The debt limit is dominating headlines. Politicians are jockeying for attention. Social Security and Medicare recipients are growing concerned over their benefit payments. Investors are making bets on the probability of a US default.
Lots of chaos. Lots of noise. But how exactly did we get here? Where does the United States government spend its money each year? I went down a deep rabbit hole over the last few days and this letter will outline everything that I learned.
First, it is important to understand the US government runs on a fiscal year that goes from October 1st until September 30th of the following year. The revenue collected in 2022 was $4.9 trillion, but spending in the same fiscal year topped $6.27 trillion, which resulted in a $1.38 trillion deficit. Adding this deficit from 2022 caused the national debt to exceed a total of $30.9 trillion for the first time in history.
The size of the 2022 deficit is equivalent to almost 30% of the total revenue collected. It is hard to argue that the US government has a revenue problem, especially when you remember it continues to collect more revenue each year, so the spending habits are of particular interest when talking about the debt limit and future borrowing.
All government spending can be put into one of three categories:
Mandatory spending (ex: Social Security and Medicare)
Discretionary spending (ex: Transportation, Education, Housing)
Net interest spending (ex: interest payments on past debt borrowed)
The big difference between mandatory spending and discretionary spending is that the former is mandated by existing laws, while the latter is not. The mandatory spending on only Social Security and Medicare account for approximately 31% of total government spending in fiscal year 2022 or almost $2 trillion in total.
When you add in all mandatory spending categories, it accounts for about 60% of the total government spending in a given year. This percentage has basically doubled since the 1960s and simultaneously cut discretionary spending in half.
When we look at spending by agency, it is shocking to see spending by the Department of Health and Human Services is double the Department of Defense (military spending) and the Department of Homeland Security combined. Additionally, we spend double the amount on Social Security compared to the Department of Education.
For discretionary spending, the US government has historically split spending 50/50 between defense-related spending and non-defense spending. This infographic from 2021 shows where the 7.3% of GDP equivalent was sent as part of the discretionary program that was approved by Congress and the President.
In the last 12 months, the United States has sent nearly $50 billion to Ukraine, which is noteworthy at a time when the government is hitting the debt limit and asking for approval to borrow more money. Along these lines, we should also remember to take every number reported in discretionary or mandatory spending with a grain of salt. It is hard to keep track of trillions of dollars. We have seen the Department of Defense fail five audits in a row as an example. The joke in the military is that counting is hard, but counting trillions may be nearly impossible.
If the details around discretionary and mandatory spending already has you scratching your head, you may want to ensure you are sitting down for this next part. Things are about to get real crazy in our analysis…
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