“The Senate voted unanimously on Wednesday to reject a $3.7 trillion budget plan that President Obama sent to Capitol Hill in February.” (TheHill.com, 5/25/2011)

“Congressional Republicans are in the midst of a campaign designed to highlight the fact that the federal government has gone almost 1,000 days without a budget—operating on short-term spending bills instead. (Politico.com, 1/23/2012)

KEY FACTS

  • Constitutional authority for the U.S. Budget:  Constitution, Art. 9, Sec. 7.
  • Federal deficit spending more than tripled between 2008 and 2009.
  • In 1965, the U.S. government spent $11,431 per household. In 2010, it spent $29,401. In 2021, it is projected to spend $35,773.
  • In 1945, there were 42 workers for each Social Security beneficiary. By 1960 that number had dropped to 5.1, and today it is 2.9. By 2031, it is expected to decline to 2.1. 
  • Agencies responsible for budgetary matters in the federal government: Office of Management and Budget (OMB), Department of the Treasury, Government Accountability Office (GAO), Congressional Budget Office (CBO), and the Joint Committee on Taxation

What is the federal budget?

Article 1, Section 9, of the Constitution states that “[n]o Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of Receipts and Expenditures of all public Money shall be published from time to time.”  Consequently, federal agencies cannot spend money unless Congress first authorizes and appropriates the funds.

According to the Budget and Accounting Act of 1921, the President is also required to submit a budget to Congress annually that details expenditures for the upcoming fiscal year. He must submit his budget request no later than the first Monday in February.

The Congressional Budget Act of 1974 states that Congress must make an annual budget resolution that sets limits on spending and revenue targets for the upcoming fiscal year. The budget resolution also indicates whether the government is planning to operate with a budget deficit or a budget surplus. A budget deficit occurs when the government spends more money than it takes in through tax revenue, and a budget surplus arises when the government collects more than it spends. The graph below displays the annual federal budget deficits and surpluses since 1970.

U.S. Federal Deficit/Surplus (in Millions of $)

 

Data from the Congressional Budget Office and the Office of Management and Budget

The graph reveals an unprecedented level of deficit spending ($1.41 trillion) for fiscal year 2009, which was over three times the level of deficit spending that occurred in 2008. The federal government continued this high level of deficit spending in both 2010 and 2011. Interestingly, Congress has been operating recently without a budget, as they have failed to pass a budget resolution since April 29, 2009.

When the government runs a deficit, it has to borrow the extra money it spends from lenders; the government goes into debt. The national debt, which is the total amount of money that the United States government owes to its lenders, was over $15.3 trillion as of February 6, 2012.

What is the process for passing a budget into law?

Federal spending is broken down into two main categories: mandatory spending and discretionary spending. The spending for mandatory programs, such as Social Security, Medicare, and Medicaid, is governed through permanent laws. However, the spending for discretionary programs, such as defense, has to be approved and allocated by Congress before the beginning of each fiscal year.

  1. The administration prepares a budget every February for the next fiscal year, which begins the following October
  2. The President sends the budget request to Congress, where budget committees in both the Senate and the House draft a budget resolution, which sets spending limits and revenue targets.
  3. The budget resolution goes to the House and Senate floors, where it can be debated, amended, and passed by majority vote.
  4. The discretionary spending totals that are set in the budget resolution are broken down into an allocation table, and the allocation is sent to the Appropriations Committee, who decides how to divide the funds among its subcommittees.
  5. The subcommittees create twelve appropriations bills, which provide funding for discretionary programs. The total amount of spending in the appropriations bills must not exceed the amount allocated by Congress in the budget resolution.
  6. All or some appropriations bills may be combined into an omnibus reconciliation bill.
  7. As a stopgap measure or in an emergency, the President may request a supplemental appropriations bill or an emergency supplemental appropriations bill, respectively, which Congress then votes on.
  8. Once an appropriations bill is passed by Congress, it is sent to the President, who may either sign it into law or veto it.  If he vetoes it, it is sent back to Congress for reconsideration.  If two-thirds of the members in each chamber vote to approve it, it becomes law.

What government agencies are chiefly responsible for producing the budget?

Office of Management and Budget.  The primary function of OMB is to aid the President in preparing his annual budget and to oversee its implementation through the agencies of the Executive Branch.  It evaluates policies and programs to ensure that they are in line with the President’s Budget and policies.  It also manages the Administrations financial and regulatory policies.

Department of the Treasury.  Among the budgetary responsibilities of the Department of the Treasury is the estimation of federal revenues on behalf of the Executive Branch, advising on matters pertaining to tax and fiscal policy, enforcing tax laws and regulations, paying bills of federal agencies, managing financial accounts, and administering the public debt of the U.S.

Government Accountability Office.  Formerly known as the General Accounting Office, the mission of the GAO is to investigate the ways in which public funds are collected, disbursed, and spent and to produce reports to the President and Congress about the results of its findings.  It works to promote efficiency in the way in which funds are spent in order to reduce waste and corruption.  It also conducts audits of government agencies and non-profits, non-governmental organizations (NGOs), and contractors receiving government funds.  It is overseen by a non-partisan Comptroller General, who is selected by the President from a list drawn up by a bipartisan committee from the Senate and House; the Senate must approve his selection.

Congressional Budget Office.  The CBO is a nonpartisan office whose central budgetary role is to provide Congress with objective data and analysis to aid members in their deliberations about various proposed and existing federal programs.  It also provides estimates to Congress about the impact of proposed and existing spending in various programs.

