In Public Expenditures in the United States: 1952-1993, John Dawson and Peter Stan expand the domain in which public expenditures are usually discussed to include all governments serving citizens. Based on data from the U.S. National Income and Product Accounts from 1952 to 1993, the analysis highlights the major categories of public expenditures that will shape the policy agenda into the next century.
The authors define four complementary schemes for classifying expenditures--function, fund, jurisdiction, and economic type--and integrate them to construct a profile of public expenditures over the past 41 years. The expenditures are expressed as a fraction of gross domestic product (GDP) to indicate how they have behaved relative to the total economy. The profile has three key elements:
Expenditures on defense peaked during the Korean War (1953) and the Vietnam War (1967); expenditures on veterans' compensation peaked subsequently. Over the past 41 years, their total has fallen by more than 9 percentage points, mostly because the relative burden of defense expenditures has decreased as the economy has grown. With the end of the Cold War, defense expenditures are expected to continue to fall as a percentage of GDP. Whether this expectation will be borne out remains to be seen.
While defense expenditures were declining, all other expenditures increased by 16 percentage points of GDP. Five categories accounted for 13 points of this increase: Social Security, medical care, welfare and social services, public education, and police and corrections. All other expenditure categories competed for the remaining 3 percentage points of GDP, with net interest payments making up one-fifth of this residual amount.
The four expenditure categories showing the most growth had specific beneficiary groups within the U.S. population: the elderly (Social Security and Medicare), the poor (medical, welfare, and social services), and the young (education). Growth in public financing of medical expenses for the poor has been much greater than growth in other forms of assistance for them.
At least to a first order, a small number of factors account for these increases. The successive cohorts of the post-World War II baby boom, along with its subsequent echo, largely shaped expenditures for public primary and secondary education after 1952, and these expenditures dominated education expenditures as a whole. Subsequent encounters of these cohorts with the law enforcement and criminal justice systems, and especially policy decisions leading to tougher sentencing in recent years, drove police and corrections expenditures.
Meanwhile, at the other end of the age distribution, both the pool of those eligible for Social Security benefits and the magnitude of these benefits increased rapidly over the period. Increases in Medicare expenditures also were driven by the larger proportion of elderly in the population, but a more important factor has been the increasing costs of medical care delivery, which some analysts have attributed to enhancements in medical technology.
Social insurance expenditures are responsible for most of the increase in total public expenditures during the period examined in the study. The bulk of these expenditures occurred at the federal level, with Social Security and the Hospital Insurance component of Medicare accounting for more than 80 percent of the increase. The past rate of growth of these two programs and particularly the approaching retirement of the baby-boom cohorts place these programs in the forefront of policy concern into the next century.
Public debt at all levels of government lies entirely within regular budgets. Net interest payments have increased by 2.7 percentage points of GDP. Other regular budget public expenditures (i.e., excluding grants) have remained essentially constant relative to the economy although, as Table 2 shows, their mix has changed dramatically.
Perhaps more important, all levels of government must be analyzed together because federal grants have increasingly linked expenditures across jurisdictions. At the federal level, grants are expenditures that become intergovernmental transfers of resources; at the state and local level, grants are receipts that, to a greater or lesser extent, are fungible when used along with the allocation of other resources. The existence of an additional layer of decisionmakers between the grant and the ultimate expenditure means that substitution effects cast doubt on any accounting of the final ends of federal grants.
The pattern of expenditures from the perspective of jurisdiction mirrors the pattern from the perspective of fund. Federal regular budget expenditures have fallen, but their state and local counterparts have risen to almost half of the regular budget total for all levels of government. The greatest growth at the federal level has been nonprogrammatic: the rise in net interest payments that has accompanied rising debt. Grants have grown almost as much while helping to fuel the rise in state and local expenditures.
Table 3 shows changes in economic categories of expenditures.
Purchases of goods and services accounted for 18 to 20 percent of GDP over most of the period covered in this study. That is, in those instances where government actually produces and delivers goods and services to its citizens, expenditures have not grown relative to the economy. All of the relative growth in government expenditures has occurred as redistributions of income through transfer and interest payments, mainly to the elderly, the poor, and creditors.
At a more fundamental level, the authors argue it is time to rethink how the federal budget is presented and to do so with attention to the fundamentals of budgetary communication and taxonomy.
RAND
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RB-2500
April 1995