The U.S. Federal Budget

What do we spend our money on, and how easy or hard is it to cut the budget?

By Deane Barker • •

This is an accumulation of information I’ve gathered over the last few years. It started as an argument among some acquaintances about whether or not it was realistic to believe we can balance the Federal Budget solely through spending cuts. It expanded from there.

By the time I was done, I had gotten weirdly obsessed. At one point, I tried to piece together a spreadsheet of the entire federal budget. I did this by actually pulling the published budgets of federal departments and sifting through them.

I also read a few books:

The core question I’m interested in: is balancing the budget as easy as just broadly cutting federal spending? Is it really that simple?

I’m going to frame the results of this research in the form of the big things I learned: the “lessons.” There are some significant things that I think people misunderstand about the federal budget and our ability to cut it.

Note that I’m trying to be non-partisan here. What’s below is simply the reality of it. A responsible politician will embrace this and figure out a way to get the larger population to understand it and commit to a long-term solution.

Also, I’m not discussing tax increases to balance the budget. This research was solely focused on spending cuts to balance the budget – is that plan realistic? If you want to raise taxes instead (or in addition to), then this discussion changes quite a bit.

After I wrote a draft of this, I sent it to a few people I know that hold very conservative political positions. Their feedback was good, and I made some changes based on it.

I don’t have any ego in this. If something is wrong, just tell me. But you’ll need to discuss specifics – don’t just wave your hand and say, “fake news.” Bring receipts, please.

Lesson: Small Cuts Will Not Matter

The size of the federal government is staggering. To the point that any substantive cuts to the budget will have to be massive to make any difference. Consider that in 2023, the government had $6.3 trillion in total outlays. That means the government is spending $17.5 billion per day.

It’s hard to put in context just how much money this is and the magnitude of spending cuts you need to make in order to move the needle.

Say you decided to completely wipe out public TV and radio (both nationwide and probably every state program) by eliminating the annual grant to the Corporation for Public Broadcasting. That would save $445 million dollars.

That certainly sounds impressive, but the savings would only fund the federal government for… about 32 minutes.

Cuts like these sound notable and make some people think we’ve made substantive progress, but they fade into insignificance compared to larger expenses (see below).

It’s comforting to think that there’s this deep pool of pointless departments and functions that no one cares about that we can get rid of and that this will solve all our budget problems. But that’s not the case – you could cut 100 grants to the Corporation for Public Broadcasting, and it would amount to a drop in the bucket.

The Point: Cutting the budget in a meaningful way isn’t about eliminating small, obscure programs. We’re going to have to cut big things.

Lesson: The Budget is Dominated By a Few Large Expenses

The budget is not a huge aggregation of small expenses. It’s chunky – there are a few really, really large expenses… and then everything else.

The last time I did these numbers in 2021:

So, those three things by themselves constituted two-thirds of the budget, leaving one-third for everything else.

Note too that there are “stealth expenses” that inflate other line items. A key example is the defense budget. In addition to the actual funds spent by the Department of Defense (DoD), there are expenses outside the DoD that relate to it (remember, these are 2021 numbers):

When discussing defense spending, you need to include those. (This is what I call “defense-ish.”) Last time I ran the numbers, our “defense-ish” budget was fully 50% more than what the DoD actually spent by itself.

The Point: Any significant cuts will have to attack the few large expenses, like Medicare, Social Security, and Defense.

Lesson: The Ease of Cutting Expenses Varies Widely

Not every expense is the same. Expenses exist on a spectrum of “cuttability.”

Here are the five levels I’ve defined, from the hardest (mostly impossible) to cut, down to the easiest to cut. In parentheses are what percentage of government I think the spending at this level consumes. That’s an estimate on my part, but understand that I’ve been neck-deep in this for a while, so it’s not totally uneducated.

  1. Interest on the National Debt (10%): the only way to cut this expense is to default on US Treasury bonds, which we’re never going to do

  2. Mandatory Expenses (50%): these are things that are required by law; mainly big entitlements like Medicare and Social Security and smaller entitlements like veteran’s benefits, unemployment insurance, food stamps, etc.

  3. Discretionary Expenses to a Mandatory End (15%): these are things we have to do to manage #2 (above); an example is the Center for Medicare Services, which costs us billions every year and is technically discretionary, but we need it to manage Medicare, which we’re required to do by law, so it’s basically mandatory

  4. Non-Optional Discretionary Expenses (20%): these are things like the defense budget; it’s technically discretionary and could be eliminated, but no reasonable person would say we don’t need a military (if you don’t like the military, fine; just replace that with… interstate highways)

  5. Optional Discretionary Expenses (5%): things that are truly optional, like the National Endowment for the Arts or contributions to various global organizations

A lot of people identify “discretionary spending” as a target for cutting the budget. Technically, that’s levels 3-5 in the list above…but it’s really not. Level 3 is mostly required to service Level 2. And Level 4 is technically discretionary, but it involves expenses a country generally requires to survive and function.

