US Secretary of Commerce Howard Lutnick on Sunday said that government spending could be separated from GDP reports, in response to questions about whether the spending cuts pushed by Elon Musk’s Department of Government Efficiency could possibly cause an economic downturn.
“You know that governments historically have messed with GDP,” Lutnick said on Fox News Channel’s Sunday Morning Futures. “They count government spending as part of GDP. So I’m going to separate those two and make it transparent.”
Doing so could potentially complicate or distort a fundamental measure of the US economy’s health. Government spending is traditionally included in the GDP because changes in taxes, spending, deficits and regulations by the government can impact the path of overall growth. GDP reports already include extensive details on government spending, offering a level of transparency for economists.
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Musk’s efforts to downsize federal agencies could result in the layoffs of tens of thousands of federal workers, whose lost income could potentially reduce their spending, affecting businesses and the economy at large.
Lutnick’s remarks echoed Musk’s arguments made on Friday on X that government spending does not create value for the economy.
“A more accurate measure of GDP would exclude government spending,” Musk wrote on his social media platform. “Otherwise, you can scale GDP artificially high by spending money on things that don’t make people’s lives better.”
The argument as articulated so far by US President Donald Trump’s officials appears to play down the economic benefits created by some forms of government spending that can shape an economy’s trajectory.
“If the government buys a tank, that’s GDP,” Lutnick said. “But paying 1,000 people to think about buying a tank is not GDP. That is wasted inefficiency, wasted money. And cutting that, while it shows in GDP, we’re going to get rid of that.”
The commerce department’s Bureau of Economic Analysis published its most recent GDP report on Thursday, showing that the economy grew at an annual rate of 2.3 percent in the final three months of last year.
The report makes it possible to measure the forces driving the economy, showing that the gains at the end of last year were largely driven by greater consumer spending and an upward revision to federal government spending related to defense.
Still, the federal government’s component of the GDP report for all of last year increased 2.6 percent, slightly lower than overall economic growth last year of 2.8 percent.
In the GDP report, government spending accounts for almost one-fifth of people’s personal income, which totaled more than US$24.6 trillion last year. This includes Social Security payments, benefits for military veterans, Medicare and Medicaid, and other programs. However, the report also measures the amount of people’s personal incomes that are paid in taxes to the government.
The government is not always a contributor to GDP and can subtract from it, which is what happened in 2022 as COVID-19 pandemic-related aid expired.
Lutnick said that the Trump administration would balance the federal budget with spending cuts, saying that would help growth and reduce the interest rates paid by consumers.
“When we balance the budget of the United States of America, interest rates are going to come smashing down,” Lutnick said. “This is going to be the best economy anybody’s ever seen. And to bet against it is foolish.”
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