Understanding US by numbers: the small government

US federal budget is larger than that of any other country in absolute dollar terms. The US federal government spends more than $2.3 trillion every year or about $500 billion dollars more than Japan, which boasts of second largest budget in the world at around $1.7 trillion. Yet, if we look at the numbers a little more closely, we can see that by some measures the US federal government is indeed small.

US government’s footprint, as measured by ratio of budgetary expenditure to GDP, on the economy seems comparatively much lower than that of developed European economies. The US federal budget at about $2.3 trillion is about one fifth (.197) of its $12.5 trillion GDP whereas the average budgetary expenditure to GDP found in developed countries in Europe is on average twice as much. For example, UK’s budget is $951 billion or nearly half of its $2.228 trillion GDP while France’s budget is $1.144 trillion or a little more than half of its $2.055 trillion GDP. US’s budget (or budgetary expenditure) to GDP ratio is closer to the ratios found in the developing world, for example, India’s GDP is $720 billion is nearly a five times bigger than its budget of about $135 billion. Surprisingly, US’s ratios also match the ratios of its socialist leaning northern neighbor Canada, which one would imagine would share more with developed European countries than US.

Petro-economies like that of Saudi Arabia had budget to GDP ratios that fell between that of developing world and developed economies in Europe, as expected. Petro-economies also fell in the middle in terms of budgetary dollars spent per person. Nigeria, unsurprisingly, was an exception in this regard with budget numbers far below that of petro-economies.

In terms of dollars spent per person, United States is far behind developed EU economies; the budgetary allocation per person in EU is more than double that in the US. This can be interpreted as a sign of a relatively small government.

There are three key caveats in the numbers that I present below and the analysis that I have presented above. The first deals with questioning whether the ratio of federal budgetary expenditure to GDP is in fact a sound measure for the size of government. One may argue that federal budget in absolute dollar terms is a better measure for the sheer size of government. The problem with using absolute dollar amounts alone is that they reveal as much as they hide for size of budgetary outlay, though most strongly dependent on GDP is also impacted by population size, tax receipts and much more. The ratio of budgetary expenditure and GDP provides us with a useful measure to estimate the impact (or contribution) of government spending on the economy.

The second caveat deals with exclusive focus on federal budget rather than on total government spending that includes spending at state and local level. In particular focus on federal budget will understate the government spending for strong federal governments like US. While that is true, it appears that federal spending and state and local spending are not inversely proportional in countries with strong federal structures but are strongly correlated, and that state spending even in strong federal countries is comparatively much smaller than the federal spending. Hence, while relying solely on federal budgetary expenditure does understate the impact, it doesn’t do it by as big a margin as one would expect. Take for example, US, whose total budget at state level is around $600 billion, adding which pushes total government spending to $3 trillion or still about .25 of the GDP.

The third caveat one must look at it is not only the size of budgetary spending but where it is spent. For example, US military budget accounts for a fifth of its net budget by conservative estimates. In sheer numbers, US military budget exceeds the total military spending of the rest of the world but in terms of its size relative to US GDP, it is a measly 4%.

Developed countries pool:

Developing country pool:

All figures from CIA World Fact Book which can be accessed at: https://www.cia.gov/redirects/factbookredirect.html