The Federal Budget: A Primer

Introduction

"The Federal Budget: A Primer" is intended as a quick introduction to the federal budget. While detailed knowledge of the federal budget process and associated terminology can only be gained from reading long monographs or book-length treatments of the subject, this primer is intended to give the interested citizen enough of a background to make sense of discussions of the budget and related legislation found in the press.

The section entitled "A Concise Introduction to the Federal Budget" is intended to be a compact yet thorough introduction to common terminology and legislative processes related to the federal budget and a topics closely related to the budget. The section "A More Detailed Discussion of the Federal Budget" is a longer, less condensed presentation of the same material.

The last few sections include tables, figures, references, and footnotes.

Goals

After reading this document, you should

  • be able to read and understand basic federal budget documents;
  • have an understanding of the annual federal budget process.

A Concise Introduction to the Federal Budget

  1. Federal government spending and taxation---basic terminology and principles
    1. The Constitution grants congress the power to tax and spend by passing legislation. Like all legislation, it can be vetoed by the president.
    2. Government action on spending typically occurs in this order: authorization, appropriation, budget authority, obligation, outlay.
      1. An authorization is an act of congress establishing, changing, or continuing a federal agency or program and delimiting its powers and structure.
        1. It is valid either indefinitely or for a specified period of time.
        2. It typically includes an authorization to congress to appropriate funds---which is not itself an appropriation---often with a limit on the amount of funds that can be appropriated.
        3. Some authorizations (e.g., those providing for entitlements) do provide budget authority (see discussion below on mandatory spending).
        4. Authorizations are enacted irregularly.
        5. Most congressional committees are authorizing committees.
      2. An appropriation is an act of congress providing an agency or program with a specified amount of budget authority.
        1. Typically, funds are appropriated annually, for the upcoming fiscal year only.
        2. Funds must be obligated during the fiscal year addressed in the act, unless otherwise specified.
        3. Appropriations are traditionally separate from substantive legislation (like authorizations), and address only the amounts specified.
        4. Appropriations are traditionally grouped into 13 separate appropriations bills. Each of these bills is the jurisdiction of a parallel pair of subcommittees of the House and Senate Appropriations Committees. Congress attempts to pass these bills before the fiscal year under consideration begins.
      3. Budget authority is the legal authority to incur financial obligations that will result in immediate or future outlays of federal government funds.
      4. Obligations are commitments to make payments, immediately or in the future. Examples include contracts and purchase orders.
      5. An outlay is a payment (usually a check drawn on the Treasury, or in cash) by the government in fulfillment of an obligation.
    3. Receipts
      1. Revenues are typically funds collected by the exercise of the government's sovereign powers, such as taxes, duties, and fines.
      2. Offsetting receipts are collections recorded as negative budget authority and outlays, rather than being listed as receipts. Usually they come from businesslike activities but also include intragovernmental receipts reflecting an agency's payments to its employees' retirement fund.
      3. Tax legislation, like authorizing legislation (and unlike appropriations) is enacted irregularly.
    4. Debt
      1. Federal debt, or gross debt, is the value of outstanding securities issued by the federal government (mainly the Treasury). It has two components:
        1. Debt held by the public (nonfederal investors, plus the Federal Reserve System), and
        2. Debt held by federal government accounts (e.g., trust funds).
      2. The debt subject to statutory limit consists of almost all gross debt. The limit itself is the debt limit, or debt ceiling. By law, the total value of this debt cannot exceed the limit.
      3. Money the Treasury collects from selling securities and disbursed by repayment of principle is not counted as receipts or outlays.
    5. The federal government's fiscal year is a yearly accounting period beginning October 1 and ending September 30. It is designated by the calendar year in which it ends: for example, fiscal year 2002 began October 1, 2001 and ended September 30, 2002.
  2. Scope of the budget
    1. The unified budget is the broadest measure of the federal budget.
      1. The unified budget consists of four types of funds: general funds, trust funds, special funds, and revolving funds. General funds, comprising about two-thirds of the budget, have no direct link between how they are raised and spent. Trust funds are designated by statute, receive earmarked collections, and are charged with particular outlays, but are not trusts in that the government has no fiducial obligation towards the beneficiaries. Special funds are similar to trust funds. Revolving funds finance their operations through income derived from their activities.
      2. Federal funds are all funds except for trust funds.
      3. The unified budget totals are often divided into two parts, those from off-budget and on-budget items. Currently, Social Security and the Postal Service are off-budget. However, reports on the budget (both official and in the mass media) often include both on- and off-budget items.
    2. If outlays exceed receipts in a given period (usually a fiscal year), the difference is referred to as a deficit. Otherwise, the difference is a surplus. Of course, the size of the reported deficit or surplus depends on which items are included in the underlying budget.
  3. Discretionary and mandatory spending
    1. Currently, less than half of federal spending is truly controlled by appropriations acts.
    2. Conceptually, mandatory (or direct) spending refers to budget authority and outlays provided for in authorizing legislation, whereas discretionary spending is that provided for in appropriations acts. Thus, "mandatory" and "discretionary" refer to legislative processes, not the relative merits or importance of the programs being funded. More precisely:
      1. Mandatory spending is budget authority and outlays provided in authorizing legislation, rather than appropriations acts; by entitlement authority, even if nominally funded through an appropriations act; and by the Food Stamp program.
