A Small Government: US Federal Budget as Proportion of the Economy

The US federal budget is larger than that of any other country in absolute terms. The US government spends more than $2.3 trillion every year, about $500 billion dollars more than Japan, which has the second-largest budget in the world at around $1.7 trillion.

Yet, as a proportion of the economy, the US federal government budget is small. The US federal budget of $2.3 trillion is about one-fifth (.197) of its $12.5 trillion GDP. The average budget-to-GDP ratio in developed countries in Europe is about twice as much. For example, UK’s budget of $951 billion is nearly half of its $2.228 trillion GDP, while France’s budget of $1.144 trillion is a little more than half of its $2.055 trillion GDP. The US budget-to-GDP ratio is closer to the ratios in the developing world. For example, India’s GDP of $720 billion is nearly five times bigger than its budget of about $135 billion. Surprisingly, the US budget-to-GDP ratio also matches the ratio of its left-leaning northern neighbor, Canada.

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

In terms of dollars spent per person, the United States is far behind developed EU economies. The budgetary allocation per person in the EU is more than double that in the US.

There are two key caveats in interpreting all this. An exclusive focus on the federal budget understates the total government spending for countries with strong federal structures like the US. But the good thing is that federal spending and state and local spending are not inversely proportional in countries with strong federal structures but are strongly correlated. 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, the US, whose total budget at the state level is around $600 billion, adding which pushes total government spending to $3 trillion or still about .25 of the GDP.

Secondly, one must look at not only the size of the budget but also where it is spent. For example, the US military budget accounts for a fifth of its net budget by conservative estimates. In sheer numbers, the 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