Which leaves us with Level 5. We could technically cut everything at Level 5. But I guarantee that you’re probably utilizing or benefiting from something at Level 5, you just don’t know it. There are quite a few things in there that people would throw a fit about losing, which means you can’t wipe it out, you can only… prune it.

So, at best, the “low hanging fruit” of the budget – the things we could easily wipe out – is in the very low single digit percent range.

The Point: The pool of easily cuttable expenses is far, far smaller than most people believe. Finding things that can be cut that will actually make a difference is very hard.

Lesson: Large Cuts Will Require Systemic Culture Changes

Expenses and programs evolve over time, and a countries policies and cultures evolve around those expenses and programs. Social Security has been around since 1935; Medicare since 1959. It’s not an over-statement to say that our country – indeed, our way of life – has evolved differently because these programs have existed.

Can you cut those? Technically yes, but the country would need time to adapt to those cuts.

For example, the structure of our society has evolved around the idea that most elderly Americans are able to live on their own. They will have income (Social Security) and health care (Medicare) for this period of their lives, and most retirement planning depends on that. Those two programs have since become the most expensive line items in the budget.

If you make major, sudden cuts to these programs, many retirees would be unable to pay for their health care, or even their day-to-day expenses.

To effectively cut those programs, the very culture of the country would have to change. We could only really change it in the future – so, plan for future cuts in those programs. And, in the meantime, we would need to prepare to return to a family dynamic where elderly parents are cared for by their adult children – grandma and grandpa would need to move in when they couldn’t care for themselves.

And to do this, we would probably have to trend away from two-income families. One adult member of a family would have to spend a non-trivial amount of time on elder care.

And to move away from two-income families… well, you get the point. This change might trickle down to how we design houses, and even cities.

This gets complicated, quickly.

And entitlements are a shocking amount of the budget – no conversation about cutting the budget is realistic without major cuts to those programs, which means we’re really talking about cultural changes, not just budget changes.

The Point: Our culture and the way we live has evolved around the existence of certain federal programs. To balance the budget through cuts, those will be deeply affected to the point where it will change how we live.

Lesson: We Depend on Other Countries, So We Have to Spend Money on Them

Lots of people seem to think we just give a bunch of money away to other countries. I saw a survey once where they asked the average American what percent of the federal budget they thought we give to other countries. The average response was something like 25%.

That’s absurd. The amount of money we just “give” to countries in the form of grants or humanitarian aid is less than 1% of the federal budget.

Mostly, we give money to other countries in the form of military aid, or we spend our money working to defend other parts of the world, mostly for very specific, valid reasons.

For example, we spend a lot of money to protect Taiwan. I don’t think it’s wrong to say that most of our military strategy in East Asia is based around preventing China from invading Taiwan, something they’ve been threatening to do for decades. We have multiple military bases and naval fleets in that region solely to prevent that from happening.

Why? Well, aside from humanitarian reasons, Taiwan makes almost all of the world’s most advanced semiconductors. The United States is absolutely addicted to these – we require them for most consumer electronics and military technology. If we lost access to them – or even worse, if China controlled the world’s supply of them – the result would be disastrous.

Can we break our dependence on Taiwan’s semiconductors? Yes, and we’re moving in that direction. But it’s going to take a while.

And this is just one region of the world. There are many others in which we’re spending money for good reason. Mostly, we don’t just throw money at other countries. We spend money to create or maintain situations that we want or need – we spend money to gain advantage. In some cases, we’re just straight up paying (bribing?) other countries to do or not do something important to us.

For example, we spent a lot of money in Central America in the 80s – both legally and illegally – to prevent them from falling in love with Communism. (Yes, yes, we did a lot of sketchy things in the process, but I’m just talking about dollars, not ethics.)

Having the Soviet Union get a foothold that close to our southern border (Cuba was bad enough…) would have ultimately been a way more expensive problem to deal with. So, that expense might have been considered…an investment? Preventiative maintenance?

There were also political and ideological reasons for it, of course. But in purely financial terms, we were spending an amount of money to avoid having to spend a larger amount of money.

These dynamics didn’t really exist 100 years ago. Back then, the world was so much more segregated, and we were largely insulated from things like this. But the world has globalized to the point where we have to stick our noses into situations that cost us a lot of money. Our economy and standard of living depend on the output of many other countries around the world.

