Government spending in the United States occurs at three levels: Federal, State, and Local. The Federal government main spending is Medicare, Social Security, National Debt, and National Defense. It also plays a major role in funding programs related to Veterans’ Benefits, Food Assistance, and Scientific Research. Around two thirds of the budget is entitlements like Medicare and Social Security that are by far the largest budget items.
State and local governments focus on providing more direct services to their residents. Their largest spending categories are typically education (K-12 and higher education), public welfare programs like Medicaid (which is jointly funded with the federal government), public safety (police and fire), and transportation (building and maintaining roads). While their responsibilities can overlap, each level of government has a distinct role in funding and delivering public services.
Federal spending has a significant and direct impact on local communities across the country. This impact is felt through a variety of channels, including direct payments to individuals, grants to state and local governments, federal contracts awarded to local businesses, and the salaries of federal employees who live and work in the community.
For example, Social Security payments provide income for local retirees, federal grants help fund local schools and roads, and contracts with local companies create jobs. Websites like USAspending.gov are designed to make this impact more transparent. You can use the site to explore how much federal money is flowing into your specific state, county, or zip code, and see which programs and projects are being funded.
Comparing government spending across countries provides context for the size and scope of the public sector. A common way to make this comparison is to look at total government spending as a percentage of the country’s Gross Domestic Product (GDP). This measures how much of a nation’s total economic output is directed by the government.
Organizations like the Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF) collect and publish this data. Historically, total government spending in the U.S. as a share of GDP has been lower than the average for most other developed, high-income countries, particularly those in Europe, which often have more extensive social programs.
Gross Domestic Product (GDP) is the total monetary value of all the finished goods and services produced within a country’s borders in a specific time period. It is the most common measure of a country’s overall economic activity and health. A growing GDP generally signifies a healthy, prosperous, expanding economy, while a shrinking GDP indicates economic contraction and often rising hardship.
GDP is crucial for the federal budget for two main reasons. First, tax revenues are closely tied to economic activity. When GDP is growing, people and businesses earn more, leading to higher tax collections for the government. Second, economists and policymakers often measure the significance of federal spending, deficits, and debt by comparing them to the size of the overall economy. Expressing these figures as a percentage of GDP provides important context for understanding their scale, efficiency, and sustainability over time.
Both recessions and depressions are characterized by a significant decline in economic activity, but a depression is much more severe and lasts longer. A recession is a widespread economic downturn that typically lasts for several months. It is often defined as two consecutive quarters of negative Gross Domestic Product (GDP) growth and is usually accompanied by rising unemployment and falling retail sales.
A depression is a much deeper and more prolonged slump in economic activity. While there is no strict definition, it is often defined as four or more consecutive quarters of negative GDP. A depression involves a more severe drop in GDP, typically by more than 10 percent, and very high unemployment that lasts for many years. The Great Depression of the 1930s is the most famous example. Recessions and Depressions are officially declared by the National Bureau of Economic Research (NBER).
The Federal Reserve, often called the Fed, is the central bank of the United States. Its primary roles are to conduct the nation’s monetary policy, promote the stability of the financial system, and supervise and regulate banks. The Fed’s key objectives, so called “dual mandate”, are to foster maximum employment and stable prices (inflation), which it pursues by influencing interest rates and credit conditions in the economy.
Unlike most federal agencies, the Federal Reserve is not funded by congressional appropriations. Its operations are financed primarily from the interest it earns on its portfolio of U.S. government securities. After covering its operational expenses, the Fed transfers the rest of its earnings to the U.S. Treasury. This independent funding structure is designed to insulate the Fed from short-term political pressures when it makes monetary policy decisions.
The U.S. Mint and the Bureau of Engraving and Printing (BEP) are two bureaus within the Department of the Treasury that are responsible for producing the nation’s currency. The U.S. Mint is responsible for producing all U.S. coins (circulating, numismatic, and bullion), while the BEP designs and manufactures all U.S. paper currency.
While they both make money, they are distinct organizations. The Mint’s operations are primarily funded through the sale of its coin products, while the BEP operates on a fee-for-service basis, charging the Federal Reserve for the cost of producing new banknotes. Together, these two agencies ensure that the public has a safe, reliable, and accessible supply of physical currency.
The primary source for inflation data in the United States is the Bureau of Labor Statistics (BLS). The BLS calculates and publishes the Consumer Price Index (CPI), which is the most widely used measure of inflation. The CPI tracks the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
Inflation has a significant impact on the federal budget on both the spending and revenue sides. On the spending side, inflation increases the cost of government purchases and also triggers automatic Cost-of-Living Adjustments (COLAs) for programs like Social Security. On the revenue side, inflation can push individuals into higher tax brackets and increase nominal wages, which can lead to higher income and payroll tax collections.
The official source for unemployment data in the United States is the Bureau of Labor Statistics (BLS). Each month, the BLS releases its “Employment Situation Summary,” which includes the national unemployment rate and a wealth of other data on the labor market. This report is based on the Current Population Survey, a monthly survey of households.
The BLS website provides detailed unemployment data, which can be broken down by age, gender, race, educational attainment, and geographic area. You can find current and historical data, as well as analysis of labor market trends. Additionally, state-level unemployment data is available from state workforce agencies, often in partnership with the BLS.
