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Government Spending Essays – IELTS Writing

Posted by David S. Wills | Feb 21, 2022 | IELTS Tips , Writing | 0

In IELTS writing task 2, it is quite common to be asked about how governments should spend their money. In fact, I see this so frequently that it is almost a unique topic!

Today, I want to show you a few essays about government spending, looking at some sample answers and language points so that you can better understand how to approach this sort of essay.

Government Spending Essays for Task 2

First of all, let’s look at three IELTS task 2 questions that deal with government spending:

The prevention of health problems and illness is more important than treatment and medicine. Government funding should reflect this. To what extent do you agree?

The world today is a safer place than it was a hundred years ago, and governments should stop spending large amounts of money on their armed forces. To what extent do you agree or disagree with this statement?

The restoration of old buildings in major cities around the world causes enormous government expenditure. This money should be used for new housing and road development. To what extent do you agree or disagree?

The first question is about how governments should spend money on healthcare , the second is about whether or not they should spend money for military purposes , and the third is about maintaining old building s. As you can see, then, the issue of government funding could be applied to a range of areas.

Also, note the different words and phrases used to introduce the idea of government spending. In the first, it is “government funding,” in the second, “spending” is a verb,” and in the third, it says “government expenditure.”

Vocabulary about Government Spending

When it comes to the topic of government spending, you obviously need to be able to discuss money and specifically large amounts of money. You need to know words and phrases related to government expenditure. Here are some useful ones:

All of these words and phrases will be used in my sample answers below.

You can also see some money idioms here:

When it comes to money verbs, don’t forget that we need to collocate them with certain prepositions. Typically, we say “spend money on”, “invest money in,” or “allocate money for”. There are other common collocations as well. Here are a few examples:

• He spent his birthday money on a new pair of shoes.
• She spent most of her budget on building a social media following.
• We’re going to invest in Apple.
• They invested too much money in that doomed project.
• We saved money on our gas bill by switching providers.

Finally, be careful with the word “budget.” This is one word that I see misused very frequently in IELTS essays. Here is a visual lesson about it, which I posted on Facebook .

You can learn more money vocabulary and also look at some IELTS speaking questions about money in this lesson .

Sample Answers

Ok, now let’s look at my answers to the above questions. These contain the vocabulary I taught you. Take note of how those words and phrases are used.

Essay #1: Government Spending on Healthcare

The prevention of health problems and illness is more important than treatment and medicine. Government funding should reflect this.

To what extent do you agree?

In many countries, government spending on healthcare is a major economic burden. Problems like obesity and heart disease are crippling healthcare systems, and some people suggest that rather than raise taxes to pay for treatments, more money should be invested in preventing these illnesses in the first place. This essay will argue that prevention is better than treatment.

The most obvious benefit of putting prevention before treatment is the reduction in human suffering that would inevitably result. Some of the biggest health problems in modern societies are utterly preventable, and therefore it is reasonable to suggest that money spent this way would cause less anguish. Government campaigns to reduce smoking would reduce cancer rates and this would increase people’s quality of life, and of course end the suffering of people who lose loved ones.

From a purely financial standpoint, it is beneficial to focus on preventing sickness rather than curing it. The cost of treating sick people with expensive medical procedures, equipment, and medicines is vastly higher than the cost of educating people not to smoke, eat unhealthily, or otherwise lead unhealthy lifestyles. Government campaigns have led to huge decreases in smoking in many Western countries, and it is likely that similar campaigns would yield similar results elsewhere. An additional benefit would be the lowering of taxes due to reduced expenditure on healthcare.

In conclusion, preventing a disease makes more sense than waiting to treat it. The benefits to average people and also to governments are significantly higher than simply investing in treatments.

Essay #2: Government Spending on Military

The world today is a safer place than it was a hundred years ago, and governments should stop spending large amounts of money on their armed forces.

To what extent do you agree or disagree with this statement?

In many developed countries, people discuss the ethics of government spending on military forces, with many people pointing out that it is wasteful. This essay will suggest that they are probably right, but that it is a more complicated situation than they think.

To begin with, it is clear that some countries spend vast sums of money on their militaries when there are many other problems that could be tackled using that money. Between the USA and China, for example, more than $1 trillion is spent per year on equipping their various armed forces and this money could potentially have been invested into protecting the environment, ending homelessness and hunger, or improving education systems. Given that these two nations are highly unlikely to be attacked by any other, it seems absurd that they invest so much money in this way.

However, all of that overlooks the fact that geopolitics is complicated and human nature has some dark elements. Although people live in an unprecedented era of peace, it is nonetheless true that this peace is not guaranteed and that it is predicated to some extent upon the fear of reprisals. The US may seem incredibly wasteful with its military spending, but if it did not maintain such a huge military, other aggressive nations would surely attack their neighbours. They are dissuaded of this by the threat of American intervention. Whilst this is highly problematic as no single country should function as a “world police,” it has certainly helped deter and even end major conflicts over the past half century.

In conclusion, it is not easy to say whether countries should stop spending so much money on their militaries. Indeed, whilst it appears this is a reasonable suggestion, the truth is more complicated.

Essay #3: Government Spending on Old Buildings

The restoration of old buildings in major cities around the world causes enormous government expenditure. This money should be used for new housing and road development.

To what extent do you agree or disagree?

Government spending is a highly controversial issue because people naturally have different priorities and beliefs. Some of them think that the money spent on the restoration of old buildings is wasteful, but this essay will argue against that notion, suggesting instead that these are essential pieces of a nation’s heritage.

To begin with, it is understandable that people might feel this way because there are numerous ways that a national budget might be spent, and old buildings are probably not high on most people’s lists. However, not everything that is important is obvious and often people do not realise the value of something until it is gone. Around Asia, for example, many countries underwent the same sort of industrial development in just two or three decades that Europe went through over a period of several centuries. As a result, these countries lost most of their ancient buildings, and these cannot be recovered. Many governments fund the construction of replicas, but these obviously lack the authenticity of truly ancient buildings.

Letting these buildings fall into ruin shows a staggering lack of civic pride. Cities and countries must unite to fund the maintenance of important shared spaces, including these historic sites. Without these places, cities begin to look unremarkable and it is hard to tell one place from another. Whilst it is important to devote spending to new projects, governments must not overlook the heritage aspect that defined their city or country over a long period of time, and which continues to mark it in the modern era.

In conclusion, old buildings may seem like a waste of money because they can be expensive to maintain, but they are important in various ways, and so governments should set aside funding to ensure their upkeep. 

About The Author

David S. Wills

David S. Wills is the author of Scientologist! William S. Burroughs and the 'Weird Cult' and the founder/editor of Beatdom literary journal. He lives and works in rural Cambodia and loves to travel. He has worked as an IELTS tutor since 2010, has completed both TEFL and CELTA courses, and has a certificate from Cambridge for Teaching Writing. David has worked in many different countries, and for several years designed a writing course for the University of Worcester. In 2018, he wrote the popular IELTS handbook, Grammar for IELTS Writing and he has since written two other books about IELTS. His other IELTS website is called IELTS Teaching.

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Government Spending

What do governments spend their financial resources on?

By: Esteban Ortiz-Ospina and Max Roser

This page was first published in October 16 and last revised in March 2023.

Public spending enables governments to produce and purchase goods and services, in order to fulfill their objectives – such as the provision of public goods or the redistribution of resources. In this topic page we study public spending through the lens of aggregate cross-country data on government expenditures. We begin with an analysis of historical trends and then move on to analyze recent developments in public spending patterns around the world.

The available long-run data shows that the role and size of governments around the world have changed drastically in the last couple of centuries. In early-industrialized countries, specifically, the historical data shows that public spending increased remarkably in the 20th century , as governments started spending more resources on social protection, education, and healthcare.

Recent data on public spending reveals substantial differences across countries. Relative to low-income countries, government expenditure in high-income countries tends to be much larger (both in per capita terms, and as a share of GDP), and it also tends to be more focused on social protection .

Recent data on public spending also shows that governments around the world often rely on the private sector to produce and manage goods and services . And public-private partnerships (PPP), in particular, have become an increasingly popular mechanism for governments to finance, design, build, and operate infrastructure projects. In the period 2005-2010 alone, the total value of PPP projects in low and middle-income countries more than doubled .

Other research and writing on government spending on Our World in Data:

• Healthcare Spending
• Education Spending

Related topics

Military Personnel and Spending

How large are countries’ militaries? How much do they spend on their armed forces? Explore global data on military personnel and spending.

State Capacity

Do governments worldwide have the ability to implement their policies? How is this changing over time? Explore research and data on state capacity.

How common is corruption? What impact does it have? And what can be done to reduce it?

See all interactive charts on government spending ↓

History of government spending

Government spending in early-industrialised countries grew remarkably during the last century.

The visualization shows the evolution of government expenditure as a share of national income, for a selection of countries over the last century. The source of the data is Mauro et al. (2015). 1

If we focus on early-industrialized countries, we can see that there are four broad periods in this chart. In the first period, until the First World War, spending was generally low. These low levels of public spending were just enough for governments to be concerned with basic functions, such as maintaining order and enforcing property rights.

In the second period, between 1915 and 1945, public spending was generally volatile, particularly for countries that were more heavily involved in the First and Second World Wars. Government expenditures as a share of national output went sharply up and down in these countries, mainly because of changes in defense spending and national incomes.

In the third period, between 1945 and 1980, public spending grew particularly fast. As we show in more detail later, this was the result of growth in social spending ; and was largely made possible by historical increases in government revenues over the same period .

Since 1980 the growth of government expenditure has been slowing down in early-industrialized countries – and in some cases, it has gone down in relative terms. However, in spite of differences in levels, in all these countries public spending as a share of GDP is higher today than before the Second World War.

Although the increase in public spending has not been equal in all countries, it is still remarkable that growth has been a general phenomenon, despite large underlying institutional differences.

At the end of the 19th century, European countries spent less than 10% of GDP via the government. In the 21st century, this figure is around 50% in many European countries. The increase in absolute terms – rather than the shown relative terms – is much larger since the level of GDP per capita increased very substantially over this period.

Public spending growth in early-industrialised countries was largely driven by social spending

The visualization above shows that government spending in early-industrialized countries grew substantially in the 20th century. The next visualization shows that this was the result of growth specifically in social spending.

The steep growth of social spending in the second half of the 20th century was largely driven by the expansion of public funding for healthcare and education .

Government spending across the world

Total government spending.

The next visualization maps recent estimates of central government expenditure, as a share of national incomes, across the world. The data is published as part of the World Development Indicators and comes from the IMF.

The most striking feature in the chart is the degree of heterogeneity between world regions. Central governments in high-income countries – particularly those in Europe – tend to control a much larger share of national production than governments in low-income countries.

Countries like France spend multiple times as much as countries like Ethiopia.

These estimates have to be interpreted with caution, since central government expenditure provides a somewhat distorted picture of total public spending, particularly in federal countries with large sub-national governments.

Spending per person

The visualization shows total public expenditure per capita, across all levels of government. To allow for cross-country comparability, these estimates are expressed in current PPP US dollars .

As we can see, cross-country differences are also large here. In India, the government spends a fraction per person than countries like Norway.

Composition of government expenditure

Governments differ substantially not only in size but also in priorities.

The visualizations above show that governments around the world differ considerably in size, even after controlling for underlying differences in economic activity and population. Here we show that governments also differ substantially in terms of how they prioritize expenditures.

The visualization shows the share of government expenditure that is specifically allocated to education.

As we can see, there are large and persistent differences, even within developing countries. The education spending in some developing countries makes up twice or three times the spending in others.

The proportion of government spending that goes towards social protection varies substantially across OECD countries

We have already pointed out that governments in high-income countries spend more resources than governments in low-income countries, both in per capita terms and as a share of their national incomes.

More so, high-income countries also have higher levels of social spending than countries with lower average incomes. 2

The chart here shows social protection expenditures as a share of total general government spending, across different OECD countries. As we can see, there are also large differences across OECD countries themselves.

How do OECD countries distribute their allocations to social spending?

In the chart here we see the allocation of public spending (given as the percentage of a country's GDP) across a range of 'social spending' branches. Note that you can change which country is shown.

Although there are some differences across countries in how social expenditure is distributed, the three priorities are predominantly the same across the OECD. Old age expenditure (in the form of pensions and elderly care) typically receives the largest allocation of social spending, followed by health, with either family or incapacity-related benefits typically coming in third.

The relative importance of these branches has remained largely constant since 1980.

Employee compensation accounts for a large share of public spending in many low-income countries

The next visualization shows the share of central government expenditure that goes to the compensation of government employees. Compensation of employees includes all salaries and benefits (both in cash and in-kind).

As we can see, the salaries of public servants and other government employees are an important component of public spending in most countries. Yet differences between countries are very large.

Throughout Europe, the share of government spending that is devoted to the compensation of government employees ranges between 5% and 15%. In contrast, throughout most of Africa, the available figures range between 30% and 50%.

Public procurement

Procurement plays an important role in government expenditure.

Governments around the world often rely on the private sector to produce and manage goods and services. The process through which governments purchase works, goods, and services from companies, which they have selected for this purpose, is often referred to as 'public procurement.'

The visualization shows the importance of public procurement in OECD countries (and partner countries providing comparable data). It shows the value of total general government procurement as a percentage of GDP.

As we can see, public sector purchases from the private sector are significant in many high-income countries.

