The $1.8 trillion federal budget deficit in the fiscal year that ended in September was the third biggest ever in dollar terms, trailing only the pandemic deficits of the 2020 and 2021 fiscal years. As a share of gross domestic product, a better gauge for historical comparisons, it was, at 6.4%, the biggest ever outside of a large war or global crisis.
Why was the deficit so big? One way to answer that is with historical statistics, which show that federal revenue in the 2024 fiscal year was about in line with the post-World War II average, while spending really wasn’t.
This view, which implies that spending is the problem and the tax level about right, is not the only valid one. Compare US government finances with those of the other affluent democracies in the Organization for Economic Cooperation and Development, and US revenue (from federal, state and local taxes) ranks near the bottom as a percentage of GDP. Spending is below average, but not such a standout.
The historical view is essential, though, to understanding why spending has risen. And while there are many different ways to organize the cornucopia of historical US fiscal data provided by the White House Office of Management and Budget, I haven’t been able to find any that reveals quite as much about the current American predicament as simply separating health spending from everything else.
After huge but temporary increases during the pandemic, federal spending on items other than health programs was actually lower as a share of GDP in the 2023 fiscal year (the OMB’s detailed breakdowns of 2024 spending won’t be out until early next year) than the 1962-2023 average. If federal health spending accounted for the same share of GDP that it did in 1973, the budget would be balanced. If it were the same as in 2000, the deficit would be 2.5% of GDP, less than both the 1946-2023 and 1962-2023 averages.
Instead, in 2023 federal health spending was almost twice its 1962-2023 average, three times what it was in 1980 and 18 times what it was in 1962. The federal government now spends more than twice as much on health as on defense; as recently as 1988 it was less than half. These health outlays include things such as research grants and 2020’s Operation Warp Speed to develop a Covid-19 vaccine, but the overwhelming majority of the money pays for health-care services. The largest share (44% in 2023) goes to Medicare, the health-care program for the elderly, but spending on that has barely grown as a share of GDP over the past decade. Most of the increase since 2013 has been accounted for by Medicaid, the federal-state health-care program for the poor, and health-insurance subsidies — in both cases driven in part by provisions of the 2010 Affordable Care Act, aka Obamacare.
With Republicans in charge of Congress and the White House for the next two years, there are sure to be attempts to cut Medicaid spending and possibly an effort to scale back the ACA. As for Medicare, the 2024 Republican platform promised “NO CUTS,” but there is a lot of GOP interest in accelerating its privatization by encouraging ever more recipients to sign up for Medicare Advantage plans run by insurers.
The latter effort seems highly unlikely to reduce spending given that Medicare Advantage currently costs taxpayers much more per enrollee than traditional Medicare. Whether any of the others would is an open question. The federal government spends so much on health care in large part because US health care is so expensive — relative both to past decades here and to current experience in other wealthy nations — and without addressing that bigger problem, it’s going to be hard to make much progress in cutting federal health-care spending.
Warren Buffett has referred to the US health-care spending gap with other countries as “the tapeworm of American economic competitiveness” — a 5%-of-GDP tax on doing business in the US. I’m not sure that’s the right way to look at it and make no claims to expertise in how to fix it. But I can report that the focus of health economists has been shifting away from fine-tuning the current system and toward starting over with “a basic bundle of valuable services that is publicly financed for all,” as Katherine Baicker (a member of President George W. Bush’s Council of Economic Advisers), Amitabh Chandra and Mark Shepard put it in the Journal of Economic Perspectives last year. That’s what other affluent countries have, for the most part, and it seems to result in better outcomes at lower cost. Implementing it in the US would “require a substantial increase in taxes,” Baicker, Chandra and Shepard wrote, although this would be offset in part by reductions in private health-care spending.
Short of such a do-over — which certainly won’t be coming in the next couple of years — there are other ways to slow health-care inflation. The ACA, while shifting more spending to the federal government, may have helped keep overall health-care spending in check over the past decade by prioritizing cost control and value-based (as opposed to fee-for-service) payment. Cost-control efforts by both the government and private insurers also slowed health-care cost increases in the 1990s.
Will we see anything like that during Donald Trump’s second term? Maybe, although with Trump’s designated spending-slashers, Elon Musk and Vivek Ramaswamy, not even mentioning health care in their “DOGE Plan to Reform Government” last month, I wouldn’t get my hopes up.
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