At the Cato Institute, Chris Edwards explains how government spending has ballooned to $6.7 trillion. He concludes by noting that “The US Constitution does not create a large or open‐ended role for the federal government to redistribute wealth or subsidize the states. Yet transfers and aid to the states now account for three‐quarters of the noninterest federal budget.” Edwards intelligently suggests that Congress should cut spending to the states and leave those funded activities to the states and the private sector. He writes:
Federal spending is rising faster than tax revenues, generating a massive flow of red ink. Congress has not balanced the budget in more than two decades, and by 2023 it was spending almost $2 trillion more than it was raising in revenues.1 Overspending is pushing costs onto younger generations, undermining economic growth, and sowing the seeds of a financial crisis.2
To tackle the problem, Congress should pursue widespread spending cuts in the $6.7 trillion federal budget. This study explores what spending to cut using data from the US Bureau of Economic Analysis (BEA).3 The government runs thousands of programs in hundreds of agencies, but the BEA data show that all spending is one of five types: transfers (benefit and subsidy payments), aid to the states, purchases, federal worker compensation, and interest on the debt.
The largest type of spending in 2023 was transfers ($3.19 trillion), followed by aid to the states ($1.15 trillion), interest ($0.95 trillion), purchases ($0.84 trillion), and worker compensation ($0.56 trillion).4 The first two types—transfers and aid to the states—are the redistribution part of the budget. Redistribution grew
from 46 percent of noninterest spending in 1970 to 76 percent in 2023.
The latter two types of spending—purchases and compensation—are the production part of the budget. These activities declined from 54 percent of noninterest spending in 1970 to 24 percent in 2023. This spending includes the active services produced by the government, such as national defense and the national park system. Purchases include everything the government buys, from fighter jets to park ranger hats.
Transfers and aid to the states are the largest and fastest‐growing types of spending, and they should be targeted for large cuts. However, federal deficits are so huge that policymakers should find savings in all types of spending. The Biden administration often says that it has a “whole‐of‐government” approach to its initiatives.5 But what we really need is a whole‐of‐government approach to fiscal downsizing, with reforms to transfers, aid to the states, purchases, and compensation.
Spending Outpaces Revenues
Figure 1 shows federal spending and revenues based on BEA data.6 Since Congress last balanced the budget in 2001, revenues have grown at a robust annual average rate of 3.9 percent, which was higher than the average inflation rate since 2001, 2.5 percent.7 The problem is that spending has grown at a much faster pace, 5.5 percent annually, which has led to today’s large deficits.
The figure reveals the huge size of the spending spree in response to the COVID-19 pandemic. Spending spiked more than $2 trillion between 2019 and 2021. It declined in 2022, but then rose in 2023 to a level almost $2 trillion higher than before the pandemic.
The Congressional Budget Office (CBO) projects that federal revenues will grow strongly over the coming decade at an annual average rate of 4.2 percent.8 However, without reforms, spending is expected to grow even faster and thus push deficits even higher.
Redistribution Dominates Federal Spending
Figure 2 breaks down federal spending in 2023 into five components based on the BEA data. Transfers to individuals and businesses account for 48 percent of federal spending. Some of the largest transfer programs are Social Security, Medicare, food stamps, and refundable tax credits. These programs do not add to gross domestic product (GDP) or national income but rather redistribute existing resources from taxpayers to program recipients.
Aid to the states accounts for 17 percent of spending. It is delivered through more than 1,300 programs that subsidize state and local government health care, highways, education, housing, transit, and other activities.9 Medicaid is the largest aid‐to‐state program. Like transfers, this part of the budget does not add to the nation’s GDP or income, but rather redistributes resources, in this case from taxpayers to state and local governments.10
Purchases account for 13 percent of spending. This includes spending on everything the government buys or procures—from laptops to aircraft carriers. National defense accounts for 57 percent of purchases and nondefense for 43 percent.
Compensation (wages and benefits) for the 3.8 million federal defense and nondefense workers accounts for 8 percent of spending.11 Defense workers (uniformed and civilian) account for 56 percent of compensation and nondefense for 44 percent.
Interest accounts for 14 percent of spending. This BEA measure of interest is larger than the net interest measure presented in the government’s budget.
Together, transfers and aid to the states account for 76 percent of noninterest spending. Thus, aside from interest, three‐quarters of the federal budget is a giant redistribution machine taking from taxpayers and giving to favored individuals, businesses, and state and local governments.