Procurement is more than subcontracting large infrastructure projects

Public procurement comprises many different forms of purchases. Public procurement includes, for example, tendering and contracting in order to build large infrastructural projects. However, public procurement goes beyond infrastructure. It also includes, for example, purchases of routine office supplies.

Generally speaking, the part of public procurement that does not fall within the category of gross fixed capital formation (e.g. building new roads), is referred to as 'outsourcing', or 'contracting out'. This form of procurement often relies on short-term contracts.

According to the definitions used by the OECD, outsourcing includes both intermediate goods used by governments (such as procurement of information technology services), or the outsourcing of final goods and services financed by governments (such as social transfers in kind via market producers paid for by governments).

The visualization shows total expenditures on general government outsourcing (accounting for both intermediate and final goods), as a share of GDP.

As we can see, governments in many high-income countries spend substantial resources via outsourcing.

Procurement of infrastructure projects has grown substantially in low and middle-income countries

Public procurement strategies available to governments are varied. Governments may choose to take responsibility for financing, designing, building, and operating infrastructure projects – and they simply outsource specific elements. Or they may choose to pursue a public-private partnership, where private actors directly take responsibility for all these aspects, from financing to operation.

The term 'private finance initiative' is often used to denote a public procurement strategy, whereby governments choose a private firm (or consortium) to construct and operate – and sometimes also finance – public infrastructure. These initiatives typically take the form of long-term contracts. The term 'public-private partnerships' is often used to denote those private finance initiatives where the public sector retains an important participation. More information about terms and classification methodologies can be found in the resources provided by the World Bank's Private Participation in Infrastructure Database (PPID) .

The chart, from the World Bank's PPID, shows the evolution of public-private partnerships in infrastructure, aggregating projects across 139 low and middle-income countries. The blue series shows the total value of projects in US dollars (scale in the left vertical axis), while the orange series shows the total number of projects (scale in the right vertical axis).

As we can see, the last two decades have seen a marked increase in public-private partnerships in low and middle-income countries. In the World Bank's PPID Visualization Dashboard , you can explore the data in more detail. The estimates by sectors and world regions suggest that electricity and roads, specifically in South Asia and Latin America, have been the key drivers of these aggregate trends.

What is linked with government spending?

Government spending correlates with national income.

We have already pointed out that government expenditure as a share of national income is higher in richer countries. The visualization provides further evidence of the extent of this correlation.

The vertical axis measures GDP per capita (after accounting for differences in purchasing power across countries), while the horizontal axis measures government spending as a share of GDP. The vertical axis is expressed by default in a logarithmic scale, so that the correlation is easier to appreciate – you can change to a linear scale by clicking on ‘Settings.’

We can see that there is a strong positive correlation: high-income countries tend to have larger government expenditures as a share of their GDP. And this is also true within world regions (represented here with different colors).

This correlation reflects the fact that high-income countries tend to have more capacity to extract revenues, which in turn is due to their capacity to implement efficient tax collection systems. In our topic page on Taxation, we discuss the drivers of tax revenues in detail.

Government spending is an important instrument for reducing inequality

The visualization shows the reduction of inequality that different OECD countries achieve through taxes and transfers.

The estimates correspond to the percentage point reduction in inequality, as measured by changes in the Gini coefficients of income, before and after taxes and transfers. Income 'before taxes' corresponds to what is usually known as market income (wages and salaries, self-employment income, capital and property income); while income after taxes and transfers corresponds to disposable income (market income, plus social security, cash transfers and private transfers, minus income taxes).

The data shows that across the 35 countries covered, taxes and transfers lower income inequality by around one-third on average. Yet cross-country differences are substantial.

Generally speaking, countries that achieve the largest redistribution through taxes and transfers tend to be those with the lowest after-tax inequality.

Interactive Charts on Government Spending

Mauro, P., Romeu, R., Binder, A., & Zaman, A. (2015). A modern history of fiscal prudence and profligacy. Journal of Monetary Economics, 76, 55-70.

Bastagli, F., Coady, D., & Gupta, S. (2012). Income inequality and fiscal policy (No. 12/08R). International Monetary Fund.

Cite this work

Our articles and data visualizations rely on work from many different people and organizations. When citing this topic page, please also cite the underlying data sources. This topic page can be cited as:

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All visualizations, data, and code produced by Our World in Data are completely open access under the Creative Commons BY license . You have the permission to use, distribute, and reproduce these in any medium, provided the source and authors are credited.

The data produced by third parties and made available by Our World in Data is subject to the license terms from the original third-party authors. We will always indicate the original source of the data in our documentation, so you should always check the license of any such third-party data before use and redistribution.

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Quick Guide to Understanding the Federal Budget

You may use a budget to determine how much money you need to cover certain expenses such as rent, utilities and groceries, as well as planning for emergencies or investing for the future. Budgets provide a framework to promote your economic well-being.

The U.S. government budget serves the same purpose: the budgetary process of the United States determines how much money the government can spend and where to allocate resources. The federal budget drives fiscal policy and determines the size and scope of the federal government, which in turn helps shape the economy.

Due to its size and scope, the federal budgetary planning process is complex. It involves many people—from the White House, from Congress and from federal agencies, and ultimately taxpayers.

When the Federal Budgetary Process Starts

The federal government fiscal year begins Oct. 1. However, the process for finalizing the federal budget begins much earlier, typically a year prior.

The budgetary planning process begins in the fall when federal agencies submit their budget requests to the Office of Management and Budget. The OMB prepares and manages the budget on behalf of the president. The Budget and Accounting Act of 1921 gave the president overall responsibility for budget planning by requiring him to submit an annual, comprehensive budget proposal to Congress; that act also expanded the president’s control over budgetary information by establishing the Bureau of the Budget (renamed the Office of Management and Budget in 1971).

By convention, the president each year submits a proposed budget to Congress by the first Monday in February, The president submits a budget to Congress by the first Monday in February every year. The budget contains estimates of federal government income and spending for the upcoming fiscal year and also recommends funding levels for the federal government. though in some cases the timing differs based upon circumstances. The proposed budget, which is not the final budget, is prioritized by the president’s revenue and spending focus areas.

Government Spending: Focus Areas

As outlined in a previous blog post, federal government spending  is divided into three categories:

• Mandatory spending: Funds that pay for Social Security, Medicare, veterans’ benefits, and other categories of mandated spending. In other words, spending that has been designated by law.
• Discretionary spending: Funds that support national defense, health and safety, transportation, education, housing, and other social and environmental programs. Discretionary spending is allocated by Congress through appropriations to federal agencies.
• Interest on the public debt: Funds the government allocates to pay toward outstanding debt.

Resolutions, Appropriations and Authorization

Each April, the U.S. Congress prepares a budget resolution, or a framework, for setting spending limits. The House and Senate each hold hearings of their respective budget committees to hear requests from federal agencies, which outline why their particular programs require the funding. Each committee then submits budgetary resolutions for a vote. Once the resolutions are voted on, Congress begins the appropriations process.

An appropriation is a law that provides budget authority or approval to receive funds. Each year, Congress passes appropriation bills that are generated by 12 financial subcommittees and grouped by the type of program and agency.

Congress can enact supplemental appropriations at any time when there is an urgent funding need .

Once Congress passes all appropriation bills, the completed budget goes back to the president for authorization (formal signature). If Congress, or Congress and the president, cannot agree on the budget, Congress can pass an omnibus bill . An omnibus bill packages together certain budgetary measures for a limited time to ensure funding.

The Deficit and National Debt

The national debt is the amount of money the federal government has borrowed to cover outstanding balances, like the balance you may have on your credit card. If spending exceeds revenue in a given fiscal year, there’s a budget deficit . To make up the deficit, the federal government has to borrow money, which it does by selling marketable securities  like Treasury bonds, bills, and Treasury inflation-protected securities.

U.S. National Debt Has Grown over the Last 100 Years

SOURCE: Historical Debt Outstanding data set from Fiscal Data; Bureau of Labor Statistics.

NOTES: 2021 dollars. Updated Sept. 30, 2021.

The total national debt is an accumulation of this borrowing along with the interest owed to investors who have purchased the securities. If over time the federal government has deficits (spending greater than tax revenues), the national debt grows.

The national debt allows the government to continue to pay for critical programs and services, even if funds are not immediately available.

U.S. Debt Ceiling and Government Shutdowns

Debt Ceiling

The debt ceiling , or debt limit, is a restriction imposed by Congress on the amount of outstanding debt the federal government can hold. This is like the credit limit your bank can impose. The debt ceiling is the maximum amount that Treasury can borrow to pay “bills” that are due as well as pay for future investments and interest on previously borrowed money. Congress can raise the debt ceiling, but if it is reached without Congress taking action, the government must stop spending, thereby losing the ability to pay bills or fund government programs and services.

While the United States has reached the debt ceiling at times, it has never run out of resources or failed to meet its financial obligations.

Government Shutdowns

Unlike spending stopped by a debt ceiling, a government shutdown is caused by Congress, or Congress and the president, failing to reach an agreement on the budget. Until there is a compromise, federal agencies must discontinue all nonessential functions until funding legislation is passed. Essential services and mandatory spending initiatives are allowed to continue. The overall health of the economy can be a factor in the budgetary process. In economic downturns, a reduction of federal revenue leading to reduced federal spending is expected. This expectation leads to an increased likelihood of debt ceiling overages and government shutdowns in the future.

Your Complete Guide to Government Financial Data

The national debt explainer is the first of four U.S. government financial concepts from “Your Guide to America’s Finances,” also known as America’s Finance Guide, which will have additional explainers to be released in the coming months. The national debt explainer provides an overview of the national debt, a look at funding programs and services, debt trends over time, how the debt is broken down, and more. The information can be found on FiscalData.Treasury.gov .

Fiscal Data is a website from the U.S. Department of the Treasury and Bureau of the Fiscal Service bringing together important data sets related to federal finance. It’s one modern site, designed with you in mind. Explore data sets on topics such as debt, deficit, revenue and spending, including the Monthly Treasury Statement and the Monthly Statement of the Public Debt . Each data set is available in fully machine-readable files, with easily accessible APIs, and comprehensive metadata.

• The Budget and Accounting Act of 1921 gave the president overall responsibility for budget planning by requiring him to submit an annual, comprehensive budget proposal to Congress; that act also expanded the president’s control over budgetary information by establishing the Bureau of the Budget (renamed the Office of Management and Budget in 1971).
• The president submits a budget to Congress by the first Monday in February every year. The budget contains estimates of federal government income and spending for the upcoming fiscal year and also recommends funding levels for the federal government.

Crystal Flynn is a senior content strategist with the Federal Reserve Bank of Cleveland.

Related Topics

This blog explains everyday economics, consumer topics and the Fed. It also spotlights the people and programs that make the St. Louis Fed central to America’s economy. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System.

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Page One Economics ®

Making sense of the national debt.

"Blessed are the young for they shall inherit the national debt." 

—Herbert Hoover

We live in a world of scarcity —which means that our wants exceed the resources required to fulfill them. For many of us, a household budget constrains how many goods and services we can buy. But, what if we want to consume more goods and services than our budget allows? We can borrow against future income to fulfill our wants now. 1 This type of spending—when your spending exceeds your income—is called deficit spending. The downside of borrowing money, of course, is that you must repay it with interest, so you will have less money to buy goods and services in the future. 

2018 U.S. Federal Deficit

In 2018 the federal deficit was $779 billion, which means that the U.S. federal government spent $779 billion more than it collected. 

SOURCE: https://datalab.usaspending.gov/americas-finance-guide/ . Data are provided by the U.S. Department of the Treasury and refer to fiscal year 2018.

Governments face the same dilemma. They too can run a deficit, or borrow against future income, to fulfill more of their citizens' wants now (Figure 1). For a variety of reasons, governments may borrow rather than fund spending with current taxes. Deficit spending can be used to invest in infrastructure, education, research and development, and other programs intended to boost future productivity. Because this type of investment can increase productive capacity , it can also increase national income over time. And deficit spending can be used to create demand for goods and services during recessions.  

For the U.S. government, deficit spending has become the norm. In the past 90 years, it has run 76 annual deficits and only 14 annual surpluses. In the past 50 years, it has run only 4 annual surpluses. 2 The accumulation of past deficits and surpluses is the current national debt : Deficits add to the debt, while surpluses subtract from the debt. At the end of the first quarter of 2019, the total national debt, also called total U.S. federal public debt, was $22 trillion and growing. This circumstance raises important questions: How much debt can an economy sustain? What are the long-term risks of high debt levels? 

Who "Owns" the National Debt?

While individuals borrow money from financial institutions, the U.S. federal government borrows by selling U.S. Treasury securities (bills, notes, and bonds) to "the public." For example, when investors purchase newly issued U.S. Treasury securities, they are lending their money to the U.S. government. The purchaser may receive periodic payments and/or a final payment, known as the "face value," at the end of the term. You or someone close to you likely holds U.S. Treasury securities either directly in an investment portfolio or indirectly through a mutual fund or pension account. As such, you, or they, own U.S. government debt. But, as a taxpayer, you are also beholden to pay part of that debt. A majority of the national debt is held by "the public," which includes individuals, corporations, state or local governments, Federal Reserve Banks, and foreign governments. 3 In other words, debt held by the public includes U.S. government debt held by any entity except the U.S. federal government itself (Figure 2). The largest public holders of U.S. government debt are international investors (40 percent), domestic private investors (38 percent), Federal Reserve Banks (15 percent), and state and local governments (6 percent). 4

Fiscal Year 2018 Debt Held by the Public and Intragovernmental Debt

SOURCE: https://www.gao.gov/americas_fiscal_future?t=federal_debt , accessed September 5, 2019.