      2. Discretionary spending is budget authority and outlays provided for by appropriations acts, other than mandatory spending.
    3. Generally, mandatory spending is under the jurisdiction of authorizing committees; discretionary spending, the appropriations committees.
    4. Mandatory spending is usually obligated by permanent authorizing law, even if it nominally requires an annual appropriation (as with Medicaid).
    5. Discretionary spending is currently about one-third of the total budget.
    6. Entitlements, a common form of mandatory spending, are legal obligations to make payments to beneficiaries meeting eligibility requirements defined by law. Because the total outlay for an entitlement is indirectly determined by eligibility criteria and payment formulas, rather than a dollar figure set in an appropriations act, the spending is called relatively uncontrollable.
  4. The budget process
    1. The need for an annual budget process stems from the conflict between demands of stakeholders in federal agencies, the executive branch, Congress, and the public, which leads to bottom-up spending decisions, and the need to constrain and coordinate spending, which requires a top-down decision process.
    2. The annual budget process is marked at its beginning by the president's submission to Congress of the president's budget for the following fiscal year in early February.
      1. The president's budget is just a recommendation.
      2. The presidential budget process was established by the Budget and Accounting Act of 1921, which also established the Bureau of the Budget, now known as the Office of Management and Budget (OMB).
    3. Congress has its own budget process, established by the Congressional Budget and Impoundment Control Act of 1974, also known as the Congressional Budget Act. The act detailed aspects of the Congressional budget process, including the Congressional budget resolution, and also established the House and Senate Budget Committees and the Congressional Budget Office.
    4. The Congressional budget resolution, also known as the concurrent budget resolution, provides an outline of Congress' budget policy for the upcoming fiscal year, as well as following years..
      1. It is a joint resolution of the House and Senate; as such, it needs no presidential signature, and does not carry the force of law.
      2. It lists revenue, new budget authority, outlays, surplus or deficit, and the level of public debt.
      3. It allocates spending among 20 spending categories known as budget functions.
      4. Sometimes the resolution contains reconciliation instructions (see below).
    5. Discretionary spending totals are allocated to the House and Senate Appropriations Committees, and from there to their subcommittees, by Section 302 allocations. Each subcommittee attempts to draft a single appropriation bill. If annual appropriations acts are not passed, nonessential federal government functions may be shut down. This may be temporarily avoided if Congress passes a continuing resolutions which, when signed into law by the president, allow government spending to continue at a specified rate. Finally, supplemental appropriations may be enacted outside the 13 regular bills.
    6. Unlike the annual appropriations process, revenue and mandatory spending are typically provided for by permanent law and often change little. Sometimes revenue or mandatory spending must be adjusted to conform with the aggregates set in the budget resolution, in which case the latter contains reconciliation instructions to the authorizing committees, resulting in reconciliation bills.
    7. Additional features of the budget process include:
      1. a calendar of target dates for completing various parts of the process;
      2. incrementalism: annual changes are usually at the margin;
      3. a historical evolution of mechanisms designed to constrain spending; and,
      4. limits on debate on the floor of the House and Senate for budget-related bills.
  5. Budget control and enforcement beyond the Congressional Budget Act
    1. Beginning in the 1980s, various additional mechanisms were developed in an attempt to contain large federal budget deficits.
    2. Gramm-Rudman-Hollings Acts
      1. This legislation is also known as the Deficit Control Act.
      2. The formal names of the two acts are Balanced Budget and Emergency Deficit Control Act of 1985 and Balanced Budget and Emergency Deficit Control Reaffirmation Act of 1987.
      3. Gramm-Rudman Hollings attempted to control the deficit through deficit caps, to be enforced by sequestration. A sequester is an across-the-board cut in budgetary resources, typically across a broad section of the budget (such as most discretionary funding).
    3. Budget Enforcement Act (BEA)
      1. The Budget Enforcement Act of 1990 was essentially in effect through fiscal year 2002, after being extended through subsequent legislation.
      2. BEA deemphasized deficit targets and instead attempted to control spending through spending caps and to ensure revenues were not cut without offsetting spending cuts.
      3. BEA had three main components:
        1. Adjustable deficit/surplus targets (though this was not of prime importance).
        2. Discretionary spending caps, enforced with the threat of a sequester.
        3. Pay-as-you-go (or PAYGO) rules for revenues and mandatory spending, also enforced with the threat of a sequester.
          1. Under PAYGO, new legislation that increased mandatory spending or decreased revenues was to be offset by other newly legislated changes that either decreased other mandatory spending or increased other revenues.
          2. Violation of PAYGO rules was to lead to a sequester on mandatory spending; however, the funds vulnerable to sequestration were limited (e.g., Social Security was immune from sequestration).
          3. Because mandatory spending and revenues vary with economic and demographic conditions, the impact of changes in law are compared to a baseline, which is a projection of revenues or spending with permanent law left unchanged. Such projections, used throughout the budget process, depend on various economic and demographic assumptions and are a common source of controversy.
  6. Budget implementation
    1. Impoundment occurs when the president delays or cancels budget resources (these actions are termed deferrals and recissions, respectively). Under procedures established by the Congressional Budget and Impoundment Control Act of 1974, Congress regulates executive impoundment of funds that stem from policy disagreements with Congress.
    2. Agencies may obligate funds only during the period specified in law. Agencies may attempt to shift budgetary resources between accounts (a transfer) or between purposes within an account (a reprogramming).

A More Detailed Discussion of the Federal Budget

Basic terminology and principles

The sequence behind government spending

Government action on spending typically occurs in this order: authorization, appropriation, budget authority, obligation, outlay.

Authorizations

Generally, funds cannot be budgeted until the agency or program that will receive those funds is established. Substantive legislation establishing, changing, or continuing federal agencies and programs, specifying their structure and powers, is referred to as authorizations.

Authorizing law is often permanent law, meaning that the law is in force until preempted by subsequent legislation (though authorizations can also be made for specified time periods). Authorizations are enacted irregularly, not following an annual schedule (as appropriations do; see below). Most congressional committees are authorizing committees.

Some authorizations (e.g., those providing for entitlements) do provide budget authority (see discussion below on mandatory spending).

Confusingly, authorizations usually have language authorizing Congress to consider an appropriation. This is usually formulated as "authorized to be appropriated," and, while setting a limit on the amount of funds that may be appropriated, does not itself constitute an appropriation.

Again, an authorization is passed before its corresponding appropriation.

Appropriations

The federal government can spend money only pursuant to legislation passed by Congress and signed into law by the president. Article I, Section 9 of the Constitution states that "No money shall be drawn from the treasury, but in consequence of appropriations made by law..." Thus, legislation providing funds (more precisely, budget authority) to agencies and programs is termed appropriations.

By tradition going back to the First Congress, authorizations and appropriations are usually (but not always) kept separate, with appropriations specifying only the amount of budget authority. This principle is specified in House Rule XXI and Senate Rule XVI, adopted in the 1800s. Again, going back to the First Congress, appropriations are traditionally enacted annually, for the upcoming fiscal year only; these are annual appropriations. There are also multiyear appropriations.

Permanent appropriations, described by permanent, substantive law, usually do not specify the amount appropriated and are in force until a new, superceding law is passed. (Hence no annual action by Congress is needed.) The amount appropriated is governed instead by eligibility criteria and payment formulas set in authorizing law; see the discussion below on mandatory spending. Social Security, for example, has a permanent appropriation.

An appropriations bill typically begin with an enacting clause that specifies the fiscal year, funds appropriated for each account, and other provisions such as limitations on the use of funds.

Annual appropriations are traditionally split among 13 appropriations bills. Each bill is the province of a single pair of subcommittees of the House and Senate Appropriations Committees. The two appropriations committees were founded in the wake of the Civil War, have traditionally worked to constrain spending, and currently control roughly one-third of the budget. These committees are usually active because of the annual nature of the appropriations process and the fact that the government will be forced to shut down unessential operations if appropriation bills are not passed on time.

Other classes of appropriations bills include supplemental appropriations, which are in addition to the regular appropriations bills noted above, and continuing appropriations (often continuing resolutions). The latter function as a stopgap measure when the appropriations process is delayed and usually provide budget authority at a given rate for a specified people of time (perhaps as little as a week).

Changes in annual appropriations tend to be made at the margin; large changes in federal programs are typically made by the authorization committees, not the appropriations committees.

Appropriations bills have traditionally originated in the House, but sometimes the Senate initiates spending bills. There has historically been a tension between the authorization and appropriations committees; authorization committees may include appropriations-forcing language in their bills, and appropriations acts may contain substantive law. Both types of committees earmark funds, often against the wishes of agencies.

Budget authority

Budget authority is the legal authority to incur financial obligations that will result in immediate or future outlays of federal government funds.

There are many potential sources of budget authority:

  • appropriations (typically annual or permanent), by far the most common form;
  • borrowing authority, usually for business-like activities, whereby agencies borrow funds (usually from the Treasury) to make obligations;
  • contract authority, usually for transportation programs, which allows obligations to be incurred in advance of an appropriation or the collection of a receipt; and,
  • spending authority from offsetting collections, in which payments are made from collections.

Most outlays come from new budget authority, but some come from old (unused) budget authority from a previous fiscal year. (Note that appropriations must be obligated during the fiscal year(s) for which they are provided.) Conversely, not all new budget authority is obligated in a given fiscal year; see Chart 19-1 on p. 398 of The Budget of the United States: Analytical Perspectives for a schematic example. (In budget tables, budget authority is recorded in that fiscal year for which it is first available, even if it is eventually carried over to a future fiscal year. Budget authority stemming from permanent, indefinite appropriations, as in the case of some entitlements, is recorded in the fiscal year during which it is obligated.) The rate at which budget authority is spent is called the spendout rate . For example, salaries will incur a high spendout rate; ship construction, a low spendout rate.

Obligations

Obligations are commitments to make payments, immediately or in the future. Examples include contracts and purchase orders.

Outlays

An outlay is a payment (usually a check drawn on the Treasury, or in cash) by the government in fulfillment of an obligation. Note that Congress has direct control over the level of budget authority, not the level of outlays.

Direct loans (lent directly by the federal government) and loan guarantees (loans made by nonfederal entities but insured by the federal government) received new budgetary treatment by the Federal Credit Reform Act of 1990. The budgeted amounts now reflect the estimated subsidy cost of loans or loan guarantees (see Shick or "Budget system and concepts and glossary" for details), allowing a more direct comparison of the costs of loans versus loan guarantees.

Receipts

Funds taken in by the government are called receipts. They include revenues and offsetting receipts. Note that borrowed funds (e.g., those collected by the Treasury by issuing debt) are not counted as receipts (nor is repayment of principle an outlay).

Revenues

Revenues are typically funds collected by the exercise of the government's sovereign powers, such as taxes, duties, and fines. Specific examples include individual and corporate income taxes, excise taxes, estate and gift taxes, Social Security and Medicare contributions, customs duties, and Federal Reserve earnings. Some budget documents refer to revenues as receipts or federal governmental receipts.

A tax can be instituted only by legislation: Article I, Section 8 of the Constitution begins, "The Congress shall have power to lay and collect taxes..." Furthermore, the legislation must originate in the House: Section 7 of the Constitution begins with the statement that "All bills for raising revenue shall originate in the House of Representatives..." Such bills typically begin in the House Ways and Means Committee.

Like authorizing legislation, and unlike the annual appropriations cycle, revenue legislation is enacted irregularly.

Revenues, but not offsetting collections and receipts, were included in the PAYGO rules (see below).

Tax expenditures are tax breaks and loopholes that reduce the tax liabilities of targeted taxpayers. They include revenue losses from deductions, exemptions, credits, special exclusions, preferential tax rates, or deferred tax liabilities, and other exceptions to the tax code. Projected income tax expenditures may be found in Chapter 6 of Analytical Perspectives, Budget of the United States Government, Fiscal Year 2004.

Offsetting collections and receipts

Offsetting collections and receipts are recorded as negative budget authority and outlays, rather than being listed as receipts. If they are authorized to be credited to the account from which they will be spent, at the program or account level, they are termed offsetting collections; examples include Postal Service stamp sales. If instead they are deducted at a higher level, that of a receipt account (usually at an agency and subfunction level), they are termed offsetting receipts. For example, National Park fees are deducted from the budget totals for the Department of the Interior. Finally, undistributed offsetting receipts are deducted at the government-wide level. These include, for example, outer continental shelf rents and royalties.

Offsetting collections and receipts have two general sources: business-like activities of government (such as asset sales, income of governmental enterprises, and some user fees), and intragovernmental transactions (such as agency payments to employees' retirement account). Specific examples of the former include Supplemental Medical Insurance (Medicare Part B) premiums, receipts from timber and oil leases, and proceeds from the sale of electric power.

Debt

Federal debt, or gross debt, is the value of outstanding securities issued by the federal government. Most federal debt is Treasury debt (also known as public debt), issued by the US Treasury. Agency debt is the small amount of debt issued directly by federal agencies (mainly the Postal Service and the Tennessee Valley Authority).

Treasury debt can be broken down into two components:

  • debt held by the public (not to be confused with public debt, above), i.e., debt held by nonfederal entities (individuals, corporations, state and local governments, foreign governments, and foreign central banks) and the Federal Reserve System; and
  • debt held by federal government accounts (mainly trust funds).

The debt subject to statutory limit consists of almost all gross debt. (In particular, it includes almost all Treasury debt, but excludes most agency debt.) The limit itself is the debt limit, or debt ceiling. By law, the total value of this debt cannot exceed the limit. The debt limit is periodically raised by legislation.

By law, trust fund surpluses must be invested in federal government securities.

Money the Treasury collects from selling securities and disbursed by repayment of principal is viewed as financing and is not counted as receipts or outlays.

Fiscal year

The federal government's fiscal year is a yearly accounting period beginning October 1 and ending September 30. <1> It is designated by the calendar year in which it ends: for example, fiscal year 2002 began October 1, 2001 and ended September 30, 2002.

Scope of the budget

Unified budget

The unified budget is the broadest measure of the federal budget and consists of four types of funds: general funds, trust funds, special funds, and revolving funds. Federal funds are all funds except for trust funds. The unified budget was adopted in 1968, when it was decided that trust funds should be included.

  • General funds, comprising about two-thirds of the budget, have no direct link between how they are raised and spent. General fund receipts include income and excise taxes; general fund spending includes military spending, interest on the debt, and operating expenses of government.
  • Trust funds are designated by statute, receive earmarked collections, and are charged with particular outlays, but are not trusts in that the government (not the beneficiaries) owns the funds and has no fiducial obligations. There are more than 150 trust funds; examples include Social Security, Medicare, the Highway trust fund, and the Airport and Airway trust fund. By law, trust funds must lend their surpluses to the government.
  • Special funds are similar to trust funds. Examples include the Land and Water Conservation Fund and the National Wildlife Refuge Fund.
  • Revolving funds finance their operations through income derived from their business-like activities. Public enterprise funds have transactions with the public; intragovernmental revolving funds conduct operations between or within government agencies.

The unified budget totals are often divided into two parts, those from off-budget and on-budget items. Currently, Social Security and the Postal Service are off-budget. However, reports on the budget (both official and in the mass media) often include both on- and off-budget items. This makes the current budget picture rosier, as Social Security is running large surpluses. On the other hand, the budget does not reflect future liabilities of Social Security, Medicare, or pension insurance; these potential liabilities, together, are in the trillions of dollars.

The list of off-budget items is often not consistent. For example, the first $20 billion assigned to the savings and loan bailout was on-budget, and the next $30 billion was off-budget.

Government-sponsored entities are private entities established and implicitly backed by the government, such as the Federal National Mortgate Association (FNMA, or Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC, or Freddie Mac); they are excluded from the budget. The budget does, however, reflect liabilities of government-owned enterprises.

Finally, unlike some state and local governments, capital and operating expenses are not segregated.

Deficits and surpluses

If outlays exceed receipts in a given period (usually a fiscal year), the difference is referred to as a deficit. Otherwise, the difference is a surplus. Of course, the size of the reported deficit or surplus depends on which items are included in the underlying budget. Currently, the deficit reported is based on both on- and off-budget items; if the Social Security surplus (which is nominally off-budget) is excluded, the deficit is considerably larger.

Discretionary and mandatory spending

Definitions

Conceptually, mandatory (or direct) spending refers to budget authority and outlays provided for in authorizing legislation, whereas discretionary spending is that provided for in appropriations acts. More precisely, mandatory spending is budget authority and outlays provided in authorizing legislation, rather than appropriations acts; by entitlement authority, even if nominally funded through an appropriations act; and by the Food Stamp program. Discretionary spending is budget authority and outlays provided for by appropriations acts, other than mandatory spending. "Mandatory" and "discretionary" refer to legislative processes, not the relative merits or importance of the programs being funded.

Entitlements, a common form of mandatory spending, are legal obligations to make payments to beneficiaries meeting eligibility requirements defined by law. Because the total outlay for an entitlement is indirectly determined by eligibility criteria and payment formulas, rather than a dollar figure set in an appropriations act, the spending is called relatively uncontrollable.

Mandatory spending

Mandatory spending is generally under the jurisdiction of authorizing committees. It is usually obligated by permanent authorizing law, even though most entitlements (like Medicaid) nominally require an annual appropriation. In this sense, it can be said that for mandatory spending, obligation precedes appropriation.

Interest on the federal debt is a form of mandatory spending.

Discretionary spending

Discretionary spending is under the jurisdiction of the two appropriations committees and constitutes about one-third of the unified federal budget (including off-budget items).

The budget process

Necessity

The need for an annual budget process stems from the conflict between demands of stakeholders in federal agencies, the executive branch, Congress, and the public, which leads to bottom-up spending decisions, and the need to constrain and coordinate spending, which requires a top-down decision process.

The presidential budget process

The presidential budget process was established by the Budget and Accounting Act of 1921. The main feature of this system is that the president creates a budget and submits it to Congress, instead of agencies themselves directly petitioning Congress for funds. The purpose of the presidential budget process was to increase budget coordination and restrain spending; historically, it has given the president a greater influence over the budget.

The Budget and Accounting Act of 1921 also established the Bureau of the Budget, now known as the Office of Management and Budget (OMB). OMB is in charge of much budget compilation and analysis, and is expected to advocate the president's budget policies.

The presidential budget is only a recommendation to Congress. It is formed in consultation with federal agencies and is submitted to Congress in early February of each year. The presidential budget, like the Congressional budget, is made in regard to the upcoming fiscal year.

The Congressional budget process

Congress has its own budget process, which interacts with but is independent of the presidential budget process. It was established by the Congressional Budget and Impoundment Control Act of 1974, also known as the Congressional Budget Act. The act detailed aspects of the Congressional budget process, including the Congressional budget resolution, and also established the House and Senate Budget Committees and the Congressional Budget Office (CBO). The act's purpose was to give Congress an independent position on the budget (as demonstrated by the fact that the budget resolution does not require a presidential signature) and provide greater coordination and accountability. The greater degree of coordination is important, and Congress itself is a large, decentralized institution; as pointed out in Schick's The Federal Budget: Politics, Policy, Process,

CBA balanced budgetary integration and legislative fragmentation by layering the budget resolution on top of existing authorizations, appropriations, and revenue processes.

The Congressional budget resolution, also known as the concurrent budget resolution, provides an outline of Congress' budget policy for the upcoming fiscal year, as well as a few following years and functions as a developmental framework. It is a joint resolution of the House and Senate; as such, it needs no presidential signature, and does not carry the force of law. The resolution is mandated to give figures for outlays and new budget authority, revenues, surplus or deficit, and the level of public debt, but not aggregates for Social Security. Additionally, budget authority and outlays are allocated among twenty categories known as budget functions. Sometimes the resolution also contains reconciliation instructions (see below). The House and Senate Budget Committees are in charge of the budget resolution and any reconciliation bill. The budget resolution is intended to be adopted by April 15, but this date is often not met.

Discretionary spending

Appropriations committees begin with the presidential budget proposal, as well as testimony from the OMB and federal agencies before the relevant subcommittees. Information from the subcommittees flows back to the committee heads and the budget committees (partly through formal views and estimates reports). After the budget resolution has passed, discretionary spending totals are allocated to the House and Senate Appropriations Committees, and from there to their subcommittees, by Section 302 allocations. Each subcommittee attempts to draft a single appropriation bill. If annual appropriations acts are not passed, nonessential federal government functions may be shut down. This may be temporarily avoided if Congress passes a continuing resolution that the president signs into law.

Mandatory spending and revenues

Unlike the annual appropriations process, revenue and mandatory spending are typically provided for by permanent law and hence do not require annual action. Sometimes revenue or mandatory spending must be adjusted to conform with the aggregates set in the budget resolution, in which case the latter contains reconciliation instructions to the authorizing committees, resulting in reconciliation bills. The instructions deal with aggregates, not program details, and use CBO baselines. Social Security is exempted from the reconciliation process.

The reconciliation process was established by the Congressional Budget Act.

Other features of the Congressional budget process

The Congressional budget process includes a calendar of dates by which parts of the process are to be completed; these targets are often not met, especially if the budget discussion is particularly contentious.

Debate on certain budget items is restricted. The budget resolution itself cannot be filibustered in the Senate. In the House, points of order can be used on the floor to attempt to enforce appropropriations subcommittees' aggregate allocations (the Section 302(b) allocations); the Senate has similar mechanisms. (Note that in the House, only a majority is needed to waive the point of order, however. Many points of order concerning the budget in the Senate need 60 votes to be waived.) Reconciliation bills cannot be filibustered, and the Senate restricts provisions in and amendments to reconciliation bills via the Byrd Rule and rules on germaneness, respectively.

