What Is the Federal Budget?
The federal budget is an itemized plan for the annual public expenditures of the United States. It is used to finance various federal expenses, ranging from paying federal employees to dispersing agricultural subsidies to paying for U.S. military equipment. Budgets are calculated annually, with a fiscal year beginning on Oct. 1 and ending on Sept. 30 of the subsequent year, the year for which the budget is named.
Expenses made under the budget are classified as either mandatory or discretionary spending. Mandatory spending is stipulated by law and includes entitlement programs such as Social Security, Medicare, and Medicaid. Such expenses are also known as permanent appropriation.
Discretionary spending is spending that individual appropriations bills must approve. The federal budget is funded by tax revenue. Still, in all years since 2001 (and many before that), the United States has operated from a budget deficit, in which spending outstrips revenue.
- The federal budget comprises the government spending authorized by Congress for a given fiscal year.
- Among the main expenses of the federal budget are so-called entitlements to programs including Social Security, Medicare, and Medicaid.
- The main sources of income to fund these programs are taxes and the issuance of government debt.
- Over the past decades, the U.S. has run a budget deficit, meaning that it spends more than it is able to take in with revenue.
- The federal budget is often politicized by both sides of the Congressional aisle.
Understanding the Federal Budget
According to the Congressional Budget Office (CBO), the 2021 federal budget had outlays of $6.8 trillion, while federal revenues (collected by taxes) were $3.8 trillion. This left the government with a deficit of $3.0 trillion.
Mandatory spending, including Social Security, Medicare, and Medicaid, accounted for $3.5 trillion of spending. The discretionary expenses, including money financed by the U.S. Department of Defense, totaled $1.68 trillion for FY 2021. American military expenditures traditionally occupy a high percentage of the discretionary budget but entered a period of decline after a massive expansion in the decade following the 9/11 attacks.
Outlay from the Coronavirus Relief Fund was $243 billion in 2021 due to the ongoing pandemic. In addition, the Small Business Administration’s Paycheck Protection Program—cost $6.8 trillion in 2021.
The President and Budget Negotiations
Article I of the U.S. Constitution specifies that any appropriations of public funds must be approved by law and that accounts of government transactions must be published regularly. On this basis, an accepted legal procedure for crafting and approving the federal budget has taken shape. However, the specific roles of the executive and Congress were not entirely clarified until the Congressional Budget and Impoundment Control Act of 1974.
The president initiates budget negotiations and is required to submit a budget to Congress for the subsequent fiscal year between the first Monday of January and the first Monday of February. (This has been relaxed at times when a newly elected president who is not from the incumbent party enters the office.)
The budget sent by the president's office does not include mandatory spending. Still, the document must also have detailed predictions for U.S. tax revenue and estimated budget requirements for at least four years after the fiscal year under discussion.
The president's budget is referred to the respective budgetary committees of the Senate and the House and the non-partisan CBO, which provides analysis and estimates to supplement the president's predictions. There is no requirement for both houses to pass the same (or any) budget; if they don't, budget resolutions from previous years carry over, or individual appropriations bills fund the necessary discretionary expenses. The House and the Senate may also propose their budget resolutions independently of the White House.
The 2014 budget was the first one approved by both the House and the Senate since fiscal 2010.
History of the Budget Process
In the early years of the United States, single committees in the House and the Senate handled the budget, which consisted entirely of discretionary spending. While not without controversy, this centralized, streamlined budget authority enabled the legislature to regularly pass balanced budgets, except in times of recession or war. However, in 1885 the House passed legislation essentially dissolving the authority of the existing Appropriations Committee and created various bodies to authorize expenditures for different purposes. Shortly after that, federal spending (including deficit spending) increased.
From 1919 to 1921, both the House and the Senate took steps to rein in government spending by centralizing appropriations authority once again. However, after the 1929 stock market crash brought about the Great Depression, Congress and President Franklin D. Roosevelt were compelled to pass the Social Security Act of 1935, establishing the first major mandatory spending program in U.S. history.
Frequently Asked Questions
What Is the Difference Between the Federal Budget Deficit and Federal Government Debt?
The federal budget deficit is the difference between what the U.S. government takes in from taxes and other revenues and the amount of money it spends on mandatory and discretionary spending.
How Is Fiscal Policy Related to the Federal Budget?
Fiscal policy is the budgetary policy of the U.S. government, which involves the way it handles its levels of tax rates and spending in relation to the federal budget.
What Is the Main Goal in Creating the Federal Budget?
The federal budget is used to set monetary priorities, such as social security, defense, and education, among the many items, and to identify how it will pay for those priorities with tax revenues.
The Bottom Line
Social Security and the later but related Medicare and Medicaid programs add to the tax burden of the individual citizen with the promise of payouts upon reaching specific qualifications. Under such provisions, the federal government is legally obligated to disperse entitlement benefits to any citizen who qualifies. Therefore, modern mandatory spending depends primarily on demographic rather than economic factors.
The federal budget has recently become one of the most contentious sources of political debate in the U.S. Federal expenditures have risen steeply since the 1980s, mainly due to the increased requirements of mandatory spending related to population growth.
The ongoing retirement of the baby boomers, the largest generation in U.S. history, spurs fears that mandatory Social Security costs will continue to rise quickly unless the programs are reformed. Furthermore, since 2001 the continually has operated in deficit, which adds to the national debt—and the cost of servicing it—every year.