In addition to owing money to "the public," the U.S. government also owes money to departments within the U.S. government. For example, the Social Security system has run surpluses for many years (the amount collected through the Social Security tax was greater than the benefits paid out) and placed the money in a trust fund. 5 These surpluses were used to purchase U.S. Treasury securities. Forecasts suggest that as the population ages and demographics change, the amount paid in Social Security benefits will exceed the revenues collected through the Social Security tax and the money saved in the trust fund will be needed to fill the gap. In short, some of the $22 trillion in total debt is intragovernmental holdings—money the government owes itself. Of the total national debt, $5.8 trillion is intragovernmental holdings and the remaining $16.2 trillion is debt held by the public. 6 Because debt held by the public represents debt payments external to the government, many economists feel it is a better measure of the debt burden. 

Household and Government Financing Over the Life Cycle 

The life cycle theory of consumption and saving holds that households seek to smooth their consumption of goods and services over the life cycle by borrowing early in life (for college or to buy a home), then saving and paying down debt during their working careers, and finally living on their savings during retirement. Financial advisors often suggest that people try to be debt free before they retire. As such, people are often motivated in their prime working years to pay down their debts and then pay them off entirely before they quit working. Given this mindset, people often assume that government debt must be paid in full at some point. But there are important differences between government debt and household debt.

While people tend to prefer to pay off their debts before they retire (and stop earning income) or die, governments endure indefinitely. In general, governments expect that their economies will continue to grow and that they will continue to collect tax revenue. If governments need to refinance past debts or cover new deficits, they can simply borrow. In effect, governments never need to pay off their debts entirely because the governments will exist indefinitely. 

However, this does not mean that debt is without cost. It is important to understand that debt has an opportuni ty cost . For the 2018 fiscal year, interest payments on the U.S. national debt were $523 billion. 7 This money could have financed other projects if the debt did not exist. And, of course, that $523 billion was simply the interest on the existing debt and did not pay down that debt.

How Much Debt Is Too Much Debt?

Although governments may endure indefinitely, that does not mean they can accumulate unlimited debt. Govern­ments must have the necessary income to finance their debt. Economists use gross domestic product (GDP), the total market value, expressed in dollars, of all final goods and services produced in an economy in a given year, as a measure of national income. Because GDP indicates national income, it also indicates the potential income that can be taxed, and taxes are a primary source of government revenues. In this way, a nation's GDP determines how much debt can be supported, which is similar to how a person's income determines how much debt that person can reasonably take on. Just as individuals can sustain higher debt as their incomes increase, economies can sustain higher debt when the economy grows over time. However, if debt grows at a faster rate than income, eventually the debt might become unsustainable. Econ­omists use the debt-to GDP ratio to measure how sustainable the debt is (Figure 3). Some economists, referred to as "owls," suggest that people's worries about U.S. government debt are overblown (see the boxed insert, "Deficit Hawks, Doves, and…Owls?"). 

Federal Debt Held by the Public as Percent of Gross Domestic Product

Federal debt held by the public has grown faster than GDP, lead ing to a rising debt-to-GDP ratio.

NOTE: Gray bars indicate recessions as determined by the National Bureau of Economic Research (NBER).

SOURCE: U.S. Office of Management and Budget. FRED ® , Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/graph/?g=lKfK, accessed September 5, 2019. 

The Government Accountability Office (GAO) suggests that the U.S government debt is currently on an unsustainable path: The federal debt is projected to grow at a faster rate than GDP for the foreseeable future. A significant portion of the growth in projected debt is to fund social programs such as Medicare and Social Security. Using debt held by the public (instead of total public debt), the debt-to-GDP ratio averaged 46 percent from 1946 to 2018 but reached 77 percent by the end of 2018 (see Figure 3). It is projected to exceed 100 percent within 20 years. 8  

Credit risk is the risk to the lender that the borrower will not repay the loan. It is one component of the interest rate that borrowers pay. Like for all loans, interest rates on Treasury securities reflect risk of default . The higher the risk of default, the higher the interest rate investors will expect: A country perceived as a higher credit risk must pay bond holders higher interest rates than a country perceived as a lower credit risk, all else equal. Thus, when bond yields spike, it might reflect rising risk. 

Economist Herb Stein once said, "If something cannot go on forever, it will stop." In other words, trends that are unsustainable will not continue because the economy will adjust, sometimes in abrupt and jarring ways. While governments never have to entirely pay off debt, there are debt levels that investors might perceive as unsustainable. A solution some countries with high levels of unsustainable debt have tried is printing money. In this scenario, the government borrows money by issuing bonds and then orders the central bank to buy those bonds by creating (printing) money. History has taught us, however, that this type of policy leads to extremely high rates of inflation ( hyperinflation ) and often ends in economic ruin. Some of the better-known examples of such polices are Germany in 1921-23, Zimbabwe in 2007-09, and Venezuela currently. An important protection against this type of policy is to create an independent central bank that is insulated from the political process and has clear objectives (such as a specific target for the inflation rate) so that it can make policy decisions to sustain economic health over the long run rather than respond to political pressures. 9  

Conclusion 

The national debt is high by historical standards—and rising. People often assume that governments must pay off their debts in the same way that individuals do. How­ever, there are important differences: Governments (and their economies) do not retire, and governments do not die (or don't intend to). As long as their debt payments remain sustainable, governments can finance their debt indefinitely. And if a government prints money to solve its debt problem, history warns that hyperinflation and financial ruin will likely result. While debt in itself is not a bad thing, it can become dangerous if it becomes unsustainable.

1 Households could alternately spend out of past savings. 

2 U.S. Office of Management and Budget, "Federal Surplus or Deficit." FRED®, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/graph/?g=otZF , accessed September 5, 2019.

3 U.S Department of the Treasury, Bureau of the Fiscal Service. "Frequently Asked Questions about the Public Debt." https://www.treasurydirect.gov/govt/resources/faq/faq_publicdebt.htm#DebtOwner , accessed September 5, 2019.

4 U.S. Government Accountability Office. "America's Fiscal Future: Federal Debt." https://www.gao.gov/americas_fiscal_future?t=federal_debt , accessed September 5, 2019.

5 Social Security Administration. "Trust Fund Data." https://www.ssa.gov/oact/STATS/table4a3.html , accessed September 5, 2019.

6 U.S. Department of the Treasury, Bureau of the Fiscal Service. "Federal Debt Held by the Public." FRED ® , Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/graph/?g=mAfK , accessed September 5, 2019.

7 U.S Department of the Treasury, Bureau of the Fiscal Service. "Interest Expense on the Debt Outstanding." https://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm , accessed September 5, 2019.

8 U.S. Government Accountability Office. "America's Fiscal Future." https://www.gao.gov/americas_fiscal_future?t=fiscal_forecast#projecting_the_future , accessed September 5, 2019.

9 Waller, Christopher. "Independence + Accountability: Why the Fed Is a Well-Designed Central Bank." Federal Reserve Bank of St. Louis Review , September/October 2011, 93 (5), pp.  293-301; https://files.stlouisfed.org/files/htdocs/publications/review/11/09/293-302Waller.pdf .

© 2019, Federal Reserve Bank of St. Louis. The views expressed are those of the author(s) and do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis or the Federal Reserve System.

Default: The failure to promptly pay interest or principal when due. 

Fiat money: A substance or device used as money, having no intrinsic value (no value of its own), or representational value (not representing anything of value, such as gold).

Hyperinflation: A very rapid rise in the overall price level; an extremely high rate of inflation.

Inflation: A general, sustained upward movement of prices for goods and services in an economy.

National debt: The accumulation of budget deficits. Also known as government debt.

Opportunity cost: The value of the next-best alternative when a decision is made; it's what is given up.

Productive capacity: The maximum output an economy can produce with the current level of available resources.

Scarcity: The condition that exists because there are not enough resources to produce everyone's wants.

U.S. Treasury securities: Bonds, notes, bills, and other debt instruments sold by the U.S. government to finance its expenditures.

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30.1 Government Spending

Learning objectives.

By the end of this section, you will be able to:

• Identify U.S. budget deficit and surplus trends over the past five decades
• Explain the differences between the U.S. federal budget, and state and local budgets

Government spending covers a range of services that the federal, state, and local governments provide. When the federal government spends more money than it receives in taxes in a given year, it runs a budget deficit . Conversely, when the government receives more money in taxes than it spends in a year, it runs a budget surplus . If government spending and taxes are equal, it has a balanced budget . For example, in 2009, the U.S. government experienced its largest budget deficit ever, as the federal government spent $1.4 trillion more than it collected in taxes. This deficit was about 10% of the size of the U.S. GDP in 2009, making it by far the largest budget deficit relative to GDP since the mammoth borrowing the government used to finance World War II.

This section presents an overview of government spending in the United States.

Total U.S. Government Spending

Federal spending in nominal dollars (that is, dollars not adjusted for inflation) has grown by a multiple of more than 38 over the last four decades, from $93.4 billion in 1960 to $3.9 trillion in 2014. Comparing spending over time in nominal dollars is misleading because it does not take into account inflation or growth in population and the real economy. A more useful method of comparison is to examine government spending as a percent of GDP over time.

The top line in Figure 30.2 shows the federal spending level since 1960, expressed as a share of GDP. Despite a widespread sense among many Americans that the federal government has been growing steadily larger, the graph shows that federal spending has hovered in a range from 18% to 22% of GDP most of the time since 1960. The other lines in Figure 30.2 show the major federal spending categories: national defense, Social Security, health programs, and interest payments. From the graph, we see that national defense spending as a share of GDP has generally declined since the 1960s, although there were some upward bumps in the 1980s buildup under President Ronald Reagan and in the aftermath of the terrorist attacks on September 11, 2001. In contrast, Social Security and healthcare have grown steadily as a percent of GDP. Healthcare expenditures include both payments for senior citizens (Medicare), and payments for low-income Americans (Medicaid). State governments also partially fund Medicaid. Interest payments are the final main category of government spending in Figure 30.2.

Each year, the government borrows funds from U.S. citizens and foreigners to cover its budget deficits. It does this by selling securities (Treasury bonds, notes, and bills)—in essence borrowing from the public and promising to repay with interest in the future. From 1961 to 1997, the U.S. government has run budget deficits, and thus borrowed funds, in almost every year. It had budget surpluses from 1998 to 2001, and then returned to deficits.

The interest payments on past federal government borrowing were typically 1–2% of GDP in the 1960s and 1970s but then climbed above 3% of GDP in the 1980s and stayed there until the late 1990s. The government was able to repay some of its past borrowing by running surpluses from 1998 to 2001 and, with help from low interest rates, the interest payments on past federal government borrowing had fallen back to 1.4% of GDP by 2012.

We investigate the government borrowing and debt patterns in more detail later in this chapter, but first we need to clarify the difference between the deficit and the debt. The deficit is not the debt . The difference between the deficit and the debt lies in the time frame. The government deficit (or surplus) refers to what happens with the federal government budget each year. The government debt is accumulated over time. It is the sum of all past deficits and surpluses. If you borrow $10,000 per year for each of the four years of college, you might say that your annual deficit was $10,000, but your accumulated debt over the four years is $40,000.

These four categories—national defense, Social Security, healthcare, and interest payments—account for roughly 73% of all federal spending, as Figure 30.3 shows. The remaining 27% wedge of the pie chart covers all other categories of federal government spending: international affairs; science and technology; natural resources and the environment; transportation; housing; education; income support for the poor; community and regional development; law enforcement and the judicial system; and the administrative costs of running the government.

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 30.4 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.

U.S. presidential candidates often run for office pledging to improve the public schools or to get tough on crime. However, in the U.S. government system, these tasks are primarily state and local government responsibilities. In fiscal year 2014 state and local governments spent about $840 billion per year on education (including K–12 and college and university education), compared to only $100 billion by the federal government, according to usgovernmentspending.com. In other words, about 90 cents of every dollar spent on education happens at the state and local level. A politician who really wants hands-on responsibility for reforming education or reducing crime might do better to run for mayor of a large city or for state governor rather than for president of the United States.

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Impact of Increasing Government Spending

Increased government spending is likely to cause a rise in aggregate demand (AD). This can lead to higher growth in the short-term. It can also potentially lead to inflation.

Higher government spending will also have an impact on the supply-side of the economy – depending on which area of government spending is increased. If spending is focused on improving infrastructure, this could lead to increased productivity and a growth in the long-run aggregate supply. If spending is focused on welfare benefits or pensions, it may reduce inequality, but it could crowd out more productive private sector investment.

Different targets of government spending

• There is a potential higher welfare benefit could reduce incentives to work, but on the other hand, welfare benefits can also help the labour market to function more efficiently.
• Pension spending – An ageing population, requires higher government spending, – pensions and health care spending. But pension spending has no impact on boosting productivity
• Education and training – If successfully targetted on improving skills and education, government spending can increase labour productivity and enable higher long-term economic growth.
• Infrastructure investment – Higher spending on roads and railways can help remove supply bottlenecks and enable greater efficiency. This can also boost long-term economic growth.
• Higher debt interest payments – If the government has higher debt and higher bond yields, then it can cause increased costs of borrowing. This spending will go to investors and have no benefit for the economy.

