As Congress prepares to do battle over the 2011 federal budget, it is a good time to review what happened in 2010. Said differently, every American tax payer should have some interest in where their money went in 2010. (For related reading, also take a look at Breaking Down The U.S. Budget Deficit.)

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A Troubling Imbalance
Right off the top there is some sobering math to consider. According to the General Accounting Office, the U.S. government spent $4.3 trillion in 2010. That stands in stark contrast to the $2.2 trillion in government revenues (which included $1.7 billion in personal income and payroll taxes). While not the point or focus of this piece, it is interesting to note that corporate taxes were $180 billion in 2010, up from $130 billion in 2009 (and down from the peak of $367 billion in 2007), but a rather small percentage of the total.

Technically, then, the U.S. government posted a $1.3 trillion deficit in 2010, down slightly from the $1.4 trillion deficit from 2009. Readers should note that changes in actuarial assumptions related to benefits, expenses, and obligations for veterans, military and civilian employees and government-sponsored enterprises reduce the deficit from the simple math of revenue minus expenses.

Where the Money Went


Defense

The U.S. government spent more money on the Department of Defense than anything else in 2010. Net Defense spending totaled $889 billion in 2010, or more than 20% of the government's total spending. Some will point to that figure and state that it is inflated by the ongoing spending in Iraq and Afghanistan, and they will be right. But even if the roughly $172 billion tied to Iraq and Afghanistan are rebated back, Defense accounts for an enormous chunk of U.S. government spending and would be a very close second.


Social Security
Social Security accounted for $754 billion in 2010, up 2% from the level of spending in 2009 and almost 18% of spending. Medicare was likewise a huge expense - in excess of $500 billion for the year - while Medicaid spending topped $300 billion and the two combined for nearly 20% of U.S. spending.


Interest
Although much is made of what the United States pays in interest every year, it amounted to $215 billion in 2010, or 5% of the total.

The Department of Labor

The Department of Labor (DOL) also accounted for a sizable chunk of spending in 2010. Why does the DOL get so much? Remember that federal unemployment benefits flow through this department, so the $179 billion spending in 2010 (up from $140 billion in 2009) is not altogether unexpected. Along similar lines, much of the $134 billion that went to the Department of Agriculture went to food assistance programs, while farm subsidies amounted to $14 billion and food safety initiatives a little more than $1 billion.


Department of Transportation
Other odds and ends of note include $80 billion to the Department of Transportation, more than half of which goes to the Federal Highway Administration, along with sizable allocations to the FAA and the Federal Transit Administration (which provides money to a variety of public transit systems). The Department of Education got slightly more, nearly $90 billion, while Homeland Security got by on $50 billion, or more than double the amount allocated to NASA.

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A Warning from the Auditors
One disturbing note from the 2010 spending year is the apparent amount of "wiggle room" in the budget and spending process. Because of various reporting weaknesses, the GAO asserted that it could not provide an audit opinion for the year. The biggest number of weaknesses was found in the Defense department, and the Homeland Security department likewise reported a large amount relative to the size of its budget. Making matters worse, the Treasury Department (the one department arguably most expected to be good at accounting) had a worrisome number as well.

If the federal government were a public corporation, investors, analysts, and financial journalists would be going berserk and lawyers would be warming up their fax machines and sharpening their wingtips. Yet, perhaps because it is the Federal government and people have come to expect less from the system as years pass, an apparently large amount of sloppiness (if not outright skulduggery) is allowed to continue.

The Bottom Line
It would seem fairly obvious and uncontroversial that the U.S. government cannot continue to spend trillions in excess of what it brings into the till every year in taxes. While there is ample scope and scale for cost-cutting across large swaths of the budget, investors should realize that we will all pay for it one way or another - either in the form of higher taxes, more out-of-pocket spending for services we currently get from the government, or in the form of higher inflation that erodes away the value of the money we keep.

In the meantime, perhaps investors should ponder the huge sums of money that the federal government pays for defense, health care, and social programs and whether the government really gets a good return on the money … or even has the capability of performing that analysis. (For additional related reading, check out 6 Things You Didn't Know About The US Budget Deficit.)

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