U.S. Federal Budget

The Constitution gives Congress the power to control government spending by creating a federal budget. The federal budget is a plan that describes in detail how the government intends to spend the money it takes in from taxes for each fiscal year, which begins October 1 and runs through September 30. It lists the amount of money each federal agency and department will receive and how these funds will be spent.

The budget also contains a plan that explains how it intends to pay for these programs, which can itself be a topic for intense debate.

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.

For the past several years, the government has spent more money than it takes in, resulting in a federal budget deficit each year. For the fiscal year 2022, the federal government spent $6.27 trillion but only brought in $4.9 trillion in revenues. This resulted in a budget deficit of $1.38 trillion.

The U.S. federal government has been operating at a deficit since 2002. This deficit is the result of the following:

• Changing demographics that have led to increased spending on Social Security, Medicare, and other mandatory entitlement programs
• Decreased revenues that resulted from the recession of 2001 and 2008
• Congress passing the 2009 economic stimulus Act to end the Great Recession
• Increased spending on the military as a result of President Bush's War on Terror
• Decreased revenues as a result of tax cuts by President Bush, Obama, and Trump

The government finances these deficits by selling Treasury bonds, which adds to the national debt. In 2022, the national debt for the U.S. has risen to more than $31 trillion.

To put this figure for the national debt in perspective, a nation's total debt is measured as a percentage of the country's gross domestic product (GDP). According to the World Bank, a healthy economy for a country would have a debt-to-GDP ratio of 77% or less. However, the Federal Reserve Bank of St. Louis reports that the U.S. debt-to-GDP ratio was 127.36% as of the third quarter of 2020.

Spending in the federal budget is broken down into three categories.

Mandatory spending

For the federal budget 2023, mandatory spending makes up 63% of the budget and is dictated by laws previously passed by Congress for entitlement programs such as Social Security, Medicare, and Medicaid. These mandatory expenditures cannot be changed unless Congress passes different legislation.

Discretionary spending

Discretionary spending comprises 30% of the budget, with the largest portion going to the military. 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 national debt takes 8% of the budget and is not part of the mandatory budget. However, not paying this interest would be considered a default on its debt, which would create serious consequences by downgrading the credit rating in the market for U.S. Treasury bonds. Therefore, not paying the interest is not a viable option.

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The largest single expenditure in the federal budget is for Social Security. It makes up 23% of the government's total budget. Medicare comes in next at 14%, and Medicaid takes up another 12%. Other mandatory programs add up to 14%.

Although defense spending has been higher in previous years, it shrank to 14% for the most recent fiscal year. Other non-defense discretionary programs make up 16%.

The government collects 32% of its revenues from payroll taxes and 53% from individual income taxes. Corporate taxes contribute another 9%, with other taxes making up 6%.

Similar to mandatory spending, taxes are governed by laws passed by Congress and remain in effect until they are changed. However, some taxes are put in 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.

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 of money the federal government can spend each year on a program. After receiving these overall appropriations and any supplemental spending appropriations, federal agencies and departments can begin to make spending commitments for their various 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 Involves resolutions to committees with instructions on arriving at reconciliation legislation to meet spending and revenue targets by a particular deadline. Reconciliation could also require reporting the effects of spending on debt ceiling legislation.

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.

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 government shutdown, Congress is forced into the position of having to pass a continuing resolution (CR) to provide funds to keep the government operating. Generally, CRs provide funding at the same appropriations levels as the previous year or a previously approved CR.

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.