Evaluation of higher government spending

How is spending financed? It depends on how government spending is financed. If government spending is financed by higher taxes, then tax rises may counter-balance the higher spending, and there will be no increase in aggregate demand (AD).

Crowding out . If the economy is close to full capacity, higher government spending can lead to crowding out . This is when the government spends more, but it has the effect of reducing private sector spending. For example, if the government borrow from the private sector, the private sector has lower savings for private investment.

Inefficiency of gov’t spending . Some free-market economists argue gov’t spending has a significant potential to be more inefficient than the private sector spending. In the government sector, there may be poor information and lack of incentives, which leads to misallocation of resources. Therefore, bigger gov’t sector could lead to less efficient economy as gov’t spending takes place of private-sector spending.

Depends on the state of the economy . The impact of government spending also depends on the state of the economy. If the economy is close to full capacity, then higher government spending may cause inflationary pressures and little increase in real GDP. If the economy is in recession, and the government borrows from the private sector, it can act as an expansionary fiscal policy to boost economic growth

UK government spending

The biggest increase in government spending as % of GDP occurred during the two World Wars. In the post-war period, government spending as % of GDP was higher due to the creation of welfare state – NHS, welfare benefits and spending on council housing.

Real Government spending – spending adjusted for inflation.

Readers Question: Why will real GDP tend to rise when government spending and taxes rise by the same amount?

This is a controversial assertion in economics. Certainly many wouldn’t agree.

It is more likely that the rise in taxes will negate the impact of rising government spending. This would leave Aggregate Demand (AD) unchanged.

However, it is possible increased spending and tax rises could lead to an increase in GDP.

In a recession, consumers may reduce spending leading to an increase in private sector saving. Therefore a rise in taxes may not reduce spending as much as usual.

The increased government spending may create a multiplier effect. If government spending causes the unemployed to gain jobs, then they will have more income to spend leading to a further increase in aggregate demand. (e.g. construction workers employed by government increase spending in pubs and transport, causing other sectors of the economy to benefit from the government spending). In these situations of spare capacity in the economy, government spending may cause a bigger final increase in GDP than the initial injection.

However, if the economy was at full capacity, the increased government spending would tend to crowd out the private sector leading to no net increase in AD from switching from private sector spending to government sector spending.

Some economists would argue increasing government spending through higher taxes would lead to a more inefficient allocation of resources as governments tend to be less effective in spending money.

Another consideration is that an economy may grow at 2.5% a year. If there is higher government spending, this growth rate continues. But, the growth is not due to the rising government spending. The government spending just fails to change the growth rate.

• Cutting government spending
• What does the government spend its money on?
• Expansionary fiscal policy

9 thoughts on “Impact of Increasing Government Spending”

helpful article ,thank you

It Is The Best Explanation

Well received

Hi, Thank you for your explicit article

Joe Chukwunyere

But how increases interest rate gov spending increases money supply interest rate down and how invest ment is not coming and twin deficit

This has been of huge help to my research.

its a good well-explained article. but i would rather recommend to evaluate the impacts of increases government spending on each of the macro-economic aims of the economy, both positive and negative.

The research helped a lot..Thank you

How does the SSA GPO on survivor’s help some states equalize the states spending?

Comments are closed.

Deficit Spending: Economic Implications and Practical Considerations

This essay is about deficit spending, explaining how it occurs when a government’s expenditures exceed its revenues, leading to a budget deficit financed by borrowing. It discusses the Keynesian economic rationale for deficit spending, particularly during recessions, to stimulate economic growth by creating jobs and boosting consumer confidence. The essay also addresses criticisms and risks, such as the accumulation of public debt, increased borrowing costs, and potential inflation. It highlights the importance of balancing economic stimulation with fiscal responsibility and examines how the impact of deficit spending varies between developing and developed countries. The essay concludes that while deficit spending can be beneficial, it requires careful management to ensure long-term fiscal sustainability.

How it works

The concept of deficit spending, frequently deliberated in fiscal policy discourse, delineates a scenario wherein a government’s disbursements surpass its earnings, culminating in a fiscal shortfall. This disparity is customarily assuaged through financial borrowing, entailing avenues such as the issuance of sovereign bonds or securing loans from international entities. Despite harboring apprehensions, deficit spending emerges as a conventional instrument wielded by governmental bodies to invigorate economic expansion, particularly amidst periods of recession or economic contraction.

The theoretical underpinnings of deficit spending trace back to Keynesian economics, postulating that during epochs of economic tumult marked by soaring joblessness or subdued consumer demand, state intervention via augmented spending can catalyze economic resurgence.

Through investments in infrastructural ventures, social welfare endeavors, and miscellaneous public amenities, governments can foster job creation, elevate consumer confidence, and catalyze overall economic dynamism. This escalated expenditure can engender a multiplier effect, wherein the initial disbursement begets supplementary economic dividends as capital permeates through the economic milieu.

Nevertheless, deficit spending does not evade critique or hazards. A primary apprehension revolves around the accretion of public indebtedness. As governmental bodies resort to heightened borrowing to underwrite their fiscal shortfalls, they ultimately confront the obligation to retire these debts along with accrued interest, a burden that could substantially encumber forthcoming fiscal frameworks. Escalating debt levels can precipitate augmented borrowing costs, as creditors may stipulate elevated interest rates to offset perceived risks. Moreover, excessive indebtedness can encroach upon private investment, as governmental borrowing could precipitate overall interest rate hikes, rendering capital acquisition more onerous for commercial entities and individuals.

A corollary concern associated with deficit spending is the specter of inflation. When governmental outlays surge without commensurate revenue augmentation, this can precipitate an uptick in the aggregate money supply. Should this inflation outstrip the concomitant expansion in goods and services, it may engender heightened price levels and diminished consumer purchasing clout. Inflation has the potential to erode the value of savings and fixed incomes, disproportionately impacting individuals with lower earnings and potentially fomenting social and economic disarray.

Notwithstanding these misgivings, myriad economists contend that deficit spending harbors the potential for utility when judiciously applied. During the crucible of the 2008 global financial meltdown, several nations undertook expansive deficit spending initiatives to ameliorate economic vicissitudes. These endeavors were attributed with forestalling deeper recessionary crevasses and expediting convalescence. Analogously, amidst the COVID-19 pandemic, governmental entities worldwide embarked upon unparalleled deficit spending endeavors to buttress commercial enterprises, individuals, and healthcare infrastructures.

The efficacy of deficit spending hinges upon sundry variables, including extant public indebtedness levels, the overall economic robustness, and the precise policy formulations. It is incumbent upon governments to strike a equipoise between invigorating the economy and upholding fiscal prudence. This frequently necessitates the deployment of targeted and ephemeral deficit spending, undergirded by a cogent blueprint for reverting to fiscal equilibrium upon the amelioration of economic circumstances.

Moreover, the repercussions of deficit spending are contingent upon context. In less developed nations, where access to capital markets may be circumscribed and borrowing costs exorbitant, executing deficit spending initiatives sans imperiling fiscal stability may prove more arduous. Such nations may necessitate succor from international entities like the International Monetary Fund (IMF) or World Bank to adroitly navigate their fiscal shortfalls.

In contradistinction, developed nations boasting robust credit standings and mature financial markets may enjoy greater latitude in engaging in deficit spending sans immediate adverse repercussions. Nevertheless, even within these precincts, vigilant oversight of debt levels and ensurance of sustainable borrowing practices over the longue durée remain imperative.

In summation, deficit spending embodies a nuanced and multifaceted instrument of fiscal policy, replete with both potential dividends and pitfalls. When wielded sagaciously, it can invigorate economic expansion and mitigate the impacts of economic downturns. Nonetheless, prudent stewardship is imperative to avert the perils of burgeoning indebtedness and inflation. By cognizantly apprehending the dynamics of deficit spending, policymakers can make informed decisions that reconcile transient economic exigencies with enduring fiscal robustness.

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How much has the U.S. government spent this year?

The U.S. government has spent $ NaN million in fiscal year to ensure the well-being of the people of the United States.

Fiscal year-to-date (since October ) total updated monthly using the Monthly Treasury Statement (MTS) dataset.

Compared to the federal spending of $ 0 million for the same period last year ( Oct -1 - Invalid Date null ) our federal spending has by $ 0 million .

Key Takeaways

The federal government spends money on a variety of goods, programs, and services to support the American public and pay interest incurred from borrowing. In fiscal year (FY) 0, the government spent $, which was than it collected (revenue), resulting in a .

The U.S. Constitution gives Congress the ability to create a federal budget – in other words, to determine how much money the government can spend over the course of the upcoming fiscal year. Congress’s budget is then approved by the President. Every year, Congress decides the amount and the type of discretionary spending, as well as provides resources for mandatory spending.

Money for federal spending primarily comes from government tax collection and borrowing. In FY 0 government spending equated to roughly $0 out of every $10 of the goods produced and services provided in the United States.

Federal Spending Overview

The federal government spends money on a variety of goods, programs, and services that support the economy and people of the United States. The federal government also spends money on the interest it has incurred on outstanding federal debt . Consequently, as the debt grows, the spending on interest expense also generally grows.

If the government spends more than it collects in revenue , then there is a budget deficit. If the government spends less than it collects in revenue, there is a budget surplus. In fiscal year (FY) , the government spent $ , which was than it collected (revenue), resulting in a . Visit the national deficit explainer to see how the deficit and revenue compare to federal spending.

Federal government spending pays for everything from Social Security and Medicare to military equipment, highway maintenance, building construction, research, and education. This spending can be broken down into two primary categories: mandatory and discretionary. These purchases can also be classified by object class and budget functions .

Throughout this page, we use outlays to represent spending. This is money that has actually been paid out and not just promised to be paid. When issuing a contract or grant, the U.S. government enters a binding agreement called an obligation. This means the government promises to spend the money, either immediately or in the future. As an example, an obligation occurs when a federal agency signs a contract, awards a grant, purchases a service, or takes other actions that require it to make a payment. Obligations do not always result in payments being made, which is why we show actual outlays that reflect actual spending occurring.

To see details on federal obligations, including a breakdown by budget function and object class, visit USAspending.gov .

The U.S. Treasury uses the terms “government spending,” “federal spending,” “national spending,” and “federal government spending” interchangeably to describe spending by the federal government.

According to the Constitution’s Preamble, the purpose of the federal government is “…to establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity.” These goals are achieved through government spending.

Spending Categories

The federal budget is divided into approximately 20 categories, known as budget functions. These categories organize federal spending into topics based on their purpose (e.g., National Defense, Transportation, and Health).

What does the government buy?

The government buys a variety of products and services used to serve the public - everything from military aircraft, construction and highway maintenance equipment, buildings, and livestock, to research, education, and training. The chart below shows the top 10 categories and agencies for federal spending in FY .

Visit the Monthly Treasury Statement (MTS) dataset to explore and download this data.

For more details on U.S. government spending by category and agency, visit USAspending.gov’s Spending Explorer and Agency Profile pages.

The Difference Between Mandatory, Discretionary, and Supplemental Spending

Who controls federal government spending.

Government spending is broken down into two primary categories: mandatory and discretionary. Mandatory spending represents nearly two-thirds of annual federal spending. This type of spending does not require an annual vote by Congress. The second major category is discretionary spending. The difference between mandatory and discretionary spending relates to whether spending is dictated by prior law or voted on in the annual appropriations process. Another type of appropriation spending is called supplemental appropriations , in which spending laws are passed to address needs that have arisen after the fiscal year has begun.

Mandatory Spending

Mandatory spending, also known as direct spending, is mandated by existing laws. This type of spending includes funding for entitlement programs like Medicare and Social Security and other payments to people, businesses, and state and local governments. For example, the Social Security Act requires the government to provide payments to beneficiaries based on the amount of money they’ve earned and other factors. Last amended in 2019, the Social Security Act will determine the level of federal spending into the future until it is amended again. Due to authorization laws, the funding for these programs must be allocated for spending each year, hence the term mandatory.

Discretionary Spending

Discretionary spending is money formally approved by Congress and the President during the appropriations process each year. Generally, Congress allocates over half of the discretionary budget towards national defense and the rest to fund the administration of other agencies and programs. These programs range from transportation, education, housing, and social service programs, as well as science and environmental organizations.

Supplemental Spending

Supplemental appropriations, also known as supplemental spending, are appropriations enacted after the regular annual appropriations when the need for funds is too urgent to wait for the next regular appropriations. In 2020, Congress passed four supplemental appropriations to aid the nation’s recovery from the COVID-19 pandemic. You can explore the spending related to these supplemental appropriation laws in USAspending.gov’s  COVID-19 Spending Profile page.

Spending Trends Over Time and the U.S. Economy

The federal government spent $ in FY . This means federal spending was equal to of the total gross domestic product (GDP), or economic activity, of the United States that year. One of the reasons federal spending is compared to GDP is to give a reference point for the size of the federal government spending compared with economic activity throughout the entire country.

How has spending changed over time? The chart below shows you how spending has changed over the last years and presents total spending compared to GDP.

