This article explains what the federal budget is, how Congress and the President create it through a seven-step process, and where mandatory and discretionary spending go each year.
Why it matters: For government contractors, budget decisions directly shape which contracts get funded and when. Missing early signals can mean missing opportunities entirely.
Key Takeaways
- Federal budget follows an annual cycle: Congress and the President negotiate spending and revenue plans each fiscal year, which runs October 1 through September 30.
- Mandatory spending dominates the budget: Social Security, Medicare, and Medicaid typically account for the largest share, while discretionary spending covers defense and agency budgets.
- Budget shifts affect contractor pipelines: Tools like Deltek GovWin IQ help government contractors track spending trends and emerging opportunities as agency budgets change.
The federal budget is the U.S. government's yearly plan for raising and spending money. Congress uses it to set spending levels for every federal agency, department, and program for a fiscal year that runs from October 1 to September 30. The Constitution gives Congress the power to control this government spending.
It also lays out how the government plans to pay for those programs — through taxes, borrowing, or both — which is often the most contested part of the process.
What Is the Main Goal in Creating the Federal Budget?
The government uses the budget as a tool to establish priorities and implement its policies, such as how much to spend on defense, education, or other social programs. Spending on various programs and agencies is supposed to reflect the values of society and the will of the voters. As a result, the allocation of government funds can be a highly political and controversial subject — deciding which issues are the most important and which deserve the most funds.
The government also uses the budget to implement fiscal policies intended to affect economic conditions. For example, the government may approve spending programs, such as programs to improve highways and bridges, that improve the nation's infrastructure and, at the same time, inject funds into the economy to stimulate its growth by increasing the money supply.
Why the Federal Budget Matters for Government Contractors
Federal budget decisions directly shape the government contracting market. When agencies gain or lose funding, contract opportunities shift with them.
Clarity Insight: Federal budget volatility is reshaping the contracting landscape. GSA consolidations and DOGE contract terminations eliminated billions in federal contracting value over the past year, and the number of small businesses participating in federal contracting has declined 49% since FY 2010.
Source: 2026 Deltek Clarity GovCon Study
Tracking budget and spending trends early gives contractors an edge. In fact, 83% of GovCon contractors missed at least one good-fit opportunity due to late discovery in 2025, according to the same Deltek Clarity study — making early visibility a competitive advantage.
Deltek GovWin IQ helps contractors monitor agency budgets, funding shifts, and emerging opportunities before they're publicly announced. To put the budget cycle to work for your pipeline, see how government contract types differ and review our guide on how to bid on government contracts.
For the fundamentals of getting started in federal contracting, read our federal contracting guide or learn how to find government contracts that match your capabilities.
Government Spending: Where Does the Money Go?
Spending in the federal budget is broken down into three categories.
Mandatory Spending
Mandatory spending typically makes up most of the budget. It's dictated by laws Congress passes for entitlement programs such as Social Security, Medicare, and Medicaid, and it can't change unless Congress passes new legislation.
Discretionary Spending
Discretionary spending typically accounts for about a third of the budget, with the largest portion supporting the military and driving the aerospace and defense industry forward. The rest of the funds go toward other government agencies, such as Health and Human Services, the Department of Justice, the Department of Education, and the U.S. Treasury.
Congress passes laws that authorize discretionary spending each year for various federal departments, but does not set the amounts. Funding for discretionary programs is set with the passage of individual appropriations bills, which are under the jurisdiction of the House and Senate Appropriations Committees.
Interest on the National Debt
Interest on the federal debt is a growing share of the budget, separate from mandatory spending. Skipping an interest payment would count as a default, which would damage the U.S. credit rating and raise borrowing costs,so it isn't considered a realistic option.
Federal Budget Breakdown
Social Security is generally the largest single expenditure in the federal budget, at roughly a quarter of total spending. Medicare and Medicaid are the next-largest mandatory programs, and together the three account for most of the budget deficit debate in Washington.
The government collects around a third of its annual revenues from payroll taxes and over half from individual income taxes. Corporate and other taxes are also sizable contributors to the government's coffers.
Like mandatory spending, taxes are governed by laws passed by Congress and remain in effect until they are changed. However, some taxes are put into effect on a temporary basis and expire if they are not extended. Laws governing the collection of revenues are under the jurisdiction of the Senate Finance Committee and the House Ways and Means Committee.
