Will U.S. federal government spending be slashed in 2025?

The outlays of the federal government totaled roughly $6.8 trillion in the fiscal year that ended on September 30. The federal spending-to-GDP ratio is about six percentage points higher today than it was in 2000. In the wake of the recent American elections, there have been calls to significantly reduce spending by the federal government.

The federal government spent roughly $6.8 trillion in FY 2024, of which mandatory spending accounted for approximately $4.1 trillion. In contrast to discretionary spending, which is governed by an annual appropriation process in Congress, mandatory spending is determined by a variety of eligibility requirements, such as income or age. For example, most individuals become eligible for health insurance via Medicare when they turn 65, and many Americans are eligible to receive Social Security benefits when they reach a certain age. Because outlays are determined by eligibility requirements and not by an annual appropriation, mandatory spending is more or less on auto-pilot.

The “Old Age and Survivors” component of the Social Security program, which is the largest individual spending component of the federal government, cost $1.3 trillion in FY 2024. Spending on the other major component of Social Security (the Disability Insurance Program) totaled roughly $150 billion. Medicare outlays neared $900 billion last year while spending on Medicaid, the leading health insurance program for low-income individuals, exceeded $600 billion. Just these three programs accounted for roughly 70% of mandatory spending in FY 2024. Other major mandatory spending programs include civilian and military retirement benefits (~$200 billion), some veterans benefits (~$200B), subsidies for purchasing health insurance on the Affordable Care Act exchanges (~$100 billion) and the Supplemental Nutrition Assistance Program (~$100B).

Spending on Social Security and Medicare together accounted for one-third of the $6.8 trillion of spending the federal government undertook in FY 2024.

The interest the federal government paid on its outstanding debt totaled about $950 billion in FY 2024. To reduce interest costs, policymakers will need to reduce spending growth or generate additional tax revenues. That leaves the roughly $1.8 trillion worth of discretionary spending that the federal government undertook in FY 2024. Defense spending ($843 billion) accounted for nearly one-half of total discretionary spending last year. There may be ways to save some money in the defense budget. That said, a wholesale reduction in the amount of money that Congress allocates to the Pentagon does not seem to be in the cards in today’s geopolitical environment. Defense spending in FY 2024 was equivalent to only 3.0% of GDP, which is more or less a post-Cold War low. Furthermore, roughly one-fifth of defense spending is dedicated to the wages and other costs of the military’s personnel, an area that does not seem politically conducive to reducing.

What about nondefense discretionary spending, which totaled roughly $950 billion in FY 2024? This category includes a variety of government operations and services, including those that often jump to mind when thinking about federal government activities. Examples include border security, air traffic control, Pell grants, medical research grants, the National Aeronautics and Space Agency (NASA), the Federal Emergency Management Agency (FEMA), the Internal Revenue Service (IRS) and some veteran benefits. The ratio of nondefense discretionary spending-to-nominal GDP is just above 3.

Federal spending grew from less than $2 trillion at the turn of the 21st century to $6.8 trillion in the fiscal year that ended on September 30. During that same period, the civilian workforce of the federal government increased from less than 1.9 million employees to 2.4 million, an increase of roughly 30%. Some commentators have suggested that significant cost savings could be achieved through sharp reductions in federal headcount. Estimated pay and benefits of civilian federal employees in FY 2024 were about $384 billion, which represents less than 6% of federal spending. Federal employment is concentrated in a few departments in which significant headcount reductions may be difficult to achieve. Civilian employment in the Departments of the Army, Navy and Air Force together exceeds 600K, and the number of workers in the Department of Veterans Affairs (VA) is nearing 500K. The Department of Homeland Security, which houses the Transportation Security Administration (TSA), employs more than 220K workers. At the other end of the spectrum, there are only 4K employees in the Department of Education, and headcount at the Department of Housing and Urban Development (HUD) totals just 9K.