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The first amendment, interpretation & debate, the spending clause, matters of debate, common interpretation, for a broad spending power, putting the 'general' back in the general welfare clause.

by Samuel R. Bagenstos

Frank G. Millard Professor of Law at the Univeristy of Michigan Law School

by Ilya Somin

Professor of Law at George Mason University Antonin Scalia School of Law; Adjunct Scholar at the Cato Institute

The Spending Clause gives Congress the power to “lay and collect Taxes, Duties, Imposts, and Excises, to pay the Debts and provide for the common Defence and the general Welfare of the United States.” Beginning in the 1790s, there has been a longstanding debate over the scope of the spending power and the meaning of “general welfare.” James Madison and other Democratic-Republicans argued that the Clause authorizes spending only when it implements other powers granted to Congress in Article I of the Constitution. Alexander Hamilton and the Federalists took a broader view. Hamilton famously argued that the Clause authorized spending, so long as “the object, to which an appropriation of money is to be made, must be general , and not local ; its operation extending in fact, or by possibility, throughout the Union, and not being confined to a particular spot.” While Hamilton did not advocate a completely unbounded interpretation of “general welfare,” under which Congress could spend money for virtually any object it considers beneficial, he and the Federalists did believe that the Clause authorized a wide range of spending for purposes that go beyond Congress’s other enumerated powers, so long as they were sufficiently “general.”

The debate between the Madisonian and Hamiltonian views continued throughout much of the nineteenth and early twentieth centuries. As a general rule, Democratic presidents and members of Congress tended to adopt positions similar to Madison’s, or slightly broader. Thomas Jefferson, Madison, James Monroe, James Polk, James Buchanan, and Grover Cleveland all opposed bills authorizing spending on local infrastructure and disaster relief projects, citing constitutional objections. By contrast, the Federalists, the Whigs, and the Republicans tended to take a broader view of congressional power, closer to Hamilton’s position. Whig leader Henry Clay, for example, argued that the Clause authorized his proposal for a wide-ranging “American System” of canal and roadbuilding.

For most of this time, federal grants to state governments were relatively rare, and only a small portion of state finances. The grants that were enacted were mostly—though not entirely—for purposes that could be readily defended even on Madisonian grounds, such as national defense and relief of state debts incurred in the Revolutionary War. Federal grants to state governments became more important in the twentieth century, and the constitutional controversies over them became more significant—especially when it comes to “conditional” grants, which require states to comply with federal dictates of various kinds in order to qualify for their share of the funds. States today rely heavily on federal spending to provide public services; federal funds account for just under a third of the average state’s budget. The more conditions Congress can place on the receipt of federal funds, the more control Congress can exercise over the operation of state governments. 

In two 1923 cases, Massachusetts v. Mellon and Frothingham v. Mellon , the Supreme Court sharply limited the ability of state governments and individual citizens to challenge such grants. The Court ruled that challengers lacked standing unless the spending conditions inflicted “some direct injury suffered or threatened.” Applied expansively, this principle might make it almost impossible for either states or individual citizens to challenge most conditional spending programs. However, the Court has allowed challenges to some conditional programs in cases where states and individuals demonstrate sufficient potential “injury” to satisfy the Justices.

The Court’s first key case on the scope of the Spending Clause came in 1936. In United States v. Butler (1936), the Court invalidated the first Agricultural Adjustment Act (AAA), a statute that paid farmers to reduce their crop production. The Court expressly took Hamilton’s side of the debate with Madison. It declared, “the power of Congress to authorize expenditure of public moneys for public purposes is not limited by the direct grants of legislative power found in the Constitution.” 

Nonetheless, the Court held the AAA unconstitutional on the ground that “[t]he act invades the reserved rights of the states.” Under the Commerce Clause doctrine of the time , evidenced in cases like United States v. E. C. Knight Co. (1895), Congress lacked the power to reduce agricultural production directly. The Court concluded that Congress could not pay farmers to achieve the same ends indirectly. Although the Butler Court said it was adopting the Hamiltonian position, a strong case can be made that its decision was more consistent with the logic of the Madisonian position.

Since Butler , the Court has repeatedly endorsed Hamilton’s position—and has arguably gone beyond Hamilton in broadly deferring  to Congress’s determination of what expenditures serve the “general welfare,”  as in South Dakota v. Dole (1987). Butler ’s invalidation of the AAA, by contrast, is now an outlier.

The judiciary’s focus has turned to evaluating the conditions federal spending statutes place on state governments. The Court has invoked three possible constraints on federal grants, with mixed results. First, the Court has required that the federal government make its conditions clear at the time the states accept the grants. Arlington Central School District v. Murphy (2006). This rule makes it harder to impose grant conditions by requiring precise drafting. But it does not actually stop Congress from imposing any conditions it wants, so long as they are clear enough. The Court has, in a few cases, ruled against the federal government in grant cases, because the condition in question wasn’t sufficiently clear. 

Second, the Court said that a condition might be unconstitutional if it was too loosely related to the purpose of the grant to which it was attached. But a grant’s purpose can typically be described broadly enough to ensure that the relatedness doctrine imposes few meaningful limitations. In South Dakota v. Dole , for example, the Court upheld a law conditioning receipt of federal highway funds on states’ raising their drinking ages to 21, because both the funding and the condition promoted “safe interstate travel.”

Third, the Court indicated that Congress’s “financial inducement” might sometimes be unconstitutionally “coercive.” But the Court never actually ruled that a condition coerced the states until its 2012 decision addressing the Affordable Care Act (ACA), NFIB v. Sebelius . One provision of the ACA required states that participated in Medicaid to expand their Medicaid programs to all adults with incomes up to 133 percent of the federal poverty level. In a ruling endorsed by seven of nine justices, the Court held that the threatened loss of all Medicaid funds to states that refused to expand their programs rendered the offer unconstitutionally coercive. 

Chief Justice Roberts’s pivotal opinion pointed to three aspects of the Medicaid expansion he found crucial. First, an extremely large amount of money was at stake, making the threat a “gun to the head” of states. Federal Medicaid funding accounts for some 10 to 20 percent of the average state’s revenues. Second, the expansion “transformed” Medicaid from the provision of health care for particular categories of needy people (the elderly or those with disabilities or with children) to a universal guarantee of health care for relatively poor. Third, states could not have anticipated, when they entered Medicaid many years ago, that Congress would later condition continued participation in that program on entry into the “dramatically” transformed program created by the ACA. 

NFIB is still the only time that a majority of the Court has invalidated a spending condition because it coerced the states. It remains unclear what, if any, other statutes might prove coercive on the Chief Justice’s analysis, which blended concerns about the uniquely large stakes with aspects of the notice and relatedness requirements. But the Court’s decision does show that there remain some judicially enforceable limits on the conditional spending power.

Further Reading:

Fiscal 50: State Trends and Analysis , PEW Charitable Trusts (July 28, 2016).

The New Deal and Great Society, and the mark they placed on the shape of American government, would not have been possible without the Spending Clause. The Social Security Act, and all of its component programs—old age, survivors’, and disability insurance; unemployment insurance; the old Aid to Families with Dependent Children program and its successor, Temporary Assistance for Needy Families; Medicare; Medicaid; the Children’s Health Insurance Program; and more—all find their source of constitutional authority in the Spending Clause.

So too with key federal education programs, such as the Elementary and Secondary Education Act (which offers aid to states to provide to their schools), the Higher Education Act (which, among other things, supports financial aid for college students), and the Individuals with Disabilities Education Act (which guarantees an education to children with disabilities). Federal housing and employment programs also rest on the Spending Clause, as do the vast federal investments in our transportation infrastructure that took off when President Eisenhower signed the Federal-Aid Highway Act in 1956. And some of the most far-reaching and important civil rights statutes—Title VI of the Civil Rights Act of 1964, which prohibits race discrimination; Title IX of the Education Amendments of 1972, which prohibits sex discrimination in education; and Section 504 of the Rehabilitation Act of 1973, which prohibits disability discrimination—were adopted under Congress’s spending power as well.

Despite the efforts of some influential academics —and lawyers for states who have brought litigation based on those academics’ theories—the Supreme Court has done very little to limit Congress’s exercise of its power to attach conditions to federal funds under the Spending Clause. Even the 2012 NFIB v. Sebelius decision—which represents the one time the Court has invalidated a federal spending condition as coercive—involved such an extreme statute that it is unlikely to impose much of a limitation on Congress’s power. 

One’s attitude about the failure of the courts to impose more meaningful limits might well depend on how one feels about the vast expansion of the American federal government since the 1930s. It is no surprise that those who, like me, are largely comfortable with the Court’s jurisprudence are also generally supportive of the changes that the New Deal and Great Society made to the shape of American government. Nor is it a surprise that those who seek more judicially-imposed limits on the spending power are skeptical of the New Deal and Great Society. 

I believe that the Court has acted sensibly in refusing to place more significant limits on Congress’s use of the spending power. There are two reasons for this conclusion. First, since the New Deal our constitutional system has settled on the position that it is for Congress—not the courts—to determine what is in the public interest. If the Supreme Court were to reject spending laws on the ground that those laws did not fit the Court’s understanding of the “general welfare,” it would subvert that important protection of democratic decisionmaking.

Second, conditional federal spending affirmatively advances the goals of dual federalism. There are many policies that people in most if not all states would prefer to implement, but that collective-action dynamics keep any individual state from implementing on its own. That is the point Justice Cardozo made in the Steward Machine Co. v. Davis (1937) case that upheld the federal unemployment insurance program under the Spending Clause: many states wanted to adopt unemployment insurance systems, but they feared that if they imposed the taxes necessary to pay for such systems they “would place themselves in a position of economic disadvantage as compared with neighbors or competitors.” A federal program that gave all states an incentive to participate overcame that collective-action dynamic and facilitated adoption of a policy that was welcomed in all corners of the Nation. The original Medicaid program, in which the federal government offered states money to provide health insurance for poor people, helped to overcome a similar dynamic.

It would be perfectly possible for the federal government simply to bypass the states and provide services like these itself. But providing these services through the mechanism of conditional grants serves important purposes. By giving states key responsibilities for implementing federal policies, conditional spending helps to ensure that programs will be administered by officials who are geographically closer and more politically responsive to local concerns than are officials in the Nation’s Capital. States can mold aspects of their implementation to adapt to unique local conditions or experiment with new administrative approaches—and state officials can seek, and in recent years have often obtained , waivers of federal program rules to do so.

Critics of conditional spending worry that Congress will use the Spending Clause to bypass the limitations on its power to regulate under the Commerce Clause, the Reconstruction Amendments, and other constitutional provisions. But the conditional-spending power contains its own built-in limit—Congress cannot enlist a state’s participation unless it is willing to pay what the state demands. Given the realities of modern federal budget politics, that built-in limit gives states key leverage in negotiating the terms of state-federal cooperative programs—and states have proved remarkably sophisticated in using that leverage. (Take a salient recent example: under the ACA’s Medicaid expansion, Congress agreed that the federal government would pay 100 percent of the states’ costs initially, dropping to 90 percent after a few years—an extraordinarily generous offer for a program that provides important services to state residents.) When a federal program relies on the conditional spending power, then, it is especially likely to take a form that is respectful of state interests.

The Spending Clause serves important purposes in our federal system, and Congress has used its power under that Clause to address significant public interests. The Supreme Court has been correct to give Congress a wide berth to do so.

Lynn A. Baker & Mitchell N. Berman, Getting Off the Dole: Why the Court Should Abandon Its Spending Doctrine, and How a Too-Clever Congress Could Provoke It to Do So , 78 Ind. L.J. 459 (2003).

Samuel R. Bagenstos, The Anti-Leveraging Principle and the Spending Clause After NFIB , 101 Geo. L. J. 861 (2013).

Samuel R. Bagenstos, Spending Clause Litigation in the Roberts Court , 58 Duke L. J. 345 (2008).

Samuel R. Bagenstos, Federalism by Waiver After the Health Care Case , in  The Health Care Case: The Supreme Court's Decision and its Implications (2013).

Lynn A. Baker, Conditional Federal Spending After Lopez , 95 Colum. L. Rev. 1911 (1995).

Erin Ryan, Negotiating Federalism , 52 B.C.L. Rev. 1 (2011).

The Spending Clause authorizes Congress to raise taxes and spend money “to pay the Debts and provide for the common Defence and the general Welfare of the United States.” These words cannot possibly justify the modern doctrine that the term “general welfare” authorizes Congress to spend money for virtually any purpose it wants.

If, as the Supreme Court has held since the 1930s, the General Welfare Clause gives Congress the power to spend for almost any purpose it considers beneficial, there would have been no need to give it the authority to spend for “the common Defence” or to pay federal debts. Both purposes are obviously beneficial to the Nation. And both are rendered superfluous by the modern interpretation of “general welfare.”

The modern approach runs counter to the original meaning of the Constitution, as well as the text. It makes a mockery of the Federalists’ repeated assurances that the Constitution sets strict limits on federal power, including the power to spend. In The Federalist No. 41 , for example, James Madison emphasized that the phrase “general welfare” was limited by the enumeration of other powers of Congress, and did not give it “a power to legislate in all cases whatsoever.”

Even Alexander Hamilton’s broader construction of the Clause, which held that it authorized spending for all objects that are “ general , and not local ; . . . and not being confined to a particular spot,” falls well short of the modern approach. Grants to specific state and local governments are, almost by definition, confined to a “particular spot.” In any event, however, Hamilton’s theory is itself flawed, because it too tends to make the power to spend for defense and debt payments redundant, especially the latter. Such spending is almost always “general” in his sense of the term.

Defenders of the modern approach to the spending power usually focus on pragmatic “living constitution” considerations, rather than text and original meaning. They claim that a virtually unlimited spending power is necessary for effective policymaking in the modern world. Even if we assume that it is proper for courts to consider such policy considerations, they are dubious on their own terms.

