, can save several hundreds of billions of dollars per year in the U.S., because for example cancer patients are more likely to be diagnosed at Stage I where curative treatment is typically a few outpatient visits, instead of at Stage III or later in an emergency room where treatment can involve years of hospitalization and is often terminal.

Transfer payments

Government expenditures that are not acquisition of goods and services, and instead just represent transfers of money, such as social security payments, are called transfer payments. These payments are considered to be exhaustive because they do not directly absorb resources or create output. In other words, the transfer is made without any exchange of goods or services. Examples of certain transfer payments include welfare (financial aid), social security, and government giving subsidies to certain businesses (firms).

Per capita

In 2010 the average national government spent $2,376 per citizen, while the average for the world's 20 largest economies (in terms of GDP) was $16,110 per citizen. Norway and Sweden topped the list with per citizen spending of $40,908 and $26,760 respectively. The federal government of the USA spent an average of $11,041 per citizen (per capita), ahead of only South Korea ($4,557), Brazil ($2,813), Russia ($2,458), China ($1,010), and India ($226) in the twenty largest world economies. The figures below, indicate 41.6% of GDP spending and a GDP per capita of $54,629, which suggests and total per person government spending of $22,726 in the U.S.

As a percentage of GDP

This is a list of countries by government spending as a percentage of gross domestic product (GDP) for the listed countries, according to the 2014 Index of Economic Freedom by The Heritage Foundation and The Wall Street Journal. Tax revenue is included for comparison.

United States

Government spending in the United States of America occurs at several levels of government, including primarily federal, state, and local governments. The Organisation for Economic Co-operation and Development (OECD) reports that total federal, state and local spending in the United States was $6.134 trillion in 2010. This is tracked in National Income and Product Accounts.

Federal spending

As of September 2001 the U.S. Congressional Budget Office reported that federal government spending for 2004 was projected to be $2.293 trillion, or slightly less than 20% of the GDP. Of that, $646.7 billion was for net interest, $486 billion for defense, $492 billion for Social Security, $473 billion for Medicare and Medicaid, $191 billion for various welfare programs, $136 billion for "retirement and disability" benefits, and $64 billion was projected to be spent elsewhere.

There are two types of government spending – discretionary and mandatory. Discretionary spending, which accounts for roughly one-third of all Federal spending, includes money for things like the Army, FBI, the Coast Guard, and highway projects. Congress explicitly determines how much to spend on these programs on an annual basis in annual appropriations bills.

Mandatory spending accounts for two-thirds of all federal spending. This kind of spending is authorized by permanent laws, and includes insurance programs like Social Security, Medicare/Medicaid, the Supplemental Nutrition Assistance Program, and federal retirement and disability programs that provide benefits to federal civilian employees, members of the military, and veterans. Spending levels in these areas are mostly determined by the number of people who request and qualify for the program benefits as determined by the agencies. In some cases, mandatory spending is influenced by earmarks in multi-year spending bills like highway bills and farm bills.

All government agencies face congressional oversight and most programs are updated and amended by congressional legislation, as well as internal agency rules and regulations. U.S. Congress members who seek to influence agencies with direct control have at times been prosecuted or disciplined by the respective House and Senate Ethics Committees.

State and local spending

The United States Census Bureau conducts a Census of Governments every five years for fiscal years ending in 2 or 7. The latest fiscal year covered by the Census of Governments is 2012.

History

The United States Census Bureau publishes historical data on government spending in the United States in its Statistical Abstract of the United States and in its special release of historical statistics in 1976 at the time of the US Bicentennial.

Over the last century, overall government spending in the United States has increased substantially from about seven percent of GDP in 1902 to about 35 percent of GDP in 2010. Major spikes in spending occurred in World War I and World War II.

When broken down by major function, the history of US government spending as a percent of GDP shows a slow and consistent increase in education spending; it shows the spikes in defense spending during World War I and World War II, and the sustained high level maintained during the Cold War. Spending on welfare shows a clear takeoff during the Great Depression and a modest decline following reform in 1996. Spending on pensions (primarily Social Security) begins to show up in the 1950s. Health care spending takes off after the birth of Medicare and Medicaid in the 1960s and shows sustained growth ever since. By 1990, the United States was spending 2 per cent of its budget on education, as against 30 per cent on the elderly.