The government increased payments to individuals without reducing spending elsewhere in the budget.Budget deficits ; Debts, Public ; Economic conditions - United States

Daniel L. Thornton

Kevin L. Kliesen

English

Research Papers in Economics

Economic SYNOPSES
short essays and reports on the economic issues of the day
2011 ■ Number 21
I
n a recent Economic Synopses essay, we investigated
whether the rise in the federal debt over the past 60
years was the result of declining revenue, increased
expenditures, or some combination of the two. We found
that “the rise in the national debt…is entirely a consequence
of the federal government’s increase of expenditures without
an offsetting increase in revenues.” We found a marked
increase in government spending beginning in 1975 that
was not matched by a corresponding increase in govern-
ment revenue. Specifically, on average, government spend-
ing increased by 2.5 percent of GDP over the period 1975-
2007 compared with the period 1960-74, while revenue
increased by only 0.6 percent of GDP. In this essay we inves-
tigate the source of the marked increase over this period.
The first chart shows the five primary categories of
government spending since 1950—defense, interest on the
public debt (IPD), Social Security and
Medicare (SSM), other payments to
individuals (OPI), and other federal
expenditures (OFE). The chart shows
that, with the exception of expendi-
tures for the Korean War, defense
spending as a percent of GDP has
generally trended lower since World
War II. After surging from about 6
percent in 1950 to about 15 percent in
1953, defense spending subsequently
declined sharply to a little more than
3 percent in the early 2000s. The sec-
ular decline in defense spending was
interrupted briefly in the 1960s and
early to mid 1980s because of the
Vietnam War and the so-called Reagan
defense build-up. Since then, defense
spending has increased to about 5 per-
cent of GDP because of the wars in
Iraq and Afghanistan.
By contrast, IPD has been relatively flat since 1950,
averaging 1.5 percent over the period 1950-80 and 1.7
percent over the period 2000-2010. There was a relatively
brief rise in IPD from the late 1970s to the mid 1990s
that reflected two developments. First, long-term nominal
interest rates rose from an average of about 7.75 percent for
1974-78 to an average of about 11.75 percent for 1979-85.
Second, as we noted in our previous essay, public debt as
a share of GDP roughly doubled from the early 1980s to
the mid 1990s, from about 35 percent of GDP to about 
70 percent.1
The Federal Debt: 
What’s the Source of the Increase in Spending?
Kevin L. Kliesen, Economist
Daniel L. Thornton, Vice President and Economic Adviser
The government increased payments
to individuals without reducing 
spending elsewhere in the budget.
Federal Spending as a Percent of GDP by Categories: 1950-2010
0
2
4
6
8
10
12
14
16
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Defense
IPD
SSM
OPI
OFE
Percent
NOTE:  IPD, interest on the public debt; SSM, Social Security and Medicare; OPI, other payments to 
individuals; OFE, other federal expenditures.
SOURCE:  Office of Management and Budget.With the exception of the rise in
the 1980s and 1990s, when it reached
a peak of a little over 3 percent of GDP,
OFE trended up during the period
1950-80, reaching a peak of 4.5 percent
of GDP in 1978. Since the early 1990s,
OFE, which is mostly non-defense dis-
cretionary spending, has been relatively
stable, averaging 2.0 percent of GDP
over the period 1992-2010.
The chart indicates that there are
two categories of federal spending
that have increased as a share of GDP
since 1950: SSM and OPI. This spend-
ing, which is mostly mandatory out-
lays not subject to annual budgetary
appropriations, have become the fed-
eral government’s largest budgetary
commitment. Social Security and
Medicare spending experienced its
largest increase from 1950 to 1983,
when its share rose from 0.3 percent of GDP to 6.5 per-
cent. SSM outlays continued to rise thereafter, but more
slowly, reaching 7.3 percent of GDP in 2007. Indeed, from
1983 to 1989, SSM outlays as a percent of GDP declined
from 6.5 to 6 percent. The second major programmatic cat-
egory, OPI, was relatively constant from the early 1950s to
the early 1970s. OPI moved temporarily higher in the
aftermath of World War II, reaching 4.7 percent of GDP
in 1950; it then began to trend lower and remained rela-
tively constant at 2.7 percent of GDP between 1951 and
1974. Other payments to individuals subsequently moved
modestly higher over the following 30 years or so. Although
OPI outlays also temporarily declined from 5 percent of
GDP to 3.9 percent during the 1983-90 business expansion,
this spending nonetheless ticked higher over time, rising
to an average of about 4.75 percent from 1975 to 2007.
Not surprisingly, both of these categories of expenditures
increased significantly during the past three years. This
increase, relatively large from an historical standpoint,
reflected the sharp decline in real GDP during the recession,
the subsequent weaker-than-normal recovery, and the non-
cyclically sensitive nature of this spending. Combined, SSM
and OPI accounted for nearly 70 percent of total govern-
ment spending in 2010.
All of the increase in government spending that we
documented previously is due to increases in SSM and OPI.
This is shown clearly in the second chart, which tracks
defense plus OFE and SSM plus OPI over the period 1950-
2010. Defense plus OFE trends down over the period, while
SSM plus OPI trends up. The two are essentially equal in
1975. Over the period 1950-1975, defense plus OFE and
SSM plus OPI averaged 11.9 and 5.1 percent of GDP, respec-
tively. From 1975 through 2007, the averages are 7.5 per-
cent and 11.0 percent, respectively. Hence, the decline in
discretionary defense and OFE spending, 4.4 percent, was
not sufficient to offset the increase in mandatory SSM and
OPI spending, 5.8 percent, so that total spending increased
by 1.4 percent of GDP.
This analysis suggests that the increase in the debt
over the period 1975-2007 was not only a consequence of
increased government spending without increased revenues,
but also that the government increased payments to indi-
viduals through Social Security, Medicare, and other pay-
ments without sufficiently reducing spending elsewhere
in the budget. In short, these trends, as the CBO’s recent
Long-Term Budget Outlook makes clear, will continue to
strain federal, state, and local budgets as they consume an
ever larger percentage of federal spending dollars. ■
1 According to the “Alternative Fiscal Scenario” outlined in the Congressional
Budget Office’s recent Long-Term Budget Outlook, net interest expenditures are
projected to rise to 43 percent of GDP in 2085. This scenario assumes that rev-
enues remain at roughly its historical levels (about 18 percent of GDP), but that
non-interest outlays rise from about 23 percent of GDP in 2011 to about 33 per-
cent of GDP in 2085.
Economic SYNOPSES Federal Reserve Bank of St. Louis      2
research.stlouisfed.org
Posted on July 14, 2011
Views expressed do not necessarily reflect official positions of the Federal Reserve System.
Defense Plus OFE and SSM Plus OPI as a Percent of GDP: 1950-2010
0
2
4
6
8
10
12
14
16
18
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Defense + OFE
SSM + OPI
Percent
NOTE:  OFE, other federal expenditures; SSM, Social Security and Medicare; OPI, other payments to 
individuals.
SOURCE:  Office of Management and Budget.

The federal debt: what’s the source of the increase in spending?

http://research.stlouisfed.org/publications/es/11/ES1121.pdf

The federal debt: what’s the source of the increase in spending?

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