CBO Director’s Statement on the Cost of Government

Posted by
Keith Hall
May 17, 2017

Today I testified about the cost of government before the Senate Budget Committee and gave the following opening remarks.

Federal Personnel Costs

My written testimony is devoted to CBO’s recent report on the compensation of federal employees. The government’s personnel costs reflect the number of workers and the average cost to employ them. For the past 30 years, the number of civilians employed by the federal government hasn’t changed much, but it has been a declining share of the growing U.S. workforce. Federal civilian employees now account for about 1.5 percent of total employment. Our report compared federal and private-sector compensation from 2011 to 2015. We concluded that total compensation was, on average, 17 percent higher for federal workers than for their private-sector counterparts, after accounting for geographic location and some other characteristics that affect compensation. However, the comparison varied by education level. For example, average federal compensation for workers with a high school diploma or less was 53 percent higher than for similar private-sector workers. For workers with a professional degree or doctorate, though, compensation was 18 percent lower for workers in the federal government than in the private sector.

Potential Efficiency Gains in Government

In my remarks this morning, I’d like to put personnel costs in a broader context to clarify their impact on the federal budget. I will focus on potential efficiency gains in executive branch agencies other than the Postal Service and the Defense Department. (Funding for defense affects combat power in complex ways that warrant a separate discussion.)

To understand the potential for such gains, it is useful to distinguish administrative from programmatic costs. In some cases, efficiency gains might allow for reductions in programmatic costs; for example, new technologies that allow medical services to be delivered more efficiently could lower the cost of federal health care programs. More typically, efficiency gains involve reductions in administrative costs—for example, efficiency may be gained by combining the management structures of programs with similar goals. However, efficiency gains cannot eliminate administrative costs entirely: Certain levels of management staffing, for example, are needed to provide oversight and prevent waste, fraud, and abuse.

Administrative costs are a relatively small part of the overall budget. In 2015, 87 percent of direct obligations by executive agencies—spending that is not reimbursed by another entity—were in categories that are mainly programmatic. Those categories include benefit payments, grants to state and local governments, and interest on the public debt.

The remaining 13 percent of 2015 federal spending fell into three categories, each of which represented a mix of administrative and programmatic costs.

  • The first category, contractual services and supplies, was 6 percent of spending. Most of that spending cannot easily be characterized as administrative or programmatic. However, payments for travel, transportation, rent, communications, and utilities were more likely to represent administrative costs. By comparison, contracts for research and development, the operation and maintenance of equipment, and the operation and maintenance of facilities—notably, the Energy Department’s national labs—were more likely to represent programmatic costs. Members of Congress often ask CBO about the number and cost of people working under federal contracts. However, the Congress has not required the executive branch to collect that information.
  • The second category was personnel, which was 5 percent of 2015 spending. Much of that spending for personnel was programmatic rather than administrative. For example, outside of defense, the Department of Veterans Affairs employed the largest share of the federal civilian workforce. About 60 percent of its employees worked in various medical professions, the most common of which was nursing. The Department of Homeland Security employed the next largest share, with the most common job being inspector for the Transportation Security Administration.
  • The third category, acquisition of assets and certain trust fund transactions, was 3 percent of spending. Nondefense assets are generally acquired for use in programmatic activities; the largest acquisitions in 2015 were in the area of international assistance, primarily representing capital contributions and loans to the International Monetary Fund. Assets can also be acquired for administrative support, as in the case of software systems for payroll management.

Improving the efficiency of government is an important objective. But given an aging population and rising health care costs, making a significant dent in federal deficits would require broader changes in federal tax or spending policies. To make such changes, lawmakers would have to increase revenues above amounts projected under current law, reduce spending for large benefit programs such as Social Security and Medicare, or combine those approaches.

Keith Hall is CBO’s Director. Contributions to this post were made by Perry Beider, a senior adviser in CBO’s Microeconomic Studies Division.