Here's a claim worth testing: in aggregate, software is the fastest-growing item in the local government budget.
Not the biggest. Labor is bigger. Facilities and capital construction are bigger. But "biggest" and "fastest-growing" are different questions, and they have different answers. The largest lines in a municipal budget are large precisely because they're structural — and structural things don't move much year to year. Technology is different. It's a smaller slice today, but it's compounding at double-digit rates while everything around it grows in the low single digits or sits flat.
Fifteen years ago, a local government's technology budget was mostly one-time purchases: servers, desktops, networking gear, a perpetual license for a few enterprise applications, and the accessories to keep it all running. Today it's an ever-expanding stack of recurring software subscriptions, cloud services, and — increasingly — automation and AI tools bought to meet public expectations that no amount of hiring can satisfy. That shift changes not just how much governments spend on technology, but the shape of the spend: from episodic capital outlays to a permanent, growing operating cost.
This piece lays out the evidence.
Start with the biggest line: people. Local governments spend roughly 55% of their budgets on employee compensation, the single largest category of municipal spending, according to the Center on Budget and Policy Priorities. That share has been remarkably stable for decades.
The reason it's stable is the reason it doesn't drive growth: headcount is constrained. State and local government employment sits around 20.7 million and only recently clawed back above its February 2020 peak, per the Bureau of Labor Statistics — meaning the sector spent roughly four years just getting back to even. Governments can't easily add bodies. Tax bases grow slowly, hiring is politically and fiscally hard, and much of the workforce is capped by budget and by a tight labor market. Compensation costs rise with wage inflation — a few percent a year — but the structure of the labor line is essentially flat. It's a big, heavy, slow-moving mass.
Capital construction is the other giant, and it's lumpier. Local government accounts for roughly two-thirds of public construction spending — about $284.5 billion in 2024, per the U.S. Conference of Mayors — and it has grown at roughly 5% a year on average since 2012. But that average hides wild swings (from −3.1% in 2021 to +17.5% in 2023), and the recent bump is largely one-time, federally-driven money from the infrastructure law. Construction is capital: you build a bridge or a water plant, and then you don't build it again for thirty years. It spikes and recedes. It does not compound.
That's the pattern with the large lines. They're structural, cyclical, or one-time. None of them has a built-in engine that makes them bigger every single year regardless of what else happens.
Technology does.
Zoom out to the whole economy first, because the government numbers ride on top of it. Industry analysts project worldwide IT spending to grow nearly 10% in 2026, topping $6 trillion for the first time. Within that total, hardware and devices grow slowly — but software is the standout. The same forecasts put enterprise software spending growing 14.7% in 2026 to more than $1.4 trillion, up from 11.5% growth in 2025. Software isn't just growing; its growth rate is accelerating.
Cloud is the delivery mechanism for most of that software, and it tells the same story. Worldwide public cloud spending reached $723.4 billion, up from $595.7 billion the prior year — better than 20% growth in a single year, according to CIO Dive.
Now bring it into government. Analyst estimates put enterprise IT spending in the U.S. state and local government sector well past $125 billion. And the government-specific cloud market — the recurring, subscription part — is forecast to grow even faster than the private sector: independent market analyses put the government cloud CAGR at around 17.75% (Straits Research) to 16% (Technavio) over the coming years. Whatever the exact figure, it's three to four times the growth rate of construction and several times the growth rate of the labor line.
Put the growth rates side by side and the thesis becomes hard to argue with:
The biggest lines are big. The technology line is the one that's moving.
The reason this is a relatively new phenomenon is that technology used to behave like construction — and now it behaves like a subscription.
Fifteen years ago, buying government technology meant capital expenditure: you purchased servers and licenses, capitalized them, depreciated them over years, and refreshed them on a cycle. The cost was real but episodic. You could go years between major purchases.
The industry has since moved that spend from capex to opex. As McKinsey documents, buyers across the board have shifted hardware and software purchases from capital to operating expense, trading big one-time costs for recurring subscription fees. For governments, almost everything new now arrives as Software-as-a-Service: a permitting platform, a records system, a constituent app, a finance suite — each one a per-user or per-usage subscription that renews, forever, and typically renews higher. SaaS renewal increases commonly run 5–15% a year. A subscription you signed three years ago is a bigger line item today even if you added nothing.
That's the mechanical engine behind the growth: you never "finish" software the way you finish a building. Every system a government adopts becomes a permanent, escalating operating cost — and governments keep adopting systems, because the alternative is falling behind public expectations.
Three forces make this a durable trend, not a temporary spike.
Automation is now a service-delivery necessity, not a nice-to-have. Residents expect to renew a permit, pay a bill, or check a case status online, at any hour, the way they do everything else. Meeting that expectation with people is impossible — the headcount isn't there and can't be added. So governments meet it with software. Every service that moves online adds a recurring technology cost and, often, reduces the pressure to grow headcount, quietly shifting spend from the labor line to the software line.
AI has become the top government technology priority. For the first time, artificial intelligence topped NASCIO's state CIO priority list for 2026, displacing cybersecurity, which had held the number-one spot for twelve straight years. Cloud services and legacy modernization remain top-ten priorities as well. AI tools are, overwhelmingly, sold as subscriptions — new recurring costs layered on top of the existing stack.
The money is following. In NASCIO's 2025 State CIO Survey, half of state CIOs reported a budget increase for the coming fiscal year, and NASCIO has noted a growing trend of supplemental funding earmarked specifically for IT modernization and innovation. When budgets tighten elsewhere, technology is increasingly the line that's protected — or grown — because it's what makes every other function more efficient.
If software is the fastest-growing line in your budget, two things follow.
First, it deserves the scrutiny you already give to the big lines. Most governments have decades of rigor around personnel budgeting and capital planning, and comparatively little around a technology portfolio that's now dozens of overlapping recurring subscriptions, each renewing higher, often bought department by department with no consolidated view. The fastest-growing cost center is frequently the least-managed one.
Second, controlling it requires market intelligence, not just a purchasing process. To know whether a renewal quote is fair, whether two departments are paying for overlapping capabilities, or what comparable cities actually pay for the same category, you need visibility into the market — organized the way you buy, with real pricing from real peer contracts. That's precisely the gap Marketplace.city was built to close: 375+ market landscapes with peer pricing and vendor detail, so the line item that's growing fastest is also the one you can see most clearly.
The biggest number in the budget will always get attention. The fastest-growing one deserves it more.
A note on the claim: the data strongly supports technology as the fastest-growing category in local government spending by growth rate, driven by recurring software and cloud costs. It's a directional argument, not a single audited national statistic — construction, for example, has grown sharply in recent years on one-time federal money. The distinction that holds up is structural: software growth is recurring and compounding, while the larger lines are flat, cyclical, or one-time.