Joint Committee on Taxation.  The Joint Committee is primarily responsible for investigating the administration and effects of federal taxation and to make recommendations to Congress about tax revenues.  It is composed of five members each from the Senate Finance Committee and the House Ways and Means Committee.

What are the main components of federal spending?

In 2011, the United States government spent $3.6 trillion. Approximately 62% of this spending was on mandatory programs and 38% was on discretionary programs. The pie chart below divides federal spending into its seven major categories for the year 2011.

 

U.S. Federal Spending in 2011 by Major Category

 

Data from the Congressional Budget Office

The pie chart shows that the major entitlement programs (Social Security, Medicare, Medicaid) accounted for approximately 41 percent of the federal budget in 2011.

What are entitlement programs?

Social Security, Medicare, and Medicaid are mandatory spending programs that are often called “entitlement programs” because those who meet the criteria for benefits are entitled to them, especially since most have been paying into them throughout their working lives.  These programs are funded by permanent laws, unlike other entitlement programs, such as the Supplemental Nutrition Assistance Program (SNAP, formerly called Food Stamps), which is funded through the regular appropriations process.

The expenditures and revenues from programs such as Social Security, Medicare, and the federal portion of Medicaid are calculated according to a cash basis method.  This method recognizes revenue only when actual money comes in and recognizes expenditures only when actual money is paid out.  Under the alternative accrual method of accounting, revenue is recognized when it is earned (not necessarily when it is received) and liabilities are recognized when they are incurred (not when they are paid).

As the CBO has noted, the effect of using the cash basis method for calculating the costs of major entitlement programs is that while liabilities are incurred today, they do not appear on the books until far into the future.  As a result, the true costs of these programs are not made clear today, and the full impact of these obligations on public revenues is distorted.  For example, if a worker is twenty-five years old today and is paying into Social Security, and he is not expected to receive any Social Security benefits until he turns 67, the cost to the federal government (and therefore to the taxpayer) is only recognized forty-two years later, when he receives his first payment from the program.

Social Security.  The Old-Age, Survivors, and Disability Insurance (OASDI) program, more commonly known as Social Security, is funded via a payroll tax of 12.4%.  As the official name implies, it is a program designed to help people when they get older, surviving spouses, and the severely disabled.  The money collected is credited to what is called the “Social Security Trust Fund,” but the funds are not actually placed into a separate account.  Rather, they are sent to the Treasury and may be used for any U.S. government program.  The “Trust Fund” holds no real assets.  Rather, it contains special non-marketable Treasury securities, which would have to be redeemed by raising taxes, borrowing from the public, or cutting expenditures.

Medicare.  Medicare is a medical insurance plan for older people and the disabled.  It consists of four parts, each with different funding mechanisms:  1) Hospital Insurance, funded through a dedicated payroll tax of 5.8% of earnings; 2) Supplementary Medical Insurance, about 75% of which is paid for from general revenues; 3) Part D, coverage for prescription drugs, also about 75% of which is paid for from general revenues; and 4) Medicare Advantage, funded by beneficiaries.

Medicaid.  Medicaid is a program designed to provide medical services to people with lower incomes.  It is funded jointly by the federal government and the states and is managed by the states.  While it is a means-tested program, poverty alone does not currently qualify one for the program.  Rather, one must not only have a low income but also fall into one of the qualifying categories:  children, parents of eligible children, pregnant women, people with disabilities, and older people needing nursing care.  However, under the Patient Protection and Affordable Care Act (sometimes called “Obamacare” by its critics), those falling under 133% of the federal government poverty line will be eligible for benefits as of 2014.

Skyrocketing Costs.  Changes in demographics largely account for the increasing costs of these programs.  For example, in 1945 there were 42 workers for each Social Security beneficiary, but due to declining birth rates by 1960 that number had dropped to 5.1, and today it is about 2.9.  By 2031, it is expected to decline to 2.1.  Similarly, the Congressional Research Service noted that Medicare costs, driven both by demographic factors and rising health-care costs, represented 3.1% of GDP in 2006 and would probably reach 7.0% by 2035 and 10.7% by 2080.  In fact, by 2028 Medicare costs will likely exceed those of Social Security, and by 2082, they are expected to be 85% more than Social Security.  Also, by 2019, participation in Medicaid is expected to increase by 27% and federal spending on the program is expected to increase by 22%.

The graph below shows the level of federal government spending in the seven major spending categories since 2000. It reveals that there has been a huge upward trend in the level of spending for all categories except net interest. As noted above, this spending is expected to skyrocket in future years.

 

U.S. Federal Spending 2000-2011 (in Billions of $)

 

 Data from the Congressional Budget Office and the Office of Management and Budget

Why is having a federal budget important?

The federal budget is a spending plan for the fiscal year. It provides Congress with a way to compare spending totals with expected revenue, so it can see how much of a deficit or surplus the government would run if the plan is followed. If spending proves to be too unrealistic, they can reanalyze their priorities and allocate spending more wisely.

Most importantly, the federal budget is a transparency measure, which allows the American people to see what the national government’s fiscal policy is for the upcoming year and where Congress plans to spend money before the money is spent, as opposed to finding out where the money went after it is already gone. The budget is also the most concrete way the federal government can display national priorities.

Without a budget resolution, Congress does not have an overall plan for allocating funds for the fiscal year, which can get the government into a very adverse situation, where they are spending unsustainable amounts of money and racking up large debt they will not realistically be able to repay. 

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