A 125-Year Picture of the Federal Government's Share of the Economy, 1950 to 2075
Summary
This policy brief presents a long view of the federal government's finances
and the potential impact of two critical drivers of federal spending: the
government's largest entitlement programs--Social Security, Medicare, and
Medicaid--and interest on the federal debt held by the public. Under the
projections shown here, outlays for those entitlement programs would rise
from 8 percent of gross domestic product (GDP) today to 21 percent in 2075,
which would exceed the share of GDP now absorbed by all federal revenues.
Even if other major categories of federal spending remained fixed as a
share of GDP, the growth of those programs would push total federal spending
well above the level that it has been throughout much of the post-World
War II period. Left unchecked, such spending could cause major deficits
to emerge, propelling the government's debt and interest expenditures to
unprecedented levels. The total cost of government, including interest
expense, could more than double as a share of the economy, rising from
19 percent of GDP in 2002 to 40 percent in 2075. |
Introduction
Presenting a 125-year picture of the financial affairs of the federal
government, this policy brief shows the size of the federal budget in relation
to the general economy from the middle of the last century through the
projected retirement years of the children of the post-World War II baby
boomers. Of course, the future path of the budget is highly uncertain and
subject to wide variation. Except for the first 10 years, which is the
period covered by the Congressional Budget Office's (CBO's) projection
of a baseline, the path shown here is simply a representation based on
an illustrative set of key assumptions.
Using CBO's new long-range projection model, the report merges the actual
revenue and spending trends from 1950 through 2001 with projections for
2002 through 2075. For that purpose, the federal budget totals include
the operations of the Social Security trust funds, which by law are considered
to be "off-budget" Treasury accounts. The report expresses the budget figures
as a share of gross domestic product (GDP) so that the magnitude of federal
receipts and expenditures can be observed in relation to the total economic
activity of the nation in any given year and over time.(1)
Assumptions
The figures and tables of this report illustrate a potential path for
the budget that highlights projections of spending under current policies
for the largest federal entitlement programs--Social Security, Medicare,
and Medicaid--and projections of net interest. Social Security spending
reflects growth in both the number of recipients and wages, upon which
benefits are calculated. Medicare and Medicaid spending also reflects the
increasing number of recipients as well as higher costs for medical care.
For these projections, the rise in health care costs per recipient is assumed
to slow to a growth rate of 1 percentage point faster than per capita GDP.
While seemingly large, that rate is less than it has been in recent decades.
It is spending for the major entitlement programs and interest, because
of the commitments involved and their sheer magnitude, that has the largest
potential to constrain future Congresses. Moreover, much of the government's
remaining spending consists of discretionary outlays, the levels for which
the Congress will determine annually.
Given the wide array of discretionary programs (with purposes ranging
from national defense to research by the National Institutes of Health),
this category of spending, unlike the major entitlement programs, does
not easily lend itself to projections that merge economic and demographic
assumptions with legislative rules for the payment of benefits. Thus, for
this presentation, the projections assume that defense, nondefense discretionary,
and all other spending (that is, other than that for Social Security, Medicare,
Medicaid, and interest) will remain fixed as a share of GDP beginning in
2012, the last year of CBO's March 2002 10-year baseline projections. The
projections also assume for analytical purposes that aggregate federal
revenues will level out at 19 percent of GDP in 2020, reflecting the higher
end of the range over which they have fluctuated during the post-World
War II period (18 percent was the average from 1950 through 2001).
Trends, 1950 to the Present
Spending by the federal government grew from approximately 3 percent
of GDP in 1925 to 15.6 percent in 1950. Following the Depression, World
War II abruptly boosted federal spending to approximately 42 percent of
GDP, but afterward it dropped and resumed a less volatile trend. Notably,
over the past 40 years, Social Security, Medicare, and Medicaid have collectively
become the largest component of the federal budget (see Figure 1 and Table 1). In 1962, with Social Security outlays representing only 2.5 percent of GDP and Medicare and Medicaid not yet created, spending for all other government activities accounted for 86 percent of noninterest federal outlays. The largest share was for national defense, which accounted for more than half of noninterest outlays and represented 9.2 percent of GDP. By 2000, spending for Social Security,
Medicare, and Medicaid equaled 7.6 percent of GDP, triple the 1962 level
for Social Security alone. While still constituting less than half of all
federal expenditures, the three programs combined accounted for the largest
share of the government's total outlays. Defense spending had fallen to
3 percent of GDP, and all other noninterest spending stood at 5.4 percent.