The Point: If we want to stop spending money on other countries, we need to become drastically more self-sufficient. Additionally, we’ll need to accept some the consequences that result from our withdrawal of financial support. Some of these consequences might be ultimately be more expensive than the money we were spending in the first place.

Lesson: Changing Demographics Will Affect the Budget

This is the sole bit of good news in this list. In 2024, we might be at the peak of the so-called Boomer Bubble, which is a huge cohort of Americans moving through the years during which they draw entitlements.

The big “bubble” of Americans born in the 40s – we made a lot of babies right after the war – are in their 70s and 80s today. These are expensive years for the budget. This huge crowd of people get Social Security and Medicare during these years.

Not to seem callous, but simple biology dictates that these Americans are going to start dying off rapidly, and the ratio of workers to retirees drawing entitlements will get better.

Consider:

With fewer workers supporting each retiree, the system gets more and more expensive. But as demographics change, the trend should reverse, resulting in more workers supporting each retiree, meaning less strain on the system. (…until the steadily declining fertility rate swings it yet again, but that’s a whole ‘nother conversation)

Also, we might have to acknowledge that people are simply living longer. When Social Security was created in 1935, the average American lived to about 60. Today, it’s almost 80, which means they’re drawing on the system for 20 years longer than they used to be.

Since the start of the Social Security, the age at which you can claim benefits has only been increased from 65 to 67 (in 1983). There are discussions to raise it to 70, but that’ll take a long time because you have to grandfather everyone in who has planned on the current retirement age (consider that the 1983 changes only went fully into effect in 2022).

The Point: We have a big bubble of retirees right now which means Social Security and Medicare are very expensive. This will get better in the future.

Thought: Does “Cutting” Something Actually Make It Go Away?

In our heads, we tend to think that if we cut a program from the federal budget, that expense just goes away. But is that always true?

The only time this is true is if we believe the thing we cut was totally unnecessary, and that its function will not be absorbed by any other part of the government, at any level.

This might be true of, say, the National Endowment for the Arts. We spend about $200 million on that every year. We could cut this and perhaps be confident that this is just thing the government is not going to do anymore and that no other branch of government will step in to cover it. That’s $200 million, saved.

However, that’s not true of everything.

Consider the federal Department of Education (USDoE). A lot of people want to cut this. Every state also has a Department of Education, so the argument goes that we should just leave this stuff to the states.

However, can we assume that least some of the things done by the USDoE are needed by the states? I’m not an expert on that, but let’s assume that the USDoE isn’t completely useless, and, say, 30% of what it does is genuinely needed by the states, meaning they will have to replace this effort.

(Even if you despise the USDoE, this is probably realistic, at a bare minimum. Remember that these state departments have evolved around the existence of a “parent” federal department. It’s not unreasonable to think that their processes are intertwined to some degree.)

The USDoE has a budget of $238 billion. Even with our assumption that 70% of this department is waste, that still means there’s about $75 billion in value that will have to be replaced by someone.

Who will pay this? Well, the states, the way the argument goes. That’s the very idea – drive this stuff down to the state-level DOEs.

But where will they get that money from? Just because someone else is doing it doesn’t make it free.

They’ll get it two ways:

  1. By raising your state income tax (or some other state tax)
  2. Asking the federal government for it, in the form of a block grant

So, in the end, did we cut the expense? Or did we just move it around? In many cases, we’re just playing whack-a-mole with expenses – we can hammer them down somewhere, but they’re going to pop back up somewhere else. Many expenses have to occur, the only question is what level or branch of government pays for it. In the end, no matter what organization pays the invoice, Americans will ultimately always pay for it, in the form of taxes.

In this case, we effectively cut 70% of it. And good for us. But that’s not the 100% we originally thought, and even that’s not always possible.

Consider the National Weather Service (NWS). You’d surprised at how utterly critical this organization is to American agriculture and business (especially the insurance business). And there’s not really a private option – predicting weather involves supercomputers and satellites.

It’s quite probable that, say, 90% of what the NWS does is absolutely necessary. That means that if you cut its $204 billion budget, you just have to move almost all of that expense somewhere else. It will trickle down to the states, and be more expensive because now its inefficient – weather isn’t confined to state borders, and so states will be duplicating work.

So, instead of $204 billion at the federal level, Americans are now collectively paying… $300 billion (?) at the state level.

Could we privatize weather prediction? …maybe? But that’s going to take a long time to do – plan on a 30-year process of “winding down” the NWS and hoping the private sector picks up the slack and that the result is of the same quality. We’d probably have to subsidize this industry until it gets established, and know that a big chunk of those 30 years won’t be pleasant for a lot of industries.

