What Are the 7 Largest Expenses for the US Federal Government? ($6.75 Trillion, Ranked)
Social Security, Medicare, Defense, Interest, Medicaid, Veterans, and Education -- in that order. Here is exactly how much, where it goes, and what each category means for federal contractors.
The 7 Largest Federal Expenses in FY2025
The federal government spent $6.75 trillion in FY2025. Seven categories account for roughly 90% of that spending. Here is each one, ranked by total dollars, with what it means for businesses that sell to the government.
1. Social Security — $1.46 Trillion (21.6%)
Social Security is the single largest line item in the federal budget. The Social Security Administration (SSA) pays retirement benefits to 67 million Americans, disability benefits to 8.3 million, and survivor benefits to 5.9 million.
Where the money goes: Almost all of it goes directly to beneficiaries as monthly payments. This is "mandatory spending" -- Congress does not vote on it annually. The amount is determined by the number of eligible recipients and the benefit formula.
Contract opportunities: SSA itself awards approximately $2.1 billion in contracts annually. The bulk is IT modernization (SSA runs on systems originally built in the 1980s), disability determination services, anti-fraud analytics, and customer service center operations. SSA's IT budget is growing 8-10% annually as they modernize legacy infrastructure.
Key NAICS codes: 541512 (Computer Systems Design), 541519 (Other Computer Services), 561422 (Telemarketing & Call Centers)
2. Medicare / Health — $1.05 Trillion (15.6%)
Medicare covers healthcare for 66 million Americans over age 65 and certain disabled individuals. The Department of Health and Human Services (HHS) administers Medicare through the Centers for Medicare & Medicaid Services (CMS).
Where the money goes: Hospital insurance (Part A), medical insurance (Part B), prescription drugs (Part D), and Medicare Advantage (Part C). Payments go to hospitals, physicians, pharmaceutical companies, and managed care organizations.
Contract opportunities: HHS is the second-largest contracting agency in the civilian government at $38.1 billion in FY2025. Contract categories include:
CMS alone spent $4.8 billion on IT contracts in FY2025, making it one of the largest IT buyers in the government. The agency is in the middle of a multi-year cloud migration and data modernization effort.
Key NAICS codes: 541512, 524114 (Direct Health Insurance), 621999 (Healthcare Services), 541611 (Management Consulting)
3. National Defense — $886 Billion (13.1%)
The Department of Defense budget covers military personnel, operations, weapons procurement, research and development, and military construction across the Army, Navy, Air Force, Marines, Space Force, and defense agencies.
Where the money goes:
Contract opportunities: DOD is the 800-pound gorilla of federal contracting -- $429.2 billion in prime contracts in FY2025, representing 63% of all federal contract spending. This is where the top defense contractors (Lockheed Martin, RTX, General Dynamics, Boeing, Northrop Grumman) earn their revenue.
But DOD also awards billions to small businesses. The DOD small business goal is 23%, and they consistently hit it -- roughly $99 billion to small businesses annually.
The fastest-growing DOD contract categories:
Key NAICS codes: 541512, 336411 (Aircraft Mfg), 541330 (Engineering), 336414 (Guided Missiles), 561210 (Facilities Support)
Use the [NAICS Competition Analyzer](/dashboard/naics-analyzer) to see how many firms compete in each DOD NAICS code and what the dollars-per-firm economics look like.
4. Net Interest on Federal Debt — $882 Billion (13.1%)
This is the cost of servicing $36 trillion in national debt. At an average interest rate of approximately 2.4%, the federal government paid $882 billion in interest in FY2025.
Where the money goes: To holders of Treasury securities -- mutual funds, pension funds, foreign governments, banks, individual investors, and the Federal Reserve. This is not discretionary spending and cannot be reduced by Congress without defaulting on debt obligations.
Contract opportunities: Minimal direct contracting. The Treasury Department and Federal Reserve manage debt issuance with relatively small operational budgets. However, Treasury does contract for IT systems, financial analytics, and cybersecurity. The IRS (under Treasury) is a major IT buyer at $2.1 billion in contracts annually, especially with the ongoing IRS modernization initiative.
Relevant context: Interest payments are now larger than the entire defense procurement budget. This has significant long-term implications for discretionary spending -- as interest costs grow, they crowd out funding for other programs, potentially driving agencies to seek more cost-efficient contract solutions.
5. Medicaid and CHIP — $616 Billion (9.1%)
Medicaid provides healthcare coverage to 92 million low-income Americans, pregnant women, children, elderly, and disabled individuals. CHIP (Children's Health Insurance Program) covers an additional 7 million children.
Where the money goes: Federal matching funds to states, which administer their own Medicaid programs. The federal government pays 50-90% of each state's Medicaid costs depending on the state's per capita income (the "FMAP" rate).
Contract opportunities: While most Medicaid spending flows through states, the federal component creates significant contracting at both levels:
State Medicaid IT contracts are particularly lucrative -- single MMIS modernization projects can be $100M-$500M over 5-7 years. Major players include Deloitte, Accenture, and Maximus, but states are increasingly breaking these contracts into smaller modules accessible to mid-size firms.
6. Veterans Affairs — $321 Billion (4.8%)
The Department of Veterans Affairs operates the largest integrated healthcare system in the country (1,321 facilities), administers education benefits (GI Bill), manages disability compensation, and runs the national cemetery system.
Where the money goes:
Contract opportunities: VA awarded $36.4 billion in contracts in FY2025, making it the largest civilian contracting agency. VA is also the most small-business-friendly major agency, consistently exceeding its small business contracting goals.
Current VA contracting priorities:
Why VA matters for small businesses: VA has the Veterans First Contracting Program, which gives priority to SDVOSBs (Service-Disabled Veteran-Owned Small Businesses) and VOSBs before opening contracts to other small businesses. If you are a verified SDVOSB, VA should be your primary target agency.
The [Recompete Pipeline Dashboard](/dashboard/recompete-pipeline) tracks thousands of VA contracts approaching expiration, sorted by incumbent vulnerability score.
7. Education — $274 Billion (4.1%)
The Department of Education manages federal student loans, Pell Grants, Title I funding for K-12 schools, IDEA (special education), and various education research programs.
Where the money goes:
Contract opportunities: The Department of Education awards approximately $4.2 billion in contracts annually. The largest category is student loan servicing -- companies like Nelnet, MOHELA, and Maximus hold multi-billion-dollar contracts to service federal student loans.
Other contracting areas:
What This Means for Federal Contractors
The seven largest expenses reveal where the money flows -- but more importantly, they reveal where the contract opportunities are:
If you sell IT services: Every major spending category is undergoing digital transformation. HHS, DOD, VA, SSA, IRS, and Education are all in the middle of multi-year IT modernization programs. IT services (NAICS 541512) is the single largest federal procurement category at $67.4 billion.
If you sell healthcare services: Medicare, Medicaid, VA, and DOD health combined represent over $3 trillion in spending with tens of billions in associated contracts.
If you sell professional services: Every agency needs management consulting, program evaluation, financial analysis, and organizational support. The growth is concentrated in DOD, HHS, VA, and DHS.
If you're a small business: The government's 23% small business goal applies across all of these categories. $178 billion went to small businesses in FY2025. The set-aside programs (8(a), SDVOSB, HUBZone, WOSB) create protected market segments within each spending category.
The question is not "is the government spending money?" It is "which slice of $6.75 trillion is mine?"
[Find where your NAICS code fits →](/dashboard/naics-analyzer)