Understanding Government Spending in U.S. and its History

Economic experts classify government spending into three major types:

Government final consumption expenditure - consists of government acquisition of products and services for present consumption of the people in the community. Government investment or Gross capital formation - consists of government expenditures of products and services that will create future benefits such as research and infrastructure. Government spending for intermediate consumption - consists of government acquisition of goods and services that are made by its own or buying goods and services from other market producers.

However, transfer payments are government expenses that do not contain acquisition of services and goods but are money transactions. These include social security payments and other trust funds or surplus. Government spending is sustained by taxes and government borrowing.

The Gross Domestic Product, also known as GDP, consists of the government investment or government gross capital formation and government final consumption expenditure.

Among the first economists to promote government deficit spending to become a part of the solution of the fiscal policy to economic contraction is John Maynard Keynes. In his concept, greater spending of the government will increase the demand for aggregate funds and will result in increased intake, thus, increasing production. Economic experts who're advocates of the Keynesian economics believe that the Great Depression ended because of the government spending programs and military spending created for World War II. According to Keynesian economists, a nation in extreme economic depression won’t end if the federal government won't take action or it won’t do anything to intervene.

The United States of America’s government expenses are published by the United States Census Bureau and this is revised annually through the Statistical Abstract of the United States. One problem in interpreting and analyzing the government expenditures is that the records are reported on a cash flow basis. Government spending could be better understood if it is presented in accrual basis.

The United States Census Bureau updates the records every 5 years by conducting a state and local government financial census and this is further revised each year. The latest reported census was completed in 2006.

If you evaluate the history of government spending, you will notice that the overall government expenditure of U.S. has significantly increased from 7 percent of the GDP in 1902 to 35 percent last year. The major events that impacted the financial system and the government spending within the last centuries include the World War I and World War II.

The government expenditures as a percent of the nation’s GDP demonstrates that the increase in spending is slow and consistent in education. The significant increase is manifested in defense spending during wars because of the funds allotted for the military force. Major spikes may be seen during World War I, World War II and the Cold War. Welfare spending, on the other hand, decreased during the Great Depression and in 1996. Government spending on Social Security and on pensions began showing up in 1950 while spending on health care took off after Medicaid and Medicare were set up in 1960s.