How Is the Federal Budget Created? The 7-Step Process
The process of creating and finding agreement on a federal budget involves seven steps.
1. President's Budget Request
The budget process starts with the President preparing a proposed budget each fiscal year.
Each federal agency submits its own budget requests, which are compiled by the Office of Management and Budget (OMB). The President is required to submit a budget to Congress between the first Monday of January and the first Monday of February.
This is not a hard-and-fast rule and has often been relaxed when a new president from a different party comes into office. The President's budget request makes detailed predictions for expected U.S. tax revenues and makes projections for budget requirements for the next four years.
This budget from the White House does not include mandatory spending items. The House and the Senate use the President's budget as a guideline and may make additional budget resolutions for other items to include in the budget.
2. Budget Resolution
Budget resolutions are non-binding resolutions passed by the House and the Senate that serve as guidelines for making budget decisions. It establishes a total spending limit but does not go into detail about spending for specific programs.
3. Appropriations Bills
Appropriations bills set the amount the federal government can spend each year on a program. Once agencies receive these appropriations, they can commit to spending and begin the actual outlays for their programs.
4. Authorization Bills
Authorization bills are passed by Congress to create a program with its own unique purpose and guidelines. Authorizations give government agencies the legal authority to operate the program and pay for the expenses.
5. Revenue Measures
Revenue measures are legislative actions taken by Congress to increase tax revenues from certain segments of society or create tax breaks for others. It isn't necessary for Congress to pass revenue measure legislation each year, but while some tax laws are permanent, others are temporary with expiration dates and have to be examined and either renewed or allowed to expire.
6. Budget Reconciliation
Budget reconciliation gives committees instructions for meeting spending and revenue targets by a set deadline. The nonpartisan Congressional Budget Office (CBO) scores these bills to show their effect on spending, revenue, and the debt ceiling.
7. Debt Limit Legislation
Debt limit legislation imposes a cap on how much debt the federal government can take on to finance budget deficits. Congress has the option to either increase the debt ceiling by passing a law or by suspending the debt limit for a certain amount of time to allow the government to take the necessary actions to finance the difference created by the budget deficit.
Government Shutdowns and Continuing Resolutions
While the federal budget process has specific procedures and steps to follow, the process doesn't always work as planned. Quite often, the political parties and the President can't come to an agreement by the federal budget timeline for the start of the fiscal year on October 1. In these situations, government agencies and departments are faced with the possibility of running out of money and having to shut down operations.
To avoid a shutdown, Congress can pass a continuing resolution (CR) — temporary legislation that keeps agencies funded, usually at the prior year's spending levels. A CR buys time without settling the full-year budget.
CRs are temporary measures that fund government activities for a specific amount of time. The purpose is to give lawmakers more time to pass complete appropriations bills for the entire fiscal year.
Frequently Asked Questions
Mandatory spending funds programs required by law, such as Social Security, Medicare, and Medicaid. Discretionary spending covers programs Congress funds through annual appropriations bills, including defense and most federal agencies. Mandatory spending makes up the larger share of the federal budget.
A continuing resolution is temporary legislation that keeps federal agencies funded when Congress hasn't passed a full budget by October 1. It typically extends funding at the prior year's levels for a set period. Congress uses it to avoid a government shutdown while appropriations bills are finalized.
Social Security is the single largest expense, representing about a quarter of federal spending. Medicare and Medicaid make up the next-largest mandatory programs. Together with defense spending, these categories account for most of the federal budget.
The President submits a budget request to Congress each year, typically between early January and early February. Congress then drafts its own budget resolution and passes appropriations bills that set actual spending levels. Both branches must agree before funding becomes law.
Federal budget decisions determine how much money agencies have to spend on contracts each year. Delays, continuing resolutions, and shifting agency priorities can slow down or redirect contracting opportunities. Contractors that track spending trends with tools like Deltek GovWin IQ can better anticipate where new federal contract opportunities will emerge.
A government shutdown happens when Congress and the President can't agree on funding before it runs out. Federal agencies must pause non-essential operations until new funding is approved. Essential services, such as national security and public safety, typically continue.
