Answer: The short answer is “a lot!” Since President Trump took office on January 20, there have been numerous headlines about efforts by his administration to review how the federal government spends money. Are his intentions more bark than bite, or will proposed spending reforms and changes reduce spending and bring down our outsized debt levels?
In fiscal 2024, which ended last September, federal spending made up 23% of the gross domestic product (GDP) and came in at approximately $6.75 trillion. Spending increases just about every year, but as a percentage of GDP, it remains stable between 20-25% of that number. The exception was during COVID, when it hit a historic high of 47.01%, according to usgovernmentspending.com.
Congress sets the budget but doesn’t spell out every line item. Mandatory federal spending equals 62% of federal spending. Even if Congress does nothing, Social Security, Medicare, and Medicaid expenditures are on autopilot. Interest on the national debt technically does not fall into this mandatory category but must obviously be paid. Only 23% of government spending is discretionary, with roughly half of that going towards defense.
The chart shows the day-to-day government overhead costs make up only a small piece of the pie. The “other discretionary” category, with the exception of the Department of Defense at 12% of that slice, are areas like State, Commerce, CIA, and other agencies). The vast majority of federal spending is in transfer payments such as Medicaid, Medicare, and Social Security.
The President can request that Congress retract appropriated funds by passing new legislation. If Congress rejects the request, the original budget stays in place. Spending cuts would require the House and Senate to approve legislation.
So, what about DOGE? The Department of Government Efficiency, led by Elon Musk, reports to the White House Chief of Staff, Susie Wiles. The stated goal of DOGE is to reduce waste and fraud in government spending. DOGE personnel have read-only access to systems monitoring payment systems. It is unlawful for DOGE to withhold legally required payments. DOGE is limited to auditing and inspection work.
The Trump administration’s goal is to reduce the overall size of government. Two controversial changes involve the Department of Education and the Agency for International Development (USAID). Trump wants to move education oversight to the State level and make USAID part of the State Department.
Congress created the Department of Education in 1980. Legislation would be required to abolish it. Bills to abolish the Department of Education (DOE) have been introduced over the years but have never been passed. The DOE’s budget only accounts for just 1% of federal spending, with the majority of that going to grants to schools, universities, and individual students. Unless Congress decides to end those grant programs, there will likely be some type of structure to manage them.
The USAID situation is a bit more complex. USAID’s history goes back to 1961, with Congress giving it standalone agency status in 1988. USAID is under the supervision of the Secretary of State. USAID’s budget is primarily used for foreign aid and accounts for just over 0.50% of federal spending. The determination of whether or not the Secretary of State can merge USAID into the State Department will be evaluated in court.
The Federal workforce, with the exception of the armed forces, employs approximately three million people. The percentage of federal employees who leave their jobs in a typical year is only 7%. This number has remained stable since 2000. There are also a substantial number of independent contractors on the Federal payroll. The Trump administration has taken steps to actively reduce headcounts by offering federal employees “buyouts.” Even a sizeable decrease in headcounts would not lead to meaningful lower spending numbers.
To significantly cut spending, Congress will need to address some of the more sensitive issues, including Social Security, Medicare, Medicaid, and/or national defense. Obviously, this would not be met well by the public. More fiscal discipline is necessary. Spending reductions are likely to be piecemeal, incremental, and gradual relative to the White House’s ambitious goal of cutting $2 trillion from the budget. Stay focused and plan accordingly.
Source: FactSet, as of 1/31/2025
The opinions expressed are those of the writer as of March 31, 2025, but not necessarily those of Raymond James & Associates, and subject to change at any time based on market conditions and other factors. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct. Investing involves risk and investors may incur a profit or a loss. Mention of specific company names is not a recommendation to buy or sell those stocks.
Certified Planner Board of Standards, Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, and CFP® (with plaque design) in the U.S., which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements. This article provided by Darcie Guerin, CFP®, Senior Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at 239-389-1041, email [email protected]. Website: www.raymondjames.com/Darcie