Unconstrained federal spending since the 1930s has caused considerable harm. Federal subsidies for local pork barrel projects, such as the notorious “bridge to nowhere,” have wasted resources and skewed public works priorities. Federal grants to state governments and interest groups have often created and enforced cartels that harm consumers, especially the poor. For example, the Agricultural Adjustment Acts of 1935 and 1938— which led to Supreme Court decisions vastly expanding the scope of congressional power—paid farmers to artificially reduce production. This increased the price of food during the Great Depression, at a time when millions of Americans were already having great difficulty making ends meet, or even suffering from malnutrition. Federal farm subsidies and associated production restrictions continue to inflate the price of food to this day, disproportionately harming the poor in the process. The growth of massive entitlement programs poses a severe threat to our fiscal future, often subsidizing the relatively affluent at the expense of the relatively poor.

Advocates of unconstrained spending power contend that it is necessary to prevent collective action problems among the states, enabling them to cooperate in situations where they would otherwise find it impossible. But such power also routinely creates dangerous collective action problems , benefiting powerful special interests at the expense of the less well-organized general public. Individual states acting on their own could never have established nationwide agricultural cartels that fleece consumers. Where genuine interstate collective action problems exist, they can usually be addressed without giving Congress a blank check to spend for whatever purposes it wants.

The widespread use of federal grants to state governments undermines beneficial diversity and competition between state and local governments , which also often helps the poor and oppressed . States and localities that can rely on the federal government for funds have less incentive to innovate and to adopt policies attractive to people “voting with their feet.”

In a nation as large, diverse, and complex as the modern United States, federally imposed standardization of policy—facilitated by conditional spending grants—is often harmful. Indeed, this is more true today than at the time of the Founding, when the nation was smaller and less diverse, and government policy much simpler. In this respect, a pragmatic “living Constitution” approach to constitutional interpretation argues for tightening constitutional limits on federal power, rather than loosening them.

In some instances, states have refused to accept ill-conceived conditional spending grants. But the vast majority of the time, state governments find it hard to resist the temptation of federal funds, especially if they are being taxed to provide similar grants to other states that compete with them. In many cases, widespread voter ignorance makes it hard for the electorate to monitor these complex programs.

Even most originalists recognize that the Supreme Court cannot and should not strike down all federal programs that go beyond the text and original meaning of the Spending Clause. Some, most notably Social Security and Medicare, are too well-entrenched to be reversed by judicial action alone. Moreover, it would be unjust to suddenly pull the rug out from under the many people who rely on them. But the Court can still take incremental steps in the direction of enforcing constitutional limits on federal power. For example, it can hold new unconstitutional programs to a higher level of scrutiny than existing well-established ones, on which many people rely. Such a distinction is already implicit in the Court’s ruling in NFIB v. Sebelius (2012), where the Justices invalidated a key part of the Affordable Care Act in part because it was a massive step beyond the existing Medicaid program. It can also strike down at least some of the many blatant cases of special-interest spending that go beyond even the Hamiltonian position.

Enforcement of a tighter conception of “general welfare” is not only practical; it is easier for judges to do than administration of the Court’s current approach to federal grants to state governments, which requires extraordinarily difficult determinations about whether a particular grant condition is “coercive” or insufficiently clear. Unlike “coercion,” the phrase “general welfare” is actually in the Constitution, and can be analyzed using conventional methods of legal interpretation.

From the standpoint of both originalism and pragmatic living constitutionalism, the Court’s Spending Clause jurisprudence is badly flawed. Fortunately, perpetuation of the status quo and complete judicial reversal of the modern approach are not the only two options available. We can and must get beyond this false choice.

Ilya Somin, Federalism and Collective Action , JOTWELL (June 20, 2011).

Ilya Somin, Foot Voting, Federalism, and Political Freedom , Nomos: Federalism and Subsidiarity (2014).

Ilya Somin, Voting With Your Feet Works for the Poor, Too , The Volokh Conspiracy (Oct. 26, 2013).

Ilya Somin, Democracy and Political Ignorance: Why Smaller Government Is Smarter (Stanford University Press, 2nd. ed. 2016).

Ilya Somin, Closing the Pandora’s Box of Federalism: The Case for Judicial Restriction of Federal Subsidies to State Governments , 90 Georgetown Law Journal 461 (2002).

John Eastman, Restoring the “General” to the General Welfare Clause , 4 Chapman Law Review 63 (2001).

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A tale of government spending efficiency and trust in the state

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• Published: 18 May 2024

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• António Afonso   ORCID: orcid.org/0000-0002-6926-2653 1 , 2 , 3 ,
• João Tovar Jalles 4 , 5 , 6 , 7 &
• Ana Venâncio 8 , 9  

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This paper empirically links the efficiency and performance assessment of the general government, proxied by efficiency scores, to the trust in government. Government spending efficiency scores are first computed via data envelopment analysis (DEA). Then, relying on panel data and instrumental variable approaches, we estimate the effect of public sector efficiency on citizens trust on national governments. The sample covers 36 OECD countries between 2007 and 2019. We find that the more efficient countries in terms of government spending are Australia, Chile, Ireland, New Zealand, South Korea, Switzerland. Secondly, our main finding is that better public sector spending efficiency is positively associated with citizens’ higher trust in governments. In general, political economy variables and the existence of fiscal rules do not seem to significantly affect our measure of trust. The results hold using alternative proxies for public sector efficiency, alternative measures for trust, specifications with different control variables and different empirical approaches (instrumental variables).

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1 Introduction

In a context of scarcer budgetary funds, special attention is given to the more efficient use of public resources, with better government spending performance and efficiency being preferred by policymakers and taxpayers (see, Afonso et al., 2021a , 2021b ). At the same time, a more efficient use of public resources and consequently better government performance, is also (positively) internalized by financial markets (see Afonso et al., 2022 ). We conjecture that such general efficiency-enhancing policy and approach to government´s assets (physical and human) can generate a higher degree of confidence and trust in the state.

Trust in the government has been identified as one of the most important foundations upon which the legitimacy and sustainability of political systems are built (Fukuyama, 1995 ). The trust citizens place in their government reflects their confidence in the government's actions. It is a function of the congruence between citizens’ preferences—their interpretation of what is right and fair and what is unfair—and the perceived actual functioning of government (Bouckaert & Walle, 2003 ). Public trust helps governments manage and administer a country on a daily basis in a way that reinforces the democratic institutions. Footnote 1 However, trust in the government has decreased not only in the US but also in several European countries (Intawan & Nicholson, 2018 ; Pérez-Morote, et al., 2020 ). Hence, the key question in this paper is whether we can empirically provide strong evidence on the relationship between government´s trust and public sector efficiency.

The relevance of public sector efficiency has been addressed by a growing literature. Several authors have identified substantial public spending efficiency differences between countries and scope for spending savings. Most public spending efficiency related studies report that there is room for improvement in terms of government spending efficiency, and this typically implies that more public services could be provided with the same public resources, or conversely, the same level of public resources might be provided with fewer public resources. For OECD and EU countries see, notably the evidence reported by Gupta and Verhoeven ( 2001 ), Afonso et al. ( 2005 ), Adam et al. ( 2011 ), Dutu and Sicari ( 2016 ), Afonso and Kazemi ( 2017 ), Antonelli and de Bonis ( 2019 ), and Afonso et al. ( 2023 ). Regarding Emerging Markets see, for instance, Afonso et al. ( 2010 ), Herrera and Ouedrago ( 2018 ), and for Latin American and Caribbean countries see Afonso et al. ( 2013 ). To explain these cross-country efficiency differences, studies have examined, in a two-step analysis, the so-called discretionary factors such as: population size, education, income level, quality of the institutions (property right security and corruption) and quality of the country’s governance level, size of the government, political orientation, voter participation, and civil service competence (Afonso et al., 2005 ; Hauner and Kyobe, 2008 ; Antonelli & de Bonis, 2019 ).

Regarding the literature on the level of trust that citizens place in their governments, we can infer that this will depend on the credibility of the government's commitment to the quality of public policies in relation to the amount of spending. For instance, Alesina and Warcziarg ( 2000 ) argue that a more pronounced polarisation of voter preferences in advanced economies and the low quality of government policy, which favour particular groups and less the median voter, both reduce trust. Moreover, unproductive government spending reduces public trust in the State, which might become more damaging for large and ineffective governments (Garen & Clark, 2015 ). Besley et al. ( 2010 ) mentioned that governments somehow associated with rent-seeking and lobbying activities contributed to a lower level of public trust. Hence, one can observe unproductive public spending and lower trust of voters in the government. This may be consistent with the decrease of citizens´ trust in government over the years (Intawan & Nicholson, 2018 ). On the other hand, Pérez-Morote et al. ( 2020 ) mentioned that economic events, corruption, or the disclosure of classified information tended to decrease the trust in government. On the same vein, Belabed and Hake ( 2018 ) reported that corruption and weak rule of law undermined trust in European governments. In addition, Foster and Frieden ( 2017 ) found via survey responses that economic factors at individual and national levels contributed to the trust in the State over the years. Finally, Rodrigues ( 2021 ), for a panel of developed and developing countries, reports adverse effects of inefficient public spending on public trust.

Moreover, one might consider the assumption that often politicians know what the ‘right’ policy is, but have private incentives to do something else. Still, it is less clear that politicians do indeed know about the “right” policies. Indeed, for instance, ideological views or lack of information can firmly support different convictions of what is “right” to do. For instance, there might be some interaction between knowledge held and gathered by policy makers and incentive problems that can skew some decisions.

In addition, people's trust in the government is probably also related to their trust in each other. Probably, one can consider that overall economic and societal prosperity is linked and depends on cooperation between individuals and large groups, which is only feasible if trust is indeed present, notably in institutions such as government. Hence, high-trust societies with high moral beliefs, particularly cultural beliefs, can result in better government performance than low-trust societies. This relation can then be perceived as a cultural question as well (see, notably Rose, 2011 , 2018 ).

In this study, we first compute composite indicators of government public sector performance. Secondly, we calculate so-called input efficiency scores for the period 2006–2019. Third, we empirically assess the relevance of these efficiency scores on proxies of trust in the government in a panel setting of 36 OECD countries. It naturally follows that the idea of efficiency is also linked to some measure of fiscal prudence embedded in spending rationalization and optimization efforts.

We find that the more efficient countries in terms of government spending, in our baseline specification (Model 0), are Australia (2009–2011; 2013; 2019), Chile (2007–2016; 2019); Ireland (2015; 2019), New Zealand (2018), South Korea (2006–2018), and Switzerland (2006–2009; 2014–2016; 2019). Moreover, better spending efficiency is positively associated with citizens’ higher trust in the governments. This result holds using alternative proxies for public sector efficiency, alternative measures for trust, specifications with different control variables and different empirical approaches (instrumental variables). In general, political economy variables and the existence of fiscal rules do not seem to significantly affect our measure of trust.

The remainder of the paper is organized as follows. Section  2 discusses and constructs the indicators and scores of public sector efficiency. Section  3 conducts the empirical panel analysis of trust and efficiency. The last section concludes.

2 Public sector efficiency and data envelopment analysis

To compute the public sector efficiency scores, we use data envelopment analysis (DEA), Footnote 2 which compares each observation with an optimal outcome. For each country i , we consider the following function:

where \(Y\) is the composite output measure (Public Sector Performance, PSP) and \(X\) is the composite input measure (Public Expenditure, PE), namely government spending-to-GDP ratio . We compute the yearly efficiency scores for 36 OECD member countries Footnote 3 between 2006 and 2019.

The output composite indicator for Public Sector Performance (PSP), as suggested by Afonso et al., ( 2005 , 2022 ), includes two main components: opportunity and the traditional Musgravian indicators. The opportunity indicators evaluate the performance of the government in administration, education, health and infrastructure sectors. The Musgravian indicators includes three sub-indicators: distribution, stability and economic performance. Table 1 summarizes the variables used to construct the PSP indicators. PSP is the average between the opportunity and Musgravian indicators. Accordingly, the opportunity and Musgravian indicators result from the average of the measures included in each sub-indicator. To ensure a convenient benchmark, each sub-indicator measure is first normalized by dividing the value of a specific country by the average of that measure for all the countries in the sample.

Our input measure, Public Expenditure (PE), is lagged 1 year and expressed as a percentage of GDP in several sectors. More specifically, we consider government consumption, expenditure on education, expenditure on health, public investment, transfers and subsidies and total expenditure. Each area of government expenditure is equally weighted to compute the public expenditure input. Tables 7 and 8 in Appendix A provide additional information on the sources and variable construction. Further explanation on the variable’s construction is provided in Afonso et al. ( 2022 ).

We adopt an input orientated approach, to measure the proportional increase in inputs while holding output constant and assume variable-returns to scale (VRS), to account for the fact that countries might not operate at the optimal scale. The efficiency scores are computed through the following linear programming problem Footnote 4 :

where \({y}_{i}\) is a vector of outputs, \({x}_{i}\) is a vector of inputs, \(\lambda\) is a vector of constants, \(I1^{{\prime }}\) is a vector of ones, \(X\) is the input matrix and \(Y\) is the output matrix. The efficiency scores, \(\theta\) , range from 0 to 1, such that countries performing in the frontier score 1. More specifically, if θ < 1, the country is inside the production frontier (i.e., it is inefficient), and if θ = 1, the country is at the frontier (i.e., it is efficient).We performed DEA for different models: baseline model (Model 0) includes only one input (PE as percentage of GDP) and one output (PSP); Model 1 uses two inputs, governments’ normalized spending on opportunity and on “Musgravian” indicators and one output, total PSP scores; and Model 2 assumes one input, governments´ normalized total spending (PE) and two outputs, the opportunity PSP and the “Musgravian” PSP scores. Detailed results are illustrated on Tables 9 , 10 and 11 of Appendix B.

