Federal Budget: What it is, How it Works, History

What Is the Federal Budget?

The federal budget is an itemized plan for the public expenditures of the United States. It must be approved by Congress and signed by the president in order to release the money that finances all federal activities.

The federal budget is the source of the salaries paid to federal employees and contractors, the dispersal of agricultural subsidies, and the equipment purchased by the U.S. military, among many other endeavors.

The budget is compiled annually, with a fiscal year beginning on Oct. 1 and ending on Sept. 30 of the subsequent year, the year for which the budget is titled.

Understanding the Federal Budget

Expenses listed in 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 must be approved by individual appropriations bills.

The federal budget is funded by tax revenues. Still, in every year since 2001 (and in many prior years), the U.S. has operated from a budget deficit, meaning that spending exceeds revenue. The shortfall is covered by debt taken on by the nation through issuing bonds.

In FY 2022, the federal government spent $6.27 trillion and collected $4.90 trillion in revenue, resulting in a deficit. The amount by which spending exceeds revenue, $1.38 trillion in 2022, is referred to as deficit spending.

Current Federal Budget Levels

According to the Congressional Budget Office (CBO), the federal budget had outlays of $6.3 trillion in fiscal year 2022, which ended on Sept. 30, 2022. About $1.4 trillion of that was deficit spending.

Measured as a percentage of gross domestic product (GDP), that's a deficit of 5.5%, a considerable improvement from the previous year's 12.3% due to a precipitous decline in coronavirus relief spending.

The single biggest expenditure of the federal government in fiscal 2022 was for Social Security, which takes up 19% of the government's dollars. Defense spending, which dominated the budget for some years after the Sept. 11, 2001 attacks, shrank to 12%.

The President and Budget Negotiations

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. An accepted procedure for crafting and approving the federal budget has taken shape on this basis. However, 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 the office.)

The budget sent by the president's office does not include mandatory spending. However, it contains 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 and the non-partisan CBO, which provides analysis and estimates to supplement the president's predictions.

The House and the Senate may propose their own budget resolutions that aren't covered in the White House budget.

There is no requirement for both houses of Congress to pass a budget. If it fails to do so, budget resolutions from previous years carry over. Individual appropriations bills are used to fund necessary discretionary expenses. Remember, those "discretionary" items include military spending and education, among other programs.

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 consisted 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 essentially dissolving the authority of the existing Appropriations Committee and creating various bodies to authorize expenditures for different purposes. Shortly after that, federal spending (including deficit spending) increased. 

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, establishing the first major mