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.

  1. Balanced Budget

    A balanced budget is a situation in financial planning or the ...
  2. Budget Committee

    A budget committee is a group of people that creates and maintains ...
  3. Budget Manual

    A budget manual is a set of instructions used by large organizations ...
  4. Performance Budget

    A performance budget is a budget that reflects the input of resources ...
  5. Administrative Budget

    A administrative budget focuses on the costs of running an operation ...
  6. Treasury Budget

    The treasury budgets is a monthly statement that accounts for ...
Related Articles
  1. Personal Finance

    How budgeting works for companies

    Budgeting is an integral part of running a business efficiently and effectively. Learn more about the two types of budgets that companies commonly use: static and flexible.
  2. Insights

    Trump Budget and CBO Budget Differ Widely

    The size of the difference between the administration’s assumption about economic growth and that of the CBO is unprecedented.
  3. Personal Finance

    Budgeting Tips for Beginners

    Consider these basic budgeting tips to save, invest and spend your money efficiently.
  4. Insights

    Trump Budget Funds Pentagon with Cuts to Health, Aid

    "This is a hard-power budget, not a soft-power budget."
  5. Personal Finance

    5 Steps Toward Creating an Effective Budget

    Creating a budget can seem daunting, but it doesn't have to be. Use these five steps to create an effective budget you can live with.
  6. Personal Finance

    5 Things to Know About the "B" Word

    Use a budget to create a financial selfie and stay on track.
  7. Personal Finance

    Tips for Implementing a Budget

    Taking these steps can help make creating a budget and committing to it simple.
  8. Personal Finance

    The Complete Guide to Planning a Yearly Budget

    A personal budget is a useful tool for tracking your income and expenses.
  9. Personal Finance

    5 Budgeting Steps for Young Families

    Here are five steps young families can take to create and stick to a budget.
  1. Which countries run the largest budget deficits?

    Discover the countries with the largest budget deficits and what it means. Deficits are influenced by the economy and also ... Read Answer >>
  2. What are the revenue recognition criteria in accrual accounting?

    Discover some of the advantages and disadvantages of zero-based budgeting. Zero-based budgeting starts with a new budget ... Read Answer >>
  3. How can you use a cash flow statement to make a budget?

    Understand how a cash flow statement can be used to create a company budget. Learn the difference between a cash budget and ... Read Answer >>
  4. Who sets fiscal policy – the President or Congress?

    Discover how fiscal policy is set in the United States, including how all three branches of government can affect a given ... Read Answer >>
  5. How does fiscal policy impact the budget deficit?

    Find out how the different uses of fiscal policy impact a government's budget deficit, and the difference between contractionary ... Read Answer >>
Trading Center