Table 2 provides a summary of the DEA results for the period 2009–2019 using input-oriented models. The purpose of an input-oriented assessment is to assess by how much input quantities can be proportionally reduced without changing the output quantities produced. Alternatively, and by computing output-oriented measures, one can assess how much output quantities can be proportionally increased without changing the input quantities used.

Analyzing our results for the input efficiency scores, we find that the average scores of our baseline model ranged between 0.58 to 0.68, For Model 1, the average scores ranged between 0.63 to 0.71, which means that with the same level of outputs, inputs could decrease between 29 and 37%. Model 2’s input efficiency scores averaged between 0.61 and 0.69. Overall, the countries located in the production possibility frontier, hence the more efficient ones in terms of government spending for Model 0 are: Australia (2009–2011; 2013; 2019), Chile (2007–2016; 2019); Ireland (2015; 2019), New Zealand (2018), South Korea (2006–2018), and Switzerland (2006–2009; 2014–2016; 2019).

3 Trust and public sector efficiency

To estimate the impact of public sector efficiency ( \({PSE}_{i,t})\) on trust \(({T}_{i,t}),\) we run the following reduced-form panel regression for the period between 2007 and 2020:

where \({\alpha }_{i}\) are country-fixed effects included to capture unobserved heterogeneity across countries, and time-unvarying factors such as geographical variables which may affect the degree of trust; \({\delta }_{t}\) are time effects to control for global shocks (such as commodity prices or the world´s business cycle); \({\varepsilon }_{i,t}\) is an i.i.d. error term satisfying usual assumptions of zero mean and constant variance.

.Our dependent variable is trust in government ( \({T}_{it})\) measured by the share of people who report having confidence in the national government. This indicator was retrieved from the OECD Stats (OECD, 2022 ) and it reflects the percentage of all survey respondents answering “yes” to the survey question: “In this country, do you have confidence in … national government?”. Footnote 5

The main independent variable is the 1 year-lag input efficiency scores \(({PSE}_{i,t-1})\) , as computed in the previous section. We also include a vector of other determinants of trust in government, \(({{\varvec{X}}}_{{\varvec{i}}{\varvec{t}}-1})\) , lagged 1 year to reduce potential reverse causality concerns. Footnote 6 This vector includes the following variables: the logarithm of population and the age dependency ratio (as percentage of working-age population) included to control for the size of the social benefits, both variables retrieved from World Bank´s World Development Indicators; the debt-to-GDP ratio to control for the size of government retrieved from the IMF´s World Economic Outlook; a dummy variable equaling one for single-party majority government to control for political cohesion, and dummy variable for the right government to control for the political ideology, both retrieved from the Database of Political Institutions (Cruz et al., 2021 ) and Comparative Political Dataset, respectively. Footnote 7 According to related literature, left-wing governments prefer larger governments, which might be subjected to more elite capture, consequently less efficient (Blais et al., 1993 ; Cusack, 1997 ; Hick and Swank, 1992 ; Jensen, 2011 ). Footnote 8

4 Empirical results

We begin our empirical analysis by assessing the standalone (unconditional) link between the input level of government spending efficiency and trust. Columns (1) to (3) present our results for Model 0 (one input and one output), Model 1 (two inputs and one output) and Model 2 (one input and two outputs), respectively.

Results reported in Table  3 show that better spending efficiency is positively associated with citizens’ higher trust in governments. These results hold for alternative output efficiency scores (for Models 0, 1 and 2 in Appendix C, Table 13 ). Footnote 9 As a next step, we estimate the initial baseline specification augmented with a set of control variables, notably: population, age dependency ratio, the debt-to-GDP ratio, right-wing ideology, and majority. Table 4 reports this new set of results again for alternative input efficient scores (for Models 0, 1 and 2).

We continue to find that better public spending efficiency contributes to strengthening the trust in governments, notably for the input and output efficiency scores variables, except for output efficiency scores in Model 2. Results for the output efficiency scores (for Models 0, 1 and 2) are reported in Appendix C, Table 14 . Regarding the control variables, we find that countries with larger population and higher level of government indebtedness are associated with lower government trust across both the input and output efficiency scores. Countries with higher levels of age dependency ratio tend to exhibit higher levels of government trust. Finally, no statistically significant result is found for the political economy variables, namely majority and right ideology.

At this point, it is important to address a relevant concern, the possible endogeneity of the efficiency score variables. We estimated specification (2) using panel fixed effect model, however, there might be a potential bi-directional relationship between the efficiency scores and trust in the government. Public sector efficiency may influence trust scores, but trust scores may also have an impact on public sector performance. For example, the citizens trust scores will affect the way they may opt out of the public services such as in the health sector and get treatment in the private sector or simply purchase private health insurances. This could then transform into a vicious cycle for the lack of need for public investment or increased efficiency in public hospitals and other primary care providers (gatekeepers) as less people are using them. A similar reasoning could apply to the provision of public education services. To account for this issue, we used the lagged efficiency score to explain the current trust score. Furthermore, we employ an instrumental variable (IV) or Two-Stage Least Squares approach. To instrument for the efficiency score variables, we select the government effectiveness index from the World Bank´s Governance Indicators. This measure is likely to be correlated with our measure of public sector efficiency, but presumably not directly related to trust. Table 5 reports the IV estimation results using alternative input efficiency score variables.

Input efficiency scores are again positively related to the trust, except for Column (2). These main results are also captured for output efficiency scores (see Table 15 in Appendix C). Note that for an instrument to be valid the following conditions have to be satisfied. First, the instrument needs to be correlated with the endogenous variable. In Appendix C, Table 16 , we see that this condition is met, except for input efficiency scores for Model 0. Second, the lagged values of the instrument should not be strongly correlated with the trust score (our dependent variable), otherwise the estimated coefficient would still be biased. To test the relevancy of the instrument, we report the Kleibergen-Paap (2016) Wald F statistics. The results are reported at the bottom of Table  5 . The rejection of the Kleibergen-Paap rk LM statistics indicates that the instruments are not redundant and hence, they are valid ones.

To assess the heterogeneity of our results, we split countries considering their share of public administration employment and their type of government (coalition versus non-collation governments). From OECD, we retrieved data on employment from on all activities (in services) as well as employment in public administration and defense. Additionally, we collected coalition data from the Comparative Political data and we created a dummy variable that takes the value of one for governments classified as either “Minimal winning coalition” or “Surplus coalition”, and zero otherwise (for all other types). The results of both analyses are presented in Columns (1)–(4) of Table 17 in Appendix C. We find that the positive relationship between public sector spending efficiency and citizens’ trust in governments only holds in countries with lower share of public employment and with non-coalition governments.

We performed several robustness analyses. Our first robustness exercise considers alternative measures for trust in the government. For that purpose, we retrieved data from Gallup confidence, EuroBarometer trust and World Values Survey confidence. Unfortunately, these datasets have more missing observations compared to our measure of trust in the baseline results. The results for alternative measures for trust are presented in Columns (5)–(6) of Table 17 in Appendix C. We continue to find a positive relationship between public sector spending efficiency and citizens’ trust in governments. Note that the magnitude of the coefficients associated with trust are similar to the baseline results presented in Table  4 , nonetheless the standard errors are larger.

Our results are still kept when we restrict our sample to a sub-sample of 22 European countries Footnote 10 and control if they have complied with or deviated from the rules set out in the Stability and Growth Pact (SGP). This is an important issue as the interaction between rules, fiscal space, counter-cyclical policies and credibility has been subjected to more and more scrutiny in recent times (see. e.g. Kopits, 2001 ; Nerlich and Reuter, 2016 ). To avert cross-border impact of a country budgetary decisions or jeopardize the functioning of the Economic and Monetary Union, the SGP encompasses four distinct numerical rules: the deficit rule, the structural budget balance rule, the expenditure rule and the debt rule. Footnote 11 Data on the rules of the SGP was retrieved from Larch and Santacroce ( 2020 ), Table  6 presents the results for the restricted sample using fixed effects and instrumental variable approach. We continue to find a positive effect of the input efficiency scores on trust for the unconditional regression (results not reported) using fixed effects and instrumental variable approach. When we include the control variables, the positive effect of input efficiency scores on trust is statistically significant in the fixed effect model specification and for input efficiency under Model 1 for instrumental variables.

Finally, we considered an alternative instrument variable. Instead of using government effectiveness, we considered the regulatory quality variable, retrieved from World Bank’s Governance Indicators. Using this as instrument for our key trust variable yields a positive and significant result but only for unconditional regression.

5 Conclusion

The 2007–08 Global Financial Crisis led to a significant loss of trust in governments. In contrast, the response by governments amidst the COVID-19 pandemic inverted that situation. A context of high-inflation and a situation of war in Europe are eroding trust in the State again. As governments search for a path to economic resilience to avoid a recession, the challenge they face is not only knowing what policies to choose, but also how to implement them. Yet, capacity to implement depends crucially on citizens’ trust and this on the other hand, depends on the ability of governments to efficiently use and allocate public moneys.

This paper empirically assessed the role of public sector efficiency scores in shaping the degree of trust in governments. By means of DEA, we first constructed several proxies of public spending efficiency and then related these, in a reduced form panel setting for a sample of 36 OECD countries over the 2007–2019 period, to a measure of trust. We find that the more efficient countries in terms of government spending are Australia, Chile, Ireland, New Zealand, South Korea, Switzerland.

Moreover, we found that indeed the more efficient a government is in managing its expenditure, the higher the level of trust it will gather from voters and citizens. This has important policy implications as the fiscal space available to conduct counter-cyclical fiscal policy is more and more limited. Footnote 12 Being able to convince the median-voter that the appropriate policies are being designed and implemented at times when tax burdens in OECD countries are at historic heights is the counterpart of benefitting from more trust which has positive externalities across other segments of the economy. In general, political economy variables and the existence of fiscal rules do not seem to significantly affect our measure of trust. Our results hold using alternative proxies for public sector efficiency, alternative measures for trust, specifications with different control variables and different empirical approaches (instrumental variables).

Future work could consider exploring more closely the way fiscal policy discretion versus rules matters in shaping government trust. On the one hand, too much discretion can erode trust if governments mismanage freely; on the other, too many rules can limit the necessary actions from the government to cope with crises and hence reap the needed trust so that policies are effective.

The rule of law and independent judiciary are especially relevant since they appropriate functioning is a fundamental driver of trust in government (Blind, 2007 ; Johnston, Krahn and Harrison, 2006 ; Knack and Zak, 2003 ). Furthermore, as well-functioning government institutions matter for business investment decisions, trust in them is a necessary component to propel economic growth (Dasgupta, 2009 ; Algan and Cahu, 2010 ).

DEA is a non-parametric frontier methodology, which draws from Farrell’s ( 1957 ) seminal work and that was further developed by Charnes et al. ( 1978 ). Coelli et al. ( 2002 ) and Thanassoulis ( 2001 ) offer introductions to DEA.

The 36 OECD member countries are: Australia, Austria, Belgium, Canada, Chile, Colombia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, the Netherlands, New Zealand, Norway, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States. We were not able to compute the efficiency scores for Mexico and Costa Rica, due to data unavailability.

This is the equivalent envelopment form (see Charnes et al., 1978 ), using the duality property of the multiplier form of the original model.

Data on trust is not available for all the years for the folowin countries: Australia, Austria, Belgium, Czech Republic, Estonia, Finland, Greece, Hungary, Iceland, Ireland, Latvia, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Slovakia, Slovenia, Switzerland and Turkey.

Similar results are obtained using contemporaneous regressors instead (not shown, but available from the authors upon request).

Summary statistics of these variables are provided in the appendix. Note that the ideology variable available in the Database of Political Institutions is often incorrect. For this reason the Comparative Political Data set was used which more accurately displays the nature of the ideological streams in power across countries and over time.

This understanding of the issue has been put down by Gary Becker´s – 1992 Nobel Laureate in Economics – Business Week columns under titles such as “To root out corruption, boot out big governments” or “If you want to cut corruption, cut government”. According to Becker “the source of official corruptiuon is the same everywhere: large governments with the power to dispense many goodies to different groups” (…) Therefore, smaller government is “the only surefire way to reduced corrption”.

Note that the output efficiency scores are higher or equal to 1. To easily interpret the results, we made the following transformation \({\widehat{PSE}}_{i,t-1}=\frac{1}{{\mathrm{\varphi }}_{i,t-1}}\) .

The 22 European countries are: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, the Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom.

According with the budget deficit rule, the budget balance of the general government is equal or larger than − 3% of GDP or, in case the − 3% of GDP threshold is breached, the deviation remains small (maximum 0.5% of GDP) and limited to one year. The debt rule defines the debt-to-GDP ratio should be below 60% of GDP or if the excess above 60% of GDP has been declining by 1/20 on average over the past three years. The structural balance rule defines that the structural budget balance of the general government is at or above the medium-term objective or, in case the MTO has not been reached yet, the annual improvement is equal or higher than 0.5% of GDP. The expenditure rule defines that the annual rate of growth of primary government expenditure, net of discretionary revenue measures and one-offs, is at or below the 10-year average of the nominal rate of potential output growth minus the convergence margin necessary to ensure an adjustment of the structural budget deficit of the general government in line with the structural balance rule (Larch and Santacroce, 2020 ).