The budget process is marked by incrementalism, with most annual changes made at the margin. Often, appropriations subcommittees use the previous year's budget as a minimal amount and the president's request as a maximal amount.

Details of how funds are to be spent create tensions between members of Congress and between different Congressional committees. Members often earmark funds, often against the wishes of federal agencies, which prefer greater discretion on spending. Members try to gain the appreciation of their constituents by "bringing pork home to their districts."

Finally, various mechanisms have evolved to constrain spending.

Budget control and enforcement beyond the Congressional Budget Act

Federal deficits began to balloon in the 1980s, despite mechanisms in the Congressional Budget Act designed to contain spending. This led to the development of various mechanisms that attempted (with varying degrees of success) to contain the deficits.

Gramm-Rudman-Hollings Acts

The Gramm-Rudman-Hollings Act, also known as the Deficit Control Act, consists of two acts formally known as the Balanced Budget and Emergency Deficit Control Act of 1985 and the Balanced Budget and Emergency Deficit Control Reaffirmation Act of 1987. This legislation attempted to control the deficit through a series of deficit caps, scheduled over many years. The caps were to be enforced by a novel process called sequestration. A sequester is an across-the-board cut in budgetary resources, typically across a broad section of the budget (such as most discretionary funding). Sequestration could be suspended in the event of war or recession by legislation.

The Gramm-Rudman-Hollings Act is generally regarded as having failed to achieve its goal of deficit control.

Budget Enforcement Act

The Budget Enforcement Act of 1990 (BEA) formally amended the Budget and Accounting Act of 1921, the Congressional Budget Act of 1974, and the two Gramm-Rudman-Hollings Acts. It itself was subsequently amended, most notably by the Balanced Budget Act of 1997, which extended the BEA through the end of fiscal year 2002.

BEA deemphasized direct deficit targets and instead attempted to control spending through spending caps and to ensure revenues were not cut without offsetting spending cuts. BEA also emphasized the distinction between discretionary and mandatory spending. The sequestration mechanism introduced by Gramm-Rudman-Hollings was maintained in the BEA. Adjustable deficit/surplus targets are continued with BEA, but are not of primary importance.

Discretionary spending, easier to project than mandatory spending and revenues, and under the control of the appropriations committees, was to be controlled by spending caps, enforced by the threat of a sequester. The caps could be raised by legislation. The caps were sometimes evaded through the use of emergency, advance or delayed appropriations, delayed payouts, and raids on PAYGO accounts (see below).

Pay-as-you-go (or PAYGO) rules attempted to constrain mandatory spending and cuts in revenues. New legislation increasing mandatory spending or decreasing revenues was to be offset by other newly legislated changes either decreasing other mandatory spending or increasing other revenues. Violation of PAYGO rules was to lead to a sequester on mandatory spending; however, the funds vulnerable to sequestration were limited (e.g., Social Security was immune from sequestration). PAYGO could be somewhat manipulated by manipulating baseline assumptions (see below) or backloading spending increases.

Baselines

Because mandatory spending and revenues vary with economic and demographic conditions, the impact of changes in law are usually compared to a baseline, a projection of revenues or spending with permanent law left unchanged. The purpose of a baseline is to allow a comparison between proposed spending levels and those needed to keep program services at a constant level.

Such projections, used throughout the budget process, depend on various economic and demographic assumptions and are a common source of controversy because of the complicated interaction between spending and revenue legislation and the economy. (For example, more optimistic economic projections leave room for the loosening of constraints on spending (or tax cuts).) The assessment of the budgetary impacts of particular legislative measures is called scoring. Static scoring takes account of behavioral changes in the public induced by new legislation that can be reliably estimated, and is contrasted with the more controversial dynamic scoring.

Depending on the baseline used, the same legislative proposal could be seen as either a spending increase or cut.

Budget implementation

Impoundment

Impoundment occurs when the president delays or cancels budget resources (particularly those provided by appropriations). A delay is called a deferral; a cancellation, a recission.

While it is understood that the president should have some authority not to spend all the funds that Congress has seen fit to appropriate (for example, for reasons of efficiency or routine financial management), the impoundment of funds owing to policy differences has been held to be an abrogation of the intent of Congress. As such, Congress established procedures in the Congressional Budget and Impoundment Control Act of 1974 to secure its prerogatives by regulating executive impoundment of funds that stem from policy disagreements with Congress.

