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 is said to have a balanced budget. For example, in , the U. Comparing spending over time in nominal dollars is misleading though, because it does not take into account inflation, growth in population, or growth in 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 1 shows the level of federal spending since , expressed as a share of GDP. The other lines in Figure 1 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 s, although there were some upward bumps in the s buildup under President Ronald Reagan and in the aftermath of the terrorist attacks on September 11, Healthcare expenditures include both payments for senior citizens Medicare , and payments for low-income Americans Medicaid. Medicaid is also partially funded by state governments. Interest payments are the final main category of government spending shown in the figure.
It then sets criteria for determining who is eligible to receive benefits from the program, and benefit levels for people who are eligible. The amount of money spent on Social Security each year is then determined by how many people are eligible and apply for benefits. Congress therefore does not decide each year to increase or decrease the budget for Social Security or other earned benefit programs.
Instead, it periodically reviews the eligibility rules and may change them in order to exclude or include more people, or offer more or less generous benefits to those who are eligible, and therefore change the amount spent on the program. Mandatory spending makes up nearly two-thirds of the total federal budget. Social Security alone comprises more than a third of mandatory spending and around 23 percent of the total federal budget.
Medicare makes up an additional 23 percent of mandatory spending and 15 percent of the total federal budget. Finally, putting together discretionary spending , mandatory spending , and interest on the debt , you can see how the total federal budget is divided into different categories of spending.
When the federal government spends money on mandatory and discretionary programs, the U. Treasury writes a check to pay the program costs.
But there is another type of federal spending that operates a little differently. Lawmakers have written hundreds of tax breaks into the federal tax code - for instance, special low tax rates on capital gains, and a deduction for home mortgage interest - in order to promote certain activities they deem beneficial to society. In fact, tax breaks function as a type of government spending, and they are officially called "tax expenditures" within the federal government.
Select personalised content. Create a personalised content profile. Measure ad performance. Select basic ads. Create a personalised ads profile.
Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. Government purchases are expenditures on goods and services by federal, state, and local governments.
The combined total of this spending, excluding transfer payments and interest on the debt, is a key factor in determining a nation's gross domestic product GDP. Transfer payments are expenditures that do not involve purchases, such as Social Security payments and farm subsidies. One method of calculating GDP , a measure of the market value of all the final goods and services produced in a specific time period within a country's borders that's used to track the health of a nation's economy, is to add up all spending in four major categories:.
The U. For instance, it breaks down government purchases into federal, state, and local spending and also differentiates defense-related federal spending from all other spending. The total for imported goods is subtracted from the final GDP total. Government purchases have risen in real terms over recent decades:. As a share of overall nominal GDP, however, nominal government purchases have been falling:. Government purchases are seen as a crucial element of a healthy economy in Keynesian economic theory.
That is, increasing or decreasing government spending is viewed as a key tool for regulating the business cycle. According to this theory, government spending boosts demand in two ways. First, the government directly boosts demand by purchasing goods, such as the steel needed to build a bridge.
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