Interest expenditures, whose share of GDP rose steadily from 1.2 percent
in 1962 to a high of 3.3 percent in 1991, stood at 2.3 percent in 2000.
Figure 1.
|
Federal Outlays, 1962 to 2001 |
(As a percentage of GDP) |
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Table 1.
|
Federal Outlays, 1962 to 2001 |
(As a percentage of GDP) |
Fiscal Year |
Social Security, Medicare, and Medicaid |
Defense |
Nondefense Discretionary |
Other |
Interest Expense |
Total |
1962 |
2.5 |
9.2 |
3.4 |
2.4 |
1.2 |
18.8 |
1965 |
2.5 |
7.4 |
3.9 |
2.1 |
1.2 |
17.2 |
1970 |
3.9 |
8.1 |
3.8 |
2.2 |
1.4 |
19.3 |
1975 |
5.4 |
5.6 |
4.5 |
4.3 |
1.5 |
21.3 |
1980 |
6.0 |
4.9 |
5.2 |
3.6 |
1.9 |
21.6 |
1985 |
6.7 |
6.1 |
3.9 |
3.0 |
3.1 |
22.9 |
1990 |
6.9 |
5.2 |
3.5 |
3.0 |
3.2 |
21.8 |
1995 |
8.2 |
3.7 |
3.7 |
1.9 |
3.2 |
20.7 |
2000 |
7.6 |
3.0 |
3.3 |
2.2 |
2.3 |
18.4 |
2001 |
7.9 |
3.0 |
3.4 |
2.1 |
2.0 |
18.4 |
|
Projections, 2002 to 2075
According to the projected path for the budget shown in this report,
outlays for Social Security, Medicare, and Medicaid (based on the current
rules for benefits) would nearly double again as a share of GDP by 2035,
rising to 15 percent. If spending for all other government activities in
2035 remained roughly the same share of GDP as projected for 2012 (7 percent),
Social Security, Medicare, and Medicaid would account for almost 70 percent
of all noninterest expenditures. By 2050, outlays for the three programs
would equal 17 percent of GDP and by 2075, 21 percent--exceeding the share
of GDP now absorbed by all federal revenues (see Figure
2 and Table 2).(2)
Figure 2.
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Federal Outlays by Category, 1950 to 2075 |
(As a percentage of GDP) |
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Table 2.
|
Federal Outlays by Category, 1950 to 2075 |
(As a percentage of GDP) |
Fiscal Year |
Social Security |
Medicare |
Medicaid |
Social Security, Medicare,
and Medicaid Combined |
All Other Spending, Excluding Interest Expense |
Interest Expense |
Total |
1950 |
0.3 |
|
n.a. |
|
n.a. |
|
0.3 |
|
13.5 |
|
1.8 |
|
15.6 |
|
1960 |
2.2 |
|
n.a. |
|
n.a. |
|
2.2 |
|
14.2 |
|
1.3 |
|
17.7 |
|
1962 |
2.5 |
|
n.a. |
|
* |
|
2.5 |
|
15.1 |
|
1.2 |
|
18.8 |
|
1970 |
2.9 |
|
0.7 |
|
0.3 |
|
3.9 |
|
12.8 |
|
1.4 |
|
19.3 |
|
1980 |
4.3 |
|
1.2 |
|
0.5 |
|
6.0 |
|
13.7 |
|
1.9 |
|
21.6 |
|
1990 |
4.3 |
|
1.9 |
|
0.7 |
|
6.9 |
|
11.7 |
|
3.2 |
|
21.8 |
|
2000 |
4.2 |
|
2.2 |
|
1.2 |
|
7.6 |
|
8.5 |
|
2.3 |
|
18.4 |
|
2010 |
4.4 |
|
2.7 |
|
1.8 |
|
8.8 |
|
7.6 |
|
0.8 |
|
17.2 |
|
2020 |
5.4 |
|
3.6 |
|
2.3 |
|
11.3 |
|
7.1 |
|
-0.5 |
|
17.9 |
|
2030 |
6.2 |
|
4.9 |
|
2.8 |
|
13.9 |
|
7.1 |
|
-0.2 |
|
20.8 |
|
2040 |
6.2 |
|
6.0 |
|
3.4 |
|
15.5 |
|
7.1 |
|
1.1 |
|
23.8 |
|
2050 |
6.0 |
|
6.7 |
|
3.9 |
|
16.7 |
|
7.1 |
|
3.1 |
|
26.9 |
|
2060 |
6.1 |
|
7.7 |
|
4.3 |
|
18.1 |
|
7.1 |
|
5.8 |
|
31.0 |
|
2070 |
6.2 |
|
8.9 |
|
4.9 |
|
20.0 |
|
7.1 |
|
9.4 |
|
36.5 |
|
2075 |
6.2 |
|
9.6 |
|
5.3 |
|
21.1 |
|
7.1 |
|
11.5 |
