U.S. Federal Spending: What We Spend and What It Costs

Two-thirds of all federal spending is mandatory—driven by entitlement formulas and demographic growth rather than annual appropriations. Social Security, Medicare, Medicaid, and interest together consume approximately 57% of total outlays. The entire discretionary budget (defense + non-defense) is approximately 24% of outlays.

In FY2026 Q1 (October–December 2025), the U.S. federal government paid more in net interest on the national debt than it spent on national defense for the first time in recorded history. Treasury Monthly Statement data:

This dynamic will worsen. Approximately $7–8T in Treasury debt issued at near-zero rates during 2020–2021 is rolling over into the current higher-rate environment (4.25–4.5% Fed funds rate). As old low-rate debt matures and is refinanced, the average interest rate on the portfolio rises mechanically. CBO projects interest payments will reach $1.7T/year by 2035 if current policies continue.

The U.S. spends nearly 3x the OECD average per capita on healthcare ($13,432 vs. ~$4,500) and 17.6% of GDP vs. the OECD average of 9.2%—while achieving lower life expectancy (78.6 vs. 81.0 years) and higher infant mortality than most peer nations. This is the central healthcare outcomes paradox.

The U.S. healthcare spending premium over peers is explained by several factors: (1) administrative costs—approximately 34% of U.S. healthcare spending is administrative, vs. 12–22% in other systems; (2) higher prices for services—U.S. MRI costs average ~$1,200 vs. ~$200–500 in peer nations; (3) higher drug prices—U.S. brand-name drug prices are 2–4x higher than in countries with price negotiation; (4) higher physician and specialist salaries; and (5) greater utilization of high-cost interventions.

The Medicare for All cost estimates span an enormous range ($0 net to $32T over 10 years) because they depend critically on assumptions about: (1) how much the government would pay providers (Medicare rates vs. current private rates); (2) how much administrative savings would materialize; and (3) how utilization would change with universal access. Both estimates use the same underlying data—they differ in assumptions, not facts.

The $2.2T projected FY2026 deficit is structural—it is not driven by temporary emergencies but by a permanent gap between the trajectory of mandatory spending (driven by aging demographics and healthcare cost growth) and the revenue base. CBO projects deficits will average 7–8% of GDP through the 2030s under current law, reaching debt-to-GDP of ~130% by 2035.

Key demographic driver: The 2010 U.S. population included 40M people age 65+. By 2030: 72M. By 2050: 88M. Social Security and Medicare costs grow automatically with the eligible population. The ratio of workers to beneficiaries (which was 16:1 in 1950) is now 2.7:1 and falling.

The CBO’s tax expenditure database shows approximately $1.8T/year in foregone revenue from tax preferences (mortgage interest deduction, employer healthcare exclusion, capital gains preferential rates, step-up basis, etc.). Eliminating major tax expenditures could close a significant fraction of the structural deficit. Raising the corporate rate from 21% to 28% would raise approximately $1.3T over 10 years (CBO). A wealth tax or financial transactions tax faces significant implementation and avoidance challenges—the revenue yield from proposed versions varies widely in practice.

The U.S. already spends more per capita on healthcare than any country with universal coverage. Converting to a single-payer system could, under favorable assumptions, reduce total healthcare spending while expanding coverage—international evidence strongly suggests the current system is inefficient at the national level, not just unequal. Investment in education has demonstrated long-run returns in human capital formation and tax base expansion that offset near-term costs.

The interest-rate risk of the current debt trajectory is real, but the U.S. dollar’s reserve currency status provides significant debt tolerance not available to other nations. Japan’s debt-to-GDP exceeds 250% without fiscal crisis—though Japan is a special case with its own dynamics. Infrastructure and R&D investment that raises productivity can grow the GDP denominator faster than the debt numerator.

Interest payments exceeding defense spending is not a metaphor—it is a real constraint. Every dollar of interest payments is a dollar not available for discretionary priorities. The CBO’s 10-year projection of $13T+ in interest represents a compounding trap: deficits increase the debt, which increases interest, which increases deficits. At some point, the market’s confidence in U.S. fiscal sustainability becomes the binding constraint—not a congressional vote.

Social Security and Medicare are driving the structural gap, and no combination of discretionary cuts or tax increases on high earners can fully close it without addressing benefit structures or eligibility ages. The actuarial deficit in Social Security through 2097 is approximately $22T (present value).