Slashing federal spending could be relatively easy, at least in theory, if there were a budget czar. In theory, the czar would be able to make spending decisions unilaterally in the absence of political considerations. But in the American system of government, the U.S. Constitution vests the power of the purse in Congress, making large and unilateral spending cuts difficult for a president to achieve unilaterally.

Much of the growth in spending over the past 25 years has been in mandatory spending programs, particularly the largest programs, Social Security and Medicare. Spending on the “Old Age and Survivors” component of Social Security and Medicare together totaled $2.2 trillion in FY 2024, accounting for roughly one-third of total federal spending. Furthermore, the Congressional Budget Office projects that spending on these programs will continue to rise in the years ahead amid an aging population and rising health care costs. Congress could potentially consider changes to the eligibility requirements or benefit rates for these mandatory spending programs, but senior citizens represent a significant proportion of the country’s voting population, and many seniors might balk at benefit cuts. Federally elected officials could come under enormous political pressure to exempt these popular programs from sizable changes.

Or consider military spending, which is determined by an annual appropriation process by Congress. There appears to be little political will to reduce spending on compensation for active-duty personnel or veterans’ benefits. The National Defense Authorization Act for 2025 that passed the House last week called for a 14.5% pay increase for junior service members and 4.5% for all other service members. What about other areas? For example, there are hundreds of military bases in the United States, and some people could reasonably argue that the federal government could save money by closing some of these bases. However, military bases provide employment opportunities for residents of the communities in which the bases are located, giving representatives and senators from those areas an incentive to oppose legislation that would shutter those bases. That said, Congress established a procedure, which is known as Base Realignment and Closure (BRAC), to make it simpler to achieve efficiencies in military spending. This process led to five rounds of base closures in 1988, 1991, 1993, 1995 and 2005. However, BRAC authority expired in 2006, so Congress would need to either reauthorize it or establish a new process. Furthermore, as noted in a report from the Congressional Research Service, the closures are estimated to have saved only $12 billion annually, a miniscule amount compared to total Pentagon spending.

This is not to say that budget cuts are impossible or that they cannot be done. There are plenty of ideas and options from nonpartisan sources for reducing the federal budget deficit. Crafting policy is about making tradeoffs, and it is up to elected officials to make those decisions. But federal spending as a share of GDP has grown sharply since 2000, while federal revenues have been largely flat. Many of the biggest culprits for the higher spending have important constituencies among voters and, by extension, among policymakers. Consider that spending on Social Security, Medicare, Medicaid, national defense and debt service costs totaled roughly $4.7 trillion in FY 2024, nearly equal to the $4.9 trillion in revenues collected by the federal government. It would take the elimination of all other spending, from veterans benefits to border security to education spending, to balance the federal budget if the aforementioned spending categories are left unchanged.

Finally, it is worth noting that another avenue to reduce federal spending could be to increase efforts to combat fraud. How much to spend and which programs to fund is a question of priorities and values, and different policymakers will always have varying views on how best to allocate public funds. However, intentional efforts to defraud the federal government clearly are not popular regardless of one’s political views. Estimating the size of money lost to fraud is inherently uncertain, but a recent study from the Government Accountability Office (GAO) pegged the federal government’s annual financial losses from fraud to be between $233 billion and $521 billion annually over the period from FY 2018 through FY 2022. Combating fraud is a challenging undertaking, but even if done successfully, reducing fraudulent payments to zero is unlikely to be enough to single-handedly put the federal government on a fiscally sustainable path.

It takes an act of Congress to materially increase or decrease federal spending. The process is somewhat different between discretionary spending and mandatory spending. The 25% of the federal budget that is discretionary spending is determined through the annual appropriations process. Congress debates and passes the 12 annual appropriation bills (sometimes combining them into one large “omnibus” bill) that dictate spending levels and priorities. If Congress does not pass the annual appropriations bills, a government shutdown ensues, and the activities that are funded through this process largely cease. The 12 appropriation bills can be filibustered in the Senate, meaning they must clear a de facto 60 vote threshold in the upper chamber of Congress. This in turn means that in the next Congress, Senate Democrats will have some say in the path forward for discretionary spending. The next Senate will include 53 Republican and 47 Democrats or Independents who caucus with the Democrats.