|
39.7 |
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Conclusion
Under the assumptions CBO made for this 125-year picture of the federal
government's finances, the projected rise in expenditures for Social Security,
Medicare, and Medicaid would drive total federal outlays well above the
level that they have been throughout much of the post-World War II period.
The core costs of the federal government--that is, ignoring net interest
on the debt--could rise from approximately 18 percent of GDP today to
24 percent in 2050 and 28 percent in 2075. Left unattended, that steady
escalation in spending could cause major deficits to emerge and thereby
push the government's debt and interest expenditures to unprecedented levels.
The total cost of government, including interest expense, could more than
double as a share of the economy, rising from 19 percent of GDP today to
40 percent in 2075 (see Figure 3 and Table 3).
Figure 3.
|
Federal Revenues, Outlays, Deficits, and Surpluses, 1950 to 2075 |
(As a percentage of GDP) |
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Table 3.
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Federal Revenues, Outlays, Deficits, and Surpluses, 1950 to 2075 |
(As a percentage of GDP) |
Fiscal Year |
Revenues |
Total Outlays |
Budget Deficit (-) or Surplus |
1950 |
14.4 |
|
15.6 |
|
-1.1 |
|
1960 |
17.8 |
|
17.7 |
|
0.1 |
|
1970 |
19.0 |
|
19.3 |
|
-0.3 |
|
1980 |
18.9 |
|
21.6 |
|
-2.7 |
|
1990 |
18.0 |
|
21.8 |
|
-3.9 |
|
2000 |
20.8 |
|
18.4 |
|
2.4 |
|
2010 |
19.2 |
|
17.2 |
|
2.0 |
|
2020 |
19.0 |
|
17.9 |
|
1.1 |
|
2030 |
19.0 |
|
20.8 |
|
-1.8 |
|
2040 |
19.0 |
|
23.8 |
|
-4.8 |
|
2050 |
19.0 |
|
26.9 |
|
-7.9 |
|
2060 |
19.0 |
|
31.0 |
|
-12.0 |
|
2070 |
19.0 |
|
36.5 |
|
-17.5 |
|
2075 |
19.0 |
|
39.7 |
|
-20.7 |
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Certainly, the long-range outlook presented here is subject to change,
as the underlying economic and demographic factors will undoubtedly vary
from the assumptions used. However, the Congress can alter it as well by
legislating changes in the policies that drive the numbers.
Note: Numbers in the tables and text may not add up to totals
because of rounding.
Related CBO Publication: Social Security: A Primer (September 2001).
Contacts: This policy brief was prepared by Dave Koitz, Melissa
D. Bobb, and Ben Page. It and other publications by CBO are available at
the agency's Web site. |
1. |
The nature of future taxes and spending as well as the aggregate difference between them can affect the growth of the economy. For this analysis, however, no macroeconomic effects that might result from the fiscal policies reflected by the projections are considered. |
2. |
For the purpose of this analysis, the projected shortfall of dedicated taxes to finance Social Security and Medicare is ignored, and spending for those programs reflects the commitments for benefits prescribed by the payment rules currently in place. |
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