The U.S. government is required by law to create a federal budget for each fiscal year. This budget shows how the government intends to spend and allocate the money that it takes in from taxes and other revenue measures. The process can be difficult to coordinate between the conflicts between political parties and balancing the interests of society.
Understanding what is included in the federal budget and how it is created can help government contractors to find government contracts to grow their public sector sales.
What is the 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.
Federal Spending Trends and The FY 2025 Federal Budget
U.S. federal government spending on contractor-provided goods and services continues to increase.
Looking ahead, federal government contractors are keeping a close eye on the FY 2025 Federal Budget Request. The $7.3 trillion budget is the largest in U.S. history, including $1.7 trillion in base discretionary spending through 12 FY 2025 appropriations bills. Submitted to Congress on March 11, 2024, by President Joe Biden, the FY 2025 Federal Discretionary Budget Request adheres to limits established in the Fiscal Responsibility Act.
The budget includes a number of proposed big-ticket items to support Defense and Civilian agencies.
FY 2025 Discretionary Budget Defense Priorities
Integrated Defense:
- New battle force fleet ships (6)
- Continued development of hypersonic and subsonic weapons
- $33.7B for space capabilities
- $9.9B to boost Indo-Pacific deterrence (ballistic missiles, cyber ops support, autonomous systems)
Technology Priorities:
- $14.5B for cyberspace activities
- Data analytics
- Artificial intelligence
- Replicator Initiative
Research and Development (R&D) / Critical Technology Areas:
- Emerging: Biotechnology; Quantum Science; Future Generation Wireless Technology; Advanced Materials
- Adoption: Trusted Al and Autonomy; Integrated Network Systems-of-Systems; Microelectronics; Space Technology; Renewable Energy Generation and Storage; Advanced Computing and Software; Human-Machine Interfaces
- DOD-Specific: Directed Energy; Hypersonics; Integrated Sensing and Cyber
Contracting:
- Replacing military manpower with contractors (combat training; Telemetry, Tracking and Command) (AF)
- Centralized Contractor Support Portal (DEF)
- IT Procurement
Supply Chain Resilience – Focus Areas:
- Microelectronics ($2.5B)
- Casting and Forging ($369M)
- Kinetic Capabilities ($243M)
- Strategic and Critical Materials stockpile ($193M)
- Submarine industrial base ($4.0B)
Infrastructure:
- Facilities that improve readiness ($8.7B)
- Facility climate resilience ($3.6B)
- Naval infrastructure ($2.0B)
- New quality of life facilities ($2.3B)
- Facilities Sustainment, Restoration and Modernization ($19.8B)
FY 2025 Discretional Budget Civilian Priorities
Technology:
- $13.0B for cybersecurity activities
- Cyber priorities: zero trust, identity and access management, critical infrastructure security, supply chain risk management
- Increases CISA budget by $103M to $3.0B
- Artificial Intelligence development, testing, procurement, integration, and hiring
- $7.8B for new NASA systems for lunar surface science under the Artemis program
Supply Chain:
- U.S. industrial base support, including microelectronics, submarine construction, munitions, and biomanufacturing supply chains
- $175M for the Manufacturing Extension Partnership
- $113M to strengthen domestic clean energy supply chain
Climate:
- $23B for climate adaptation and resilience projects across DOC, DOI, DHS, USDA, USACE, EPA, and DOD
- $10.7B across DOE, NASA, NSF, and DOD to support industry clean energy
- DOE high-performance computing for climate modeling ($477M)
- $2.8B for EPA climate-related programs
- $275M for DOI to study impacts of climate change on land management practices
Border Security:
- $2.9B for more agents/officers, including $849M for detection technology
- $981M to improve immigration courts, including $30M for the USDS digital courtroom capabilities
Infrastructure:
- Funding of $78.4B for highway, highway safety and transit formula programs (including the Infrastructure Investment and Jobs Act, IIJA)
- $9.5B in advance IIJA appropriations for bridge replacement/rehab, EV charging infrastructure
- $2.0B for VA medical facility infrastructure maintenance
Public Health:
- Women’s health research; $13.7B for women veterans’ healthcare
- Adds $2.0B across NCI, FDA, CDC and ARPA-H for Cancer Moonshot projects
Research and Development (R&D):
- Priorities: Artificial Intelligence; analytics; advanced simulation and computing; QIS; clean energy; advanced communications
- $606M for DOE to integrate AI, supercomputing, and quantum technology
The FY 2025 Federal Budget Request is a comprehensive plan that addresses a wide range of priorities. It is a bold and ambitious plan that will require significant action from Congress.
Here are additional key takeaways from the FY 2025 Federal Budget Request:
- The Biden Administration's Management Agenda: The FY 2025 Federal Budget Request continues to drive the major priorities of the Biden Administration's management agenda, such as public health, cybersecurity, climate change, and technology advancement.
- Sustaining U.S. Technological Leadership: The FY 2025 Federal Budget Request prioritizes sustaining U.S. technological leadership and will drive significant R&D and technological opportunities in artificial intelligence, high-performance computing, quantum information systems, robotics, advanced communications technologies, biotechnology, and cybersecurity.
- Department of Defense (DoD) Priorities: DoD’s FY 2025 budget request prioritizes key programs, technology, and R&D that address key national security concerns, particularly those posed by China and Russia.
- Clean Energy: The Biden Administration continues to drive its clean energy vision through investments in R&D, fusion energy, and climate resiliency efforts.
- Supply Chain: The FY 2025 Federal Budget prioritizes a focus on protecting critical material supply chains and boosting domestic manufacturing.
- Cybersecurity: Government-wide cybersecurity priorities include advancing zero trust principles and practices, addressing the cybersecurity of the software supply chain, improving agency threat detection and response capabilities, increasing use of encryption to protect sensitive data and systems and working to migrate to post-quantum cryptography.
The FY 2025 Federal Budget Request is a bold and ambitious plan that will require significant action from Congress. If passed, this budget will make significant investments in our nation's future.
Free Report
Exclusive FY 2025 Federal Budget Request Analysis
Review this free report to better understand the major priorities, programs, and spending plans outlined within the President's FY 2025 federal budget request.
What Does the Government Spend Money On?
Spending in the federal budget is broken down into three categories.
Mandatory Spending
Mandatory spending typically makes up most of the budget and is dictated by laws 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 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 national debt comprises a growing percentage 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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Federal Budget Breakdown
The largest single expenditure in the federal budget is for Social Security, typically representing about a quarter of the government's total budget. Medicare and Medicaid also represent sizeable portions of the budget, along with the other remaining mandatory programs.
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.
Federal Budget Process and Timeline
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.
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 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.
