NCPA - National Center for Policy Analysis


August 18, 2006

Five main components made up the majority of the $2.8 trillion federal budget in 2006, and each has been rising steadily since 1990, says Chris Edwards, Director of Tax Policy Studies at the Cato Institute.

Currently, of those five categories:

  • Transfer payments, such as Social Security benefits, are the largest spending activity at $1.26 trillion, or 45 percent of the budget.
  • Purchases of goods and services are 17 percent of the budget.
  • Aid to the states represents 15 percent.
  • Compensation costs for federal workers are 13 percent.
  • Interest paid on the debt equals 10 percent.

Much of the budget deficits have been the result of rising spending during this decade, with increases seen across the board:

  • Transfer payments have grown at an annual average rate of 7.1 percent since 2000.
  • Nondefense purchases - everything from paper clips to computers and consulting services - have grown 8.4 percent this decade.
  • Compensation for nondefense federal workers has grown 5.9 percent the past six years.

With these deficits, and looming cost increases, a number of measures need to be taken to ensure fiscal accountability, says Edwards, including:

  • Cutting all types of transfers including Social Security benefits, health care spending and business subsidies.
  • Decreasing purchasing costs through better management of budgets and inventories, privatizing activities such as energy research, cutting low-priority weapons programs and making procurement data more accessible for public scrutiny.
  • Reducing state bureaucracies that impose heavy regulations and waste federal money on what should be autonomous local activities.
  • Bringing compensation costs under control through a federal wage freeze and benefits scale back, allowing public sector pay to fall in line with the private sector.

Source: Chris Edwards, "How to Spend $2.8 Trillion," Cato Institute, Tax and Budget Bulletin, August 2006

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