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Afonso, A., Jalles, J.T. & Venâncio, A. A tale of government spending efficiency and trust in the state. Public Choice (2024). https://doi.org/10.1007/s11127-024-01144-6

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The per-household cost of federal spending and regulation.

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"Measure what is measurable, and make measurable what is not so" is a quote attributed to Galileo that, as such things tend to shake out, he probably never said.

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"We have concerns ," intoned Rep. Ilhan Omar (D-Minnesota). "We believe that we shouldn't just show citizens one side of the budget ... that we should talk about the investments and services that they are also receiving.” She protested that the original bill "only examines federal liabilities but does not really consider the asset side of the balance sheet or the long term benefits from spending.”

Unfortunately, such “investments” terminology permeates public policy with respect to federal outlays and the lengths to which some will go to avoid acknowledging fiscal and regulatory costs are remarkable. The GOP is itself culpable in abetting this transformation with endorsement of the likes of the CHIPS and Science Act and the Infrastructure Investment and Jobs Act . These and other big-spending legislation like them drip with market socialism and the notion that government spending constitutes investments rather than transfers and accompanying deadweight losses.

Therefore brazenly, Omar was able to assert without pushback that "public spending can yield more for the economy and greater society than if that money had been solely allocated in the private sector." Omar invoked fiscal year 2023 "investments" of $536 billion on grants to state and local governments as well as on various research and development, education and training initiatives. She presented these as benefits, despite the fact that they are prime examples of today's fiscal deterioration that has induced the call for per-taxpayer transparency in the first place. A similar version of utilitarianism and pretended offset of costs with benefits exists on the regulatory side to be noted shortly.

The bottom line is that Rep. Omar’s protest against clean-slate presentation of debt per taxpayer resulted in a successful amendment requiring more information on "federal total financial assets, net liabilities and federal investments." If one were to imagine this would mean the Democrats are open to, for example, selling off federal lands and conducting other privatizations to reimburse taxpayers, one would surely be in for a surprise.

If anything, subsidies, grants, loan guarantees, grants-in-aid to states and like escapades are widely exploited for political purposes. They merit drastic retrenchment, likely via constitutional amendment, not fresh legitimization pretending they offset individual Americans’ debt burdens.

We already hear rationales for stratospheric outlays from the entire federal government. What we need is a clear emphasis on the cost side, reflected on the W-2. Future adjustments to the Debt Per Taxpayer Act should ensure this transparency. No matter where those costs and benefits fall, Peter pays and Paul receives. Peter deserves, for once, to know the score without smoke and mirrors and without being presented with the illusion that he always comes out a winner.

Federal regulatory costs as a hidden tax on the household : Atop federal spending generating that debt load of $200,000 per taxpayer, Congress and agencies prod extensively in the form of economic and social regulation.

While income taxes get itemized on pay stubs and merit the annual household reckoning discussed above, nothing similar to latch on to exists for the hidden tax of economic, environmental, labor, medical, social, paperwork and other regulatory costs embedded in prices of goods and services that we buy.

Regulations can affect households directly, or indirectly such as when businesses pass compliance costs on to consumers, just as they do the corporate income tax. Regulations can also directly and indirectly impact households in their capacities as workers and as investors in stock and mutual fund holdings of companies subject to various regulations.

Costs of regulation percolating throughout the economy, for which I maintain a current placeholder of just over $2 trillion annually based on various legacy government reports and other sources, happens to be on par with today’s annual deficit.

Unlike the specificity of the debt and its relative ease of translation to the income tax paying household, the true incidence of individual regulatory costs is indeterminate since no one knows what the aggregate costs of regulation and intervention are. They surpass the $2 trillion employed here.

But for present purposes, by assuming a full pass-through to households of the $2 trillion placeholder regulatory costs, one can look at those households’ share of regulatory costs and compare it with their annual expenditures on key necessities, goods and services using figures compiled by the Department of Labor’s Bureau of Labor Statistics.

For America’s 134.1 million households (BLS calls them “consumer units”), the average 2022 pretax income was $94,003. Were one to allocate annual regulatory costs assuming the full pass-through of costs to consumers, U.S. households “pay” $15,788 annually in embedded costs ($2.1 trillion in regulation divided by 134,090,000 consumer units), or 17 percent of average income before taxes (and of course more as a share of after-tax income).

That’s somewhat of a lowball figure. A late 2023 study by the National Association of Manufacturers reckons regulatory costs of $3.079 trillion, which would imply costs of $22,962 per household, or 24 percent of income.

Using the $2.1 trillion baseline, the buried regulatory “tax” of $15,788 amounts to up to 22 percent of the typical household’s expenditure budget of $72,967. That exceeds every annual household expenditure item except housing, as shown in the chart here:

US Household Expense Budget items Compared to Cost of Regulation

The average U.S. household spends far more on regulation, therefore, than on either health care, food, transportation, entertainment, apparel, services, or savings. For comparison, he NAM’s $3.079 trillion regulatory $22,962 amounts to 31 percent of household expenditures. That still does not exceed housing costs but comes uncomfortably close.

Tying it all together: The tax costs and regulatory costs covered above are the makings of necessary markers to give policymakers a better sense of the scale and scope of Washington’s initiatives and their true effects at the household level. The $800,000 in debt per family of four is a lump-sum figure. The $16,000 in regulatory costs is an annual embedded burden. Lawmakers should improve official disclosures of both.

The Debt Per Taxpayer Information Act represents the elemental transparency often talked about but not always actualized. If enacted into law, it promises to foster an informed citizenry and strengthen the democratic process by enabling taxpayers to hold elected officials accountable for fiscal stewardship in a brand new way.

That done, the next step is for Congress to provide the same level of disclosure for the hidden taxes of federal rules and regulations in terms of compliance costs and wide ranging indirect effects. Whether or not the man really said it, “Measure what is measurable, and make measurable what is not so.”

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Why Does the Federal Government Borrow? 

• Daily Economy
• Fiscal Policy
• Central Banking

Recently, White House Council of Economic Advisers Chair Jared Bernstein was featured in a viral clip in which he appears to flub a basic question about his job. The interviewer asked, “Like you said, they print the dollar, so why does the government even borrow?” Here’s the clip of his answer. 

In all fairness to Mr. Bernstein, he was asked a loaded question. The interviewers phrased the question to make it sound like the institution that issues debt and the institution that prints money are one in the same. That is not the case. The US Treasury borrows while the Federal Reserve prints money. The separation of these two institutions is designed to prevent the government from using the money printer to pay for government spending and the inflationary consequences that come with it. 

As my colleague Thomas Hogan noted , advocates of Modern Monetary Theory (MMT) intentionally blur the lines between the Treasury and the Fed. For example, in Stephanie Kelton’s The Deficit Myth , she claims, “Both the US Treasury and its fiscal agent, the Federal Reserve, have the authority to issue dollars.” This claim stems from the Bureau of Engraving and Printing, within the Department of the Treasury, having the authority to print our paper currency. What Kelton omits, however, is that those notes are distributed by the Fed through its network of regional banks. 

It’s important to note that the relationship between the Treasury and the Fed is far from total independence. Throughout its history, the Fed has succumbed to political pressure from elected officials on both sides of the aisle, bureaucrats, and academics. The Fed currently operates under a policy of “ constrained discretion ,” where Fed officials to stick to rules during “ordinary” times while giving them the ability to act with discretion during emergencies or crises. It’s during emergencies where interest groups can most easily exert influence over monetary policy. For example, during the COVID-19 pandemic, the Fed opened numerous facilities to allocate credit, which ultimately blurred the line between fiscal and monetary policy. The policy of “constrained discretion” has led to the mess we’re seeing now. 

Advocates of MMT want to blur the line between fiscal and monetary policy even more than what we have now. If they accomplish this, it will spell disaster for the American people. 

What Happens When Government Uses the Money Printer to Finance Spending? 

This question has been asked and answered throughout economic history. Adam Smith discusses this point in Book V of The Wealth of Nations : 

It occasions a general and most pernicious subversion of the fortunes of private people; enriching in most cases the idle and profuse debtor at the expence of the industrious and frugal creditor, and transporting a great part of the national capital from the hands which were likely to increase and improve it, to those which are likely to dissipate and destroy it.

Smith comments that attempting to pay down debt with newly printed money is a “juggling trick” used to avoid default. This trick comes at the expense of everyday citizens, as the inflation brought about by money printing destroys the purchasing power of the money they hold. 

George Selgin made similar warnings in his book The Menace of Fiscal QE . Fiscal QE refers to the policy of the Federal Reserve purchasing assets and expanding its balance sheet to support government spending. Selgin notes that while Fiscal QE is extremely tempting it casts doubt on the central bank’s independence and creates an unaccountable back door for spending. 

This question was also explored in a 2021 research paper by AIER Senior Fellow Joshua Hendrickson, titled “What Happens When Governments Pay for Spending with Money Creation? Lessons from the Early Riksbank” In the paper, Hendrickson discusses a historical example of mid-1700’s Sweden when the Swedish parliament controlled both the government budget and the central bank (known as the Riksbank), bringing both fiscal and monetary policy decisions under one governing body. Results from Hendrickson’s research as well as others show that the government was able to finance its spending using money creation but at the cost of rising inflation and no impact on inflation-adjusted economic activity. The government gained at the expense of the people. Economists cite similar results in Germany following World War I, Argentina over the past 25 years, and Turkey under President Erdoğan. The clear takeaway is that just because a government can finance spending with money printing doesn’t mean it should. 

In the case of the United States, where the US dollar is currently the world reserve currency and the US Treasury security is the global reserve asset, we’d still see similar results despite what the advocates of Modern Monetary Theory (MMT) claim. The “world reserve” status depends on investors’ faith in the US government to keep its promises. If policymakers were to openly embrace MMT, it would face all of the knowledge problems that other attempts at government intervention have faced before. Ultimately, the knowledge needed to organize an economy is decentralized and not easily quantified, because much of it is contingent on time and place. The closest the US came to this arrangement was during the late 1960s and early 1970s when the Fed funded deficits using expansionary monetary policy, resulting in stagflation . 

Furthermore, there would be rampant cronyism if the federal government were to openly embrace MMT. The logic of collective action would play out. Politicians, eager to win political support, would promise to use the money printer for small, vocal groups seeking to concentrate benefits for these groups and disperse costs among the American people. When inflation results from this policy, don’t be surprised when politicians blame it on corporate greed , price gouging , and anything else besides themselves. 

So Why Does the Government Borrow? Look at the Incentives! 

If the government can’t use the money printer to spend, why borrow instead of raising taxes? This is another point Adam Smith discusses in Book V of The Wealth of Nations , 

The government of [a commercial state of society] is very apt to repose itself upon this ability and willingness of its subjects to lend it their money on extraordinary occasions. It foresees the facility of borrowing, and therefore dispenses itself from the duty of saving.

Smith’s discussion of devaluation and inflation above as well as his comments on public debt here show that there’s nothing new under the sun. Policymakers have an incentive to finance spending with money printing and debt to hide the cost of spending from taxpayers. These costs cannot be hidden forever, though, as inflation and tax increases to pay for yesterday’s unproductive spending will eventually follow. 

You don’t need to read Adam Smith to understand that raising taxes is politically unpopular. A politician’s top two priorities are to get elected and then get reelected, so raising taxes on their voters is to be avoided at all costs. At the same time, voters also love to be the recipients of government money. Government debt offers a politician the ability to win over voters with increased spending and put off the sting of tax increases until later. Politicians also can rest assured that the government has willing lenders that are happy to purchase government debt knowing that they’ll be paid back with interest. 

As my colleague Peter Earle and I noted , the government taking on debt has a two-fold effect. In the short term, private capital is diverted away from the productive private sector and into the unproductive public sector. As economist James M. Buchanan put it , spending that is funded by debt is “in effect chopping up the apple trees for firewood, thereby reducing the yield of the orchard forever.” The second effect, Buchanan also noted, is that debt-financed spending also  shifts  tax burdens from present to future generations. While bond investors trust that their loan will be paid back with interest, future generations will bear the cost of the government spending undertaken today. 

Don’t be fooled by anyone saying there is no cost to printing money or that deficits and debt do not matter. History has clearly shown that when the government decides to finance spending by printing money or taking on massive amounts of debt, it is the average person who is bound to get hit the hardest. 

Thomas Savidge

Thomas Savidge is a Research Fellow at the American Institute for Economic Research. He earned his Master in Public Policy from George Mason University and a Bachelor of Arts in Political Science and Philosophy from SUNY New Paltz.

Prior to joining AIER, Mr. Savidge was a Research Director at the American Legislative Exchange Council focusing on tax and fiscal policy. He was a co-author of several publications focused on public pensions, public retiree benefits, bonded obligations, tax and expenditure limits, and state taxes. In 2020, Mr. Savidge published a peer-reviewed study on Tennessee public retirement systems with the PERI Center at MTSU titled, “Tennessee Public Pensions: A Model for Reform.”

Mr. Savidge has also written articles published in  The Wall Street Journal ,  The Orange County Register, Taxnotes ,  The Washington Post, US News & World Report, The New York Post,  and  The Daily Caller .

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