Allotment of funds

Agencies may not obligate more funds than were originally appropriated, may obligate funds only during the period specified in law, and only for purposes permitted by law. Agencies may attempt to shift budgetary resources between accounts (a transfer) or between purposes within an account (a reprogramming). Congress regulates transfers and reprogrammings.

Tables and Figures

Table 1: History surrounding the federal budget

late 1600sprinciple of parliamentary control of taxes and spending developed in England
US Constitution
Congress given power to tax and spend
revenue bills must originate in House
First Congress
tradition of separation of authorization legislation and appropriations acts
tradition of appropriations originating in House
1800s
public budget accounting developed in Europe
Congress adopts rules formalizing distinction between authorizations and appropriations
post-Civil WarHouse, Senate Appropriations Committees created
1921Budget and Accounting Act establishes presidential budget system and the Bureau of the Budget (now OMB)
1968unified budget accounting adopted
1974Congressional Budget and Impoundment Control Act establishes Congressional budget process, CBO
1985Gramm-Rudman-Hollings act attempts to control deficits
1990Budget Enforcement Act attempts to control spending
2002last year Budget Enforcement Act (as amended) in effect

Table 2: The 13 regular appropriations bills

  1. Agriculture, rural revelopment, Food and Drug Administration
  2. Commerce, Justice, State, Judiciary
  3. Defense
  4. District of Columbia
  5. Energy and water development
  6. Foreign operations, export financing
  7. Homeland Security
  8. Interior
  9. Labor, Health and Human Services, Education
  10. Legislative Branch
  11. Military construction
  12. Transportation, Treasury, General Government
  13. Veterans Affairs, Housing and Urban Development, Independent Agencies
Note: This list recently changed with the addition of the Homeland Security category.

Table 3: The 20 budget functions

Function numberBudget function
050National defense
150International affairs
250General science, space, and technology
270Energy
300Natural resources and environment
350Agriculture
370Commerce and housing credit
400Transportation
450Community and regional development
500Education, training, employment, and social services
550Health
570Medicare
600Income security
650Social Security
700Veterans benefits and services
750Administration of justice
800General government
900Net interest
920Allowances
950Undistributed offsetting receipts
Source: House Committee on the Budget, "Basics of the budget process: a briefing paper," February 2001

Table 4: Budget calendar

First Monday in FebruaryDeadline for submission of president's budget
6 weeks after president's budget submissionDeadline for committees to submit their "views and estimates" to the Budget Committees
April 15Congress passes Congressional budget resolution
May 15House may consider annual appropriations bills, even if budget resolution not yet adopted
June 10House Appropriations Committee reports the last of its annual appropriations bills
June 15Congress completes actions on reconciliation bills (if necessary)
June 30House completes action on House appropriations bills
July 1 - September 30Senate completes actions on Senate appropriations bills; conference committee completes action on appropriations, reports to floors of House and Senate; joint appropriations bills pass both chambers
October 1Fiscal year begins
Note: Congress often fails to meet the deadlines in this schedule

Sources:

  1. Analytical Perspectives, Budget of the United States Government, Fiscal Year 2004
  2. Stanley E. Collender, The Guide to the Federal Budget: Fiscal 2000, The Century Foundation Press, New York, 1999
  3. House Committee on the Budget, "Basics of the budget process: a briefing paper," February 2001

Recommended Reading

The work most useful in compiling these notes was Schick's The Federal Budget: Politics, Policy, Process.

Footnotes

<1> Before 1977, the fiscal year ran from July 1 to June 30. For example, fiscal year 1976 began July 1, 1975 and ended June 30, 1976. The three month period, July 1, 1976 to September 30, 1976, between fiscal years 1976 and 1977 is called the transition quarter ("TQ").

References

  1. Analytical Perspectives, Budget of the United States Government, Fiscal Year 2004
  2. "Budget system and concepts and glossary," Budget of the United States Government: Fiscal Year 2004
  3. Stanley E. Collender, The Guide to the Federal Budget: Fiscal 2000, The Century Foundation Press, New York, 1999
  4. Congressional Budget Office, "Glossary of budget and economic terms"
  5. House Committee on the Budget, "Basics of the budget process: a briefing paper," February 2001
  6. Allen Schick, The Federal Budget: Politics, Policy, Process, Brookings Institution Press, Washington, DC, 2000
  7. Section 9, Statistical Abstract of the United States: 2002.
  8. Sandy Streeter, "The Congressional Appropriations Process: An Introduction," CRS Report for Congress, August 3, 1999