For most of the last two decades, federal government spending equaled about one-third of the total gross national product. Following the 2007-2008 financial crisis, the portion jumped to 40 percent of GDP. How and where the federal government spends money has a big impact on the overall growth or lack of growth in the economy. Government spending can be divided into three main types.
The purchase of goods and services comprises one major type of government spending. This category covers the purchase of equipment ranging from government office computers to jet fighters and aircraft carriers. Government consumption also includes the payment of salaries and benefits for federal employees. These workers perform the task of governing, such as conducting inspections for all types of industries and managing the programs that pay out the other types of expenditures.
Transfer payments consist of providing money to recipients in plans like Social Security, Medicare, health insurance subsidies and various welfare programs. Foreign aid programs also fall under the transfer payments category. Social Security and Medicare, the major transfer payment mechanisms, have their own, separate tax funding sources.
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Interest on the Debt
Interest on the federal debt is the most variable of the three major types of expenditures. In 2013, interest on about $17 trillion of debt was 6.2 percent of total federal outlays. In the period following the 2007-1008 financial crisis, low interest rates helped keep the interest payments down even as the total debt load grew. In comparison, in the 1990's when rates were higher, interest payments accounted for up to 15 percent of total federal government expenditures.
Cutting Up the Tax Revenues Pie
Every year, the government collects trillions of dollars in tax revenue, and borrows billions more through the sales of government bonds. Approximately two-thirds of spending consists of mandatory expenditures on programs such as Social Security and Medicare. The amount of interest depends on the total federal debt and interest rates. That leaves just 20 to 30 percent of expenditures that are discretionary and can be changed in the government's annual budget.