"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.
After reading this document, you should
Government action on spending typically occurs in this order: authorization, appropriation, budget authority, obligation, outlay.
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.
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 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:
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 are commitments to make payments, immediately or in the future. Examples include contracts and purchase orders.
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.
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 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 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.
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:
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.
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.
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.
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.
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.
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 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 is under the jurisdiction of the two appropriations committees and constitutes about one-third of the unified federal budget (including off-budget items).
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 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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
|late 1600s||principle of parliamentary control of taxes and spending developed in England|
|post-Civil War||House, Senate Appropriations Committees created|
|1921||Budget and Accounting Act establishes presidential budget system and the Bureau of the Budget (now OMB)|
|1968||unified budget accounting adopted|
|1974||Congressional Budget and Impoundment Control Act establishes Congressional budget process, CBO|
|1985||Gramm-Rudman-Hollings act attempts to control deficits|
|1990||Budget Enforcement Act attempts to control spending|
|2002||last year Budget Enforcement Act (as amended) in effect|
|Function number||Budget function|
|250||General science, space, and technology|
|300||Natural resources and environment|
|370||Commerce and housing credit|
|450||Community and regional development|
|500||Education, training, employment, and social services|
|700||Veterans benefits and services|
|750||Administration of justice|
|950||Undistributed offsetting receipts|
|First Monday in February||Deadline for submission of president's budget|
|6 weeks after president's budget submission||Deadline for committees to submit their "views and estimates" to the Budget Committees|
|April 15||Congress passes Congressional budget resolution|
|May 15||House may consider annual appropriations bills, even if budget resolution not yet adopted|
|June 10||House Appropriations Committee reports the last of its annual appropriations bills|
|June 15||Congress completes actions on reconciliation bills (if necessary)|
|June 30||House completes action on House appropriations bills|
|July 1 - September 30||Senate 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 1||Fiscal year begins|
The work most useful in compiling these notes was Schick's The Federal Budget: Politics, Policy, Process.
|<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").|
Page last updated on 2004 March 3