Total mandatory spending is determined in more of a bottom-up way than the top-down process for discretionary spending. Congress does not set a top-line budget total for Medicare each year. Instead, total spending is determined by a variety of eligibility requirements, formulas, and other processes. Unlike discretionary spending, there is typically no annual deadline for action, and as a result spending usually runs on “auto-pilot” from year to year. Congress can pass legislation that alters mandatory spending, although like discretionary spending this is subject to a filibuster in the Senate.

There is one key tool that can allow policymakers to bypass the Senate filibuster: budget reconciliation. In short, budget reconciliation is a fast-track procedure to help policymakers make changes to mandatory spending programs and tax policy. Reconciliation has gained prominence in these partisan times due to its privileged status; debate time in the Senate is limited, preventing a filibuster by the minority party. As a result, passing legislation through reconciliation requires just a 51-vote majority in the Senate, a much easier hurdle to clear than the de facto 60-vote threshold needed to end a filibuster when considering legislation in the more traditional way.

Thus, budget reconciliation is a potential option for the next administration and a Republican-controlled Congress to reduce federal spending despite potential opposition from Democrats. However, there are some limiting factors. The Byrd Rule prevents changes to Social Security in budget reconciliation, and the discretionary spending segment of the budget also cannot be reduced using this tool. Furthermore, budget reconciliation generally has been used in recent years for deficit-increasing policies. Examples include the American Rescue Plan in 2021 and the Tax Cuts and Jobs Act in 2017.

It is possible for a president’s unilateral actions to impact the federal budget. Executive orders, regulatory moves and other decisions that flow from the executive branch can drive changes in federal spending. Indeed, the Committee for a Responsible Federal Budget (CRFB) outlined numerous Biden-era executive orders that could be undone by President-elect Trump. If realized, reversing these executive actions could save between $830 billion and $1.4 trillion over the next decade according to CRFB’s analysis. That said, some of these actions may have bipartisan support. Furthermore, savings of $1 trillion over the next decade pale in comparison to the roughly $26 trillion cumulative budget deficit that the Congressional Budget Office projects over the next 10 years if the 2017 Tax Cuts and Jobs Act is extended.

It takes an act of Congress to materially increase or decrease federal spending. Spending by the federal government has ramped up significantly over the past few decades, not only in absolute dollar terms but also as a percent of GDP. It will be difficult to take an axe to the federal budget and make deep cuts. For starters, spending on Social Security and Medicare together accounted for one-third of the $6.8 trillion of spending the federal government undertook in FY 2024. Senior citizens represent a powerful voting bloc, and elected officials will come under enormous political pressure to spare those popular programs from any spending reductions. Indeed, President-elect Trump has already taken cuts to Social Security and Medicare off the table. Medicaid and other “mandatory” spending programs, such as those for veterans benefits and military and civilian retirement benefits, represented another 27% of federal spending in FY 2024.

Interest on the national debt accounts for another 14% of spending, and those outlays cannot be touched without risking a financial crisis. Another 12% of the federal budget is directed to defense spending, a category of the budget that has been declining as a share of GDP in recent decades even amid rising risks in today’s geopolitical environment. That leaves nondefense discretionary spending, which includes many programs and departments that one often associates with the federal government. However, nondefense discretionary spending accounts for only 14% of federal spending, and outlays for many of these programs are near the lows of the past few decades as a share of GDP.

The new government will have to look at every dollar and try to create efficiencies and cut costs wherever possible. At the same time, there is something wrong with the revenue side as only about 50% of individuals and 50% of corporations pay any tax at all. There are too many loopholes and too many deductions. To start working on a new tax system where everyone will pay their fair share would bring in more revenue and help to create a balanced budget. Musk and Vivek will do what they can to save money, but it will be an uphill battle.