Federal Spending: Where Does the Money Go (2024)

Federal Budget 101

The total federal budget of the United States has recently run about $4 trillion or more each year. In 2020, the total federal budget ran much higher, at $7 trillion, because of all of the steps the government took to address the COVID-19 pandemic.

Because few of us have any idea what a trillion really is, here’s one example: 1 trillion seconds is about 31,000 years. The extinction of Ice Age animals like the wooly mammoth and saber-toothed tiger was only about 13,000 years ago, or less than half a trillion seconds.

So where does all that money go?

Three Types of Federal Spending

The U.S. Treasury divides all federal spending into three groups: mandatory spending, discretionary spending and interest on debt. Together, mandatory and discretionary spending account for more than ninety percent of all federal spending, and pay for all of the government services and programs on which we rely. Interest payments on the national debt account for a much smaller amount than the other two categories. The pie chart shows federal spending in 2020 broken into these three categories.

Source: OMB, National Priorities Project

What is Discretionary Spending?

Discretionary spending refers to the portion of the budget that is decided by Congress each year through the appropriations process.

In 2020, Congress budgeted $1.6 trillion in discretionary spending.

Source: OMB, National Priorities Project

By far, the biggest category of discretionary spending is spending on the Pentagon and military. In most years, this accounts for more than half of the discretionary budget. In 2020, because some discretionary spending passed through supplemental appropriations went to pandemic programs, the share of the discretionary budget that went to the military was smaller – even though the amount that went to the military was just as high as in previous years.

Other examples of discretionary spending include the early childhood education program Head Start (included in Housing & Community), public housing and homeless programs (Housing & Community), federal aid for public K-12 education (Education), Pell grants for low-income college students (Education), food assistance for Women, Infants and Children (or WIC, in Food and Agriculture), job training and placement for unemployed people (in Social Security, Unemployment and Labor), and scientific research through the National Institutes of Health (NIH) and National Science Foundation (NSF), among many others.

Mandatory Spending

Mandatory spending is also legislated by Congress, often for multiple years at a time. It is dominated by the Social Security and Medicare programs, which provide income security and health insurance for retirees and some Americans with disabilities, and sometimes their families.

It also includes Medicaid, the health insurance program for low-income adults and children, and widely used safety net programs like food stamps (SNAP), welfare (TANF), and highway construction and maintenance, and other things.

When Congress decides to create a program like Social Security, rather than setting aside a certain amount of money, it sets rules for who can receive benefits from the program, and what those benefits will be. People who are eligible can get help, and the government covers the costs. Medicare and other programs work similarly.

One advantage of this kind of spending compared to discretionary spending (which is limited by the amounts Congress sets) is that it can more readily respond to unexpected circ*mstances like a recession, or a pandemic. During the COVID-19 crisis, for example, anyone who qualified for stimulus checks could get them. Unlike discretionary programs, the money didn’t run out and shut some people out.

Mandatory spending makes up roughly two-thirds of the total federal budget in most years, and more in some years.

In 2020, most pandemic relief fell under mandatory spending programs. This led to mandatory spending of $5.2 trillion, much higher than in previous years. The ability to quickly ramp up spending enabled the government to help people who lost jobs, those who got sick, and many others.

This chart shows where $5.2 trillion in mandatory spending went in 2020.

Source: OMB, National Priorities Project

All Federal Spending

Finally, putting together discretionary spending, mandatory spending, and interest on the debt, you can see how the total federal budget is divided into different categories of spending. This pie chart shows the breakdown of $7 trillion in combined discretionary, mandatory, and interest spending budgeted by Congress in fiscal year 2020. This year looks different from previous years, thanks to spending on the COVID-19 response.

Source: OMB, National Priorities Project

Spending in the Tax Code

When the federal government spends money on mandatory and discretionary programs, the U.S. Treasury writes a check to pay the program costs. But there is another type of federal spending that operates a little differently. Lawmakers have written hundreds of tax breaks into the federal tax code - for instance, special low tax rates on capital gains (certain kinds of investments), a deduction for home mortgage interest, and many others.

In fact, tax breaks function as a type of government spending, and they are officially called "tax expenditures" by the Treasury Department. Tax breaks cost the federal government more than $1.3 trillion in 2020 – nearly as much as all discretionary spending in the same year.

Source: OMB, National Priorities Project

Unlike discretionary spending, which must be approved by lawmakers each year during the appropriations process, tax breaks do not require annual approval. That means that once they are written into the tax code, they remain on the books until lawmakers change them.

On average, these tax breaks tend to benefit corporations and the wealthy more than the average person. There are many proposals out there for more fair taxation for the wealthy and corporations.

« Where Does the Money Come From

Borrowing and the Federal Debt »

Federal Spending: Where Does the Money Go (2024)
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