Federal Spending in States Equivalent to Almost 20% of Economic Activity


Federal spending is equivalent to nearly 20% of economic activity in the states according to a new report released yesterday by the Pew Charitable Trusts. The report shows how federal spending impacts state budgets and local development. According to the report, the federal government spent $3.1 trillion in the states in 2013.


The data doesn’t present much more than a picture of how federal dollars trickle down. Each state is going to see a different amount of federal spending depending on local demographics, industries, programs and myriad other factors. However, it does show some broad national trends in terms of which states rely most on federal dollars and which states have seen an evolution in use of federal funding.

Federal funding has long been a polarizing issue for state government as the funding itself often shifts from political cycle to political cycle even if demand remains the same or increases on the ground. In recent years, states have started to resist more federal funding citing a range of concerns from the lack of stability to state’s rights.

According to the report, the bulk of federal spending can be divided into five main categories – retirement benefits; nonretirement benefits; grants; contracts, salaries and wages. Benefits payments to individuals accounted for 61 percent of federal spending in the states in fiscal 2013. This number will likely continue to increase as more and more people move into retirement. If wages remain flat for most workers, government will have to consider other options for managing those payments as less and less revenue comes in.

In total, federal spending has increased 26 percent over the past decade adjusted for inflation. “From fiscal 2004 to 2013, total inflation-adjusted federal spending in the states grew 26 percent, from $2.5 trillion to $3.1 trillion. Every category of spending increased in real terms, with the exception of grants, which fell by 5 percent. Spending on retirement and nonretirement benefits grew the most (37 percent and 62 percent, respectively), followed by contracts (10 percent) and salaries and wages (9 percent). Federal stimulus aid to states resulted in a temporary spike in grants and nonretirement benefit payments during and immediately after the Great Recession; that aid has been almost entirely phased out,” according to the report.

As states enter new rounds of budget negotiations, lawmakers will likely have to grapple with continued changes in federal spending, with benefits being the biggest issue. Benefits and tax reform are likely to come up when the new Congress convenes according to recent speculation about the Republican agenda. Watch this space.