I could go on.

(…okay, one more: Rick Perry wanted to eliminate the Department of Energy. He didn’t understand that a sub-department of Energy manages our entire nuclear stockpile. Over half of Energy’s budget goes to doing that, which means that unless we spend a trillion or so dispose of all our nuclear weapons, that money is just gonna pop up somewhere else.)

The Point: Some of all of the value lost from cutting a program will often have to be replaced, which means we’ll just be paying for it somewhere else.

Counterpoint: It’s Not About “Cutting,” But About Incrementally Reducing Expenses and Increasing Efficiency

A friend read a draft of this and pointed out that I’m biased towards the idea of “cutting” or excising programs. He said we should just be trying to incrementally reduce the size of government over time.

To do this, we’d need to figure out what part of the budget is incrementally reducible. Some is, and some isn’t.

For example, Social Security payouts are set in law, and you’re never going to convince enough legislators to change that, so we can’t reduce the payouts. We could, conceivably, reduce the amount that we spend to administrate the program, but that’s not a huge amount, relatively speaking.

For 2025, the Social Security Administration (SSA) has requested about $15 billion, just to run the program. The actual amount paid out to retirees in 2025 is estimated to be $1.543 trillion, meaning the SSA has a budget of less than 1% of the total cost of Social Security. So when we talk about reducing costs, the most we could reduce Social Security expense is less than 1%, if we completely wiped out the SSA, which we clearly can’t do.

Let’s consider the defense budget – what could we reduce there? It would be wildly unpopular to cut salaries for people in uniform. And I’m not sure we could cut payments to the military-industrial complex. General Dynamics sells us M1 Abrams tanks for about $11 million each. Could we just tell them we’re going to pay $10 million? I doubt it.

We could close military bases and drop programs, which we do, but this is very hard. Every time a base closes or some new weapons system is canceled, lawmakers fight it because bases and programs generate a lot of economic activity for their constituents.

We could stop fighting wars – in the 2000s, the wars in Iraq and Afghanistan have cost us well over $2 trillion. However, as noted above, sometimes we have to spend money overseas to avoid bigger problems. With Iraq and Afghanistan effectively over already, there’s much less to cut here, but perhaps we can reduce the size of the military now by attrition – let people retire and recruit less.

We can reduce government headcount, which is basically the same as cutting administrative expenses. We’ve done this – the peak of government headcount was in the 1990s, with about 3.4 million people. We’re now under 3 million (note: I’ve found vastly differing numbers on this). Could we cut 10% more? Maybe?

It’s popular to generally claim that government can get more efficient. There’s a lot of hand waving here, as if we can just shrink budgets and expectations together. However, I think there’s a “floor expense” to things – even if government was as efficient as possible, it will still costs a certain amount of money.

For example, my friend (from above) pointed out that the government “spends $40 billion on paper” (article here) Seems like a great thing to fix, but when you pick that apart, it gets less attractive. Turns out the $40 billion is on paper-based processes, not the actual paper. Even if you digitized it all (a project that would cost tens of billions, no doubt, and result in billions of annual infrastructure costs), you’d still have to “process” the information.

So, how much of that $40 billion could we trim in the end? Half? As someone who has worked enterprise in IT for 25 years, I can tell you that’d be an amazing accomplishment. Well, that’s $20 billion saved, which isn’t pocket change, but it’s about 0.3% of the budget as a whole.

And more importantly: now that opportunity is gone – that juicy, low-hanging, glow-in-the-dark fruit has been plucked. So, what’s next? Do you have another big, glaring inefficiency we can resolve? How many? You’re gonna need a lot of them.

I don’t claim to have all the answers to this, but I’m suspicious that claims of “reducing expenses” too-often rely on cherry-picked anecdotes of government waste. A large part of the population loves to be horrified by these anecdotes – they generate some feeling of vindication or righteous confirmation that people enjoy.

Whenever someone tells a story about the government wasting money (like $40 billion on paper), they’re implying that this waste runs rampant through the entire system, as if it’s a portrait of dysfunction and there are 100 secret stories for every one that gets exposed.

…but is there? Nothing can ever be 100% efficient, but even if we rooted and resolved all of the egregious anecdotal waste that gets discussed, how far would we actually get?

The Point: We can increase the efficiency of government and incrementally reduce some headcount and expense, but the potential savings is likely exaggerated.

Lesson: People Hide Behind Political Anger When Talking About the Budget

Politics plays a huge role in our inability to cut spending. Consider:

I’ve talked to a lot of people about the budget, and two things are consistent:

  1. Most people have a very shallow understanding of how the budget works
  2. When confronted with the reality of it, they simply express anger at the system

I hope that what you’re reading right now has helped with #1.

As for #2, people tend to throw up their hands and just hide behind that anger. The budget is bad because politicians are crooks, and “we should just vote them all out.”

…okay, sure. But that’s not productive, because we’re never going to do that –

Since 1964, incumbents in the House are reelected 94% of the time; in the Senate, 84% of the time. So for all our anger, we seem to just keep sending the same people back.

And even when we do drive electoral change, it doesn’t seem to help. Not since George Sr. won in 1988 has a party managed to keep the White House for more than one administration. George Sr. (R) lost to Clinton (D). He handed the keys to Bush Jr (R). He passed it over to Obama (D). Then to Trump (R). He lost it to Biden (D). Now Biden’s party has lost it back to Trump (R).

During that time, the national debt has gone from $4 trillion to $34 trillion.

Regardless of how dysfunctional it is, this is the system we have. It’s the system we’ve built for 200 years. It’s the system that we have to work within. Everyone who gets elected within the system has to work with the same constraints, and the system tends to bend people to it, rather than the other way around.

Try as they might, no politician has been able to drive huge change in how this system works, so lamenting about how politics in the United States prevents us from taking real action is not really helpful.

At the risk of being a cynic – the system changes very slowly, if at all, and shaking our fist at it isn’t going to fix anything. At some point, this anger just becomes an avoidance mechanism.

The Point: No matter how mad we get at the system, we’re remarkably unable to change it to any measurable degree, so it remains the rules have to work within.

The Overall Lesson: A Long-Term, Stable Balancing of the Budget will take Generations

The idea that we’re going to immediately hack and slash our way out of this mess is a myth.

To be clear, I’m not saying we shouldn’t cut pointless and inefficient spending. What I’m saying is that the idea someone can just wander into the budget with a red pen and “make it balance” is the fiction of election campaigns. When you get up close with the numbers and the consequences, it gets very hard, very quickly.

If you look back through all these lessons, you’ll see a common theme: this is going to take time. We didn’t get into this situation overnight, and we’re not going to get out of it in one presidential term. Hell, not even in one generation.

No one in our lifetimes will responsibly balance the federal budget solely by cutting expenses. Someone might start that process, and generations from now, someone else might enact the last cut to get the budget balanced, but that’s a long time in the future.

The federal budget has been growing and growing for 100 years. You can’t make rapid changes to this safely and smoothly. It’s going to take a while to unravel. The government – through many consecutive administrations – is going to have to play the long game.

So, can we balance the budget with immediate spending cuts? Technically, yes. Realistically, no.

Let’s say someone over-promised and (somehow) unilaterally slashed the budget by the 40% or so it would take to balance it. Here’s some things that would likely result:

The result would be chaos, for years.

To even attempt this would require drastic and painful cuts that would be spectacularly unpopular. The population would immediately throw the offending administration out of the office in the next cycle and elect someone who promises to put everything back the way it was. I don’t think any administration – or any series of party wins – could survive long enough to see the problems work themselves out.

To go back to the example of an immediate 40% cut – some may say, “Well, this will lower everyone’s tax burden so they can spend more freely, and those workers will be absorbed by the private sector.”

Theoretically, sure – that’s the ideal scenario that we all want to achieve. But that’s not going to happen overnight. That kind of adjustment on the scale of the U.S. population and economy would take decades and those years would be incredibly painful, to the point of risking some kind of revolution. (And that would be in the opposite direction that most people currently calling for revolutions want to go… think Russian, not American.)

If we’re going to responsibly balance the budget through spending cuts – and have that balancing persist consistently – it will take generations to happen. We will have to cut the budget gradually enough to give the population time to adjust. (Start building an attic apartment for grandma now…)

I have no doubt that some presidential administration will do something and be able to show some significant improvement on paper. But this is usually done through “stunt” legislation or accounting tricks. It’s easy to enact tax increases that will expire, or move expenses into different budget years. Politicians have been doing this for centuries. The “big wins” are either only on paper or they just kick the can further down the road.

The numbers are pretty clear. We mostly spend a lot of money on things that many people depend on and have planned on. And why wouldn’t they depend on them or plan on them? These things have existed for decades. They have been an enduring promise of American government.

You can say we shouldn’t have create these programs in the first place. Okay sure, but we did create them. They exist, they have grown over time, and they are very difficult to rearrange.

It will be monumentally hard to actually live within our means, which means truly and honestly spending less every year than we take in.

To do this will require a significant restructuring of the American economy, and of American society itself.

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