DEFINITION of 'Federal Budget'

The federal budget is an itemized plan for the annual public expenditures of the United States.

BREAKING DOWN 'Federal Budget'

The federal budget is used to finance a variety of federal expenses, which range from paying federal employees, to dispersing agricultural subsidies, to paying for U.S. military equipment. Budgets are calculated on an annual basis, with a fiscal year beginning on Oct. 1 and ending on Sept. 30 of the subsequent year, which is 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 appropriations.  Discretionary spending is spending which must be approved by individual appropriations bills. The federal budget is funded by tax revenue, but in all years since 2001 (and many before that as well), the United States has operated from a budget deficit, in which spending outstrips revenue.

Receipts, Outlays and Deficits

According to the Congressional Budget Office (CBO), the 2016 federal budget allotted $3,854 billion, while federal revenues (collected by taxes) were $3,267 billion. This left the government with a deficit of $587 billion, or 3.2% of gross domestic product (GDP).

Mandatory spending on Social Security, Medicare and Medicaid accounted for $1,865 billion of spending. Of the discretionary expenses, $565 billion financed the Department of Defense. American military expenses 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. The agencies receiving the most discretionary funding after the Department of Defense are the Treasury – which paid $284 billion in net interest on the public debt – Veterans Affairs, Agriculture and Education.

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, although 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 office.) The budget sent by the president's office does not include mandatory spending, but the document must also include 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, as well as to 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 the necessary discretionary expenses are funded by individual appropriations bills. The 2014 budget was the first one approved by both the House and the Senate since fiscal 2010. The House and the Senate may also propose their own budget resolutions independently of the White House.

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 at the time consistently 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 largely dissolving the authority of the existing Appropriations Committee and created various bodies to authorize expenditures for different purposes. Shortly thereafter, federal spending (including deficit spending) began to increase.  

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, which established the first major mandatory spending program in U.S. history. 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 certain 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, largely as a result of 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 continually operated in deficit, which adding to the national debt – and the cost of servicing it – every year.

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