The Government Spending Burden

Federal Spending

Special Focus: Spending and the Federal Budget Deficit

State and Local Spending

Federal Spending

Federal spending continues to be the major contributor to the total cost of government and the main driving force behind the substantial increase in the size of government over the last decade.

The average American will have to work 88 days just to pay for federal spending, which consumes 24.04 percent of gross domestic product this year. We note that this is a slight improvement from 91 days in 2011 and 90 days in 2009. However, over the last ten years, federal spending has jumped over 17 days from its place in 2002. Federal spending, relative to the economy, has increased by 21.15 percent since 2002.

 

While there is a slight improvement in the number of days worked to pay for federal spending this year, the growth of government remains the largest threat to American prosperity today. 

Taking spending from 20.8 percent of GDP in 2008 to 25.2 percent in 2009, the Obama Administration has overseen one of the largest expansions of the state in history.

In 2010, Congress passed and the President signed the Patient Protection and Affordable Care Act (PPACA). This massive overhaul of the country’s health care system exploits the unfunded liabilities of the current entitlements while exacerbating the crisis of exploding health care costs. Ultimately, the health care bill could cost upwards of $2.3 trillion, paid for partially with hundreds of billions of new taxes on Americans.

At the time of this writing, the United States Supreme Court is considering the constitutionality of the President’s health care law. If PPACA iscompletely overturned, it would relieve Americans of its twenty new or higher taxes and unbridle the country with its trillions in expected new spending. However, the country’s fiscal future will still be greatly imperiled by trillions in coming tax hikes beginning at the end of the year, unsustainable entitlement programs and unrestrained discretionary spending.

In 2011, the government spent $3.753 trillion. Over the last decade, federal spending has gone from $2.112 trillion in 2002 to $3.760 trillion in 2012. This is an estimated increase of 78.03 percent over the course of ten years. This accelerated spending has led to the largest deficits in history: $1.413 trillion in 2009, $1.294 trillion in 2010, $1.296 trillion in 2011, and an estimated $1.095 trillion in 2012. The deficits from 2009-2012 constitute the largest spending sprees, as a percentage of GDP, since World War II. By 2022 government spending is estimated to reach $5.520 trillion—a 46.81 percent increase from today.

Special Focus: Spending and the Federal Deficit

Due to unprecedented government spending over the last four years, the federal deficit has received a significant amount of attention. The deficit, however, is only helpful insofar as it forces profligate policymakers to tackle the real problem of fiscal insolvency: out of control spending.

The size of government is determined not by the deficit, but by levels of spending and revenues. These are the major factors affecting the economy, as they determine the incentives for saving, investment, entrepreneurship and employment.

However, national debt, at a certain threshold, is correlated with negative economic growth. A 2010 study by Reinhart and Rogoff found that, “median growth rates for countries with public debt over 90 percent of GDP are roughly one percent lower than otherwise; average (mean) growth rates are several percent lower.” As long as President Obama oversees annual deficits exceeding $1 trillion, the rapid pace to 90 percent becomes increasingly evident.

The 2012 federal deficit is expected to more than double in size compared to 2008—jumping from $459 billion to an estimated $1.095 trillion. This means that the deficit relative to GDP will balloon from 3.2 percent in 2008 to 7.0 percent at the end of 2012.

Institutionalizing modest spending restraint could have avoided massive run-ups in debt and prevented the stark austerity measures some have suggested may be necessary to right the country’s fiscal ship. If federal spending had been chained to GDP, then $4.257 trillion would have been prevented from 2001-2011. Tying federal spending to CPI would have generated $6.837 trillion in savings and would have produced a $2.360 trillion surplus over the last ten years.

State and Local Spending

In 2012, the average American will labor 40 days to pay for state and local spending. This is the same as 10 years ago in 2002 and up one day from 39.2 days in 2010.

The Bureau of Economic Analysis shows that state and local government current receipts exceeded $2 trillion in 2010, including $500 billion in federal transfers. Similarly, state and local spending is nearly equivalent to federal spending, with outlays amounting to roughly 14 percent of GDP. The one-time injection of federal “stimulus” money threw state budgets into flux as those federal funds have dried up while the spending strings attached to them remain. States now must make smart spending decisions to make their budgets whole.

In 2010, Wisconsin Governor Scott Walker aimed to close a $3.6 billion state budget deficit by confronting the unsustainable liabilities in the state’s pension and benefits system. His proposals ended collective bargaining for most state employee union members and offered paycheck protection to workers. This prohibited unions from deducting dues from workers’ paychecks and allows employees to choose whether they would like to cut a check to their union.

In effect, this will save workers in Wisconsin anywhere between $800 and $1400 annually; savings that can be used to cover the modest increase in personal contributions the budget required them to make to their own benefits. The reforms required state employees to contribute 5.8 percent of salaries to their pensions and 12.6 percent to their health insurance premiums. Despite widespread backlash from organized labor, this is well below the national average contributions required of union employees.

A recent study conducted by the Beacon Hill Institute looked at the effectiveness of the Wisconsin reforms. It found the measures prevented “painful tax increases that would have damaged the state’s private economy.” The study also showed that over 6500 public sector jobs, and somewhere between 11,500 and 14,000 private sector jobs, have been spared due to the proposal’s cost-savings.

Finally, the Walker budget saved Wisconsin taxpayers over $1 billion during its first year. In terms of COGD, this amounts to 1.37 days of work in the Badger State. Coupled with other reforms, Wisconsin has gone from an almost $4 billion deficit to a surplus in two years, without raising taxes. Governor Walker’s efforts should be used as a model for other states in order to reduce spending and tackle the unaffordable liabilities of bloated public worker pay and benefits.

<< Previous Main Next >>

2012 Report

Case Studies

Methodology
Chart Room
COGD Launch Event: Sin Tax Party
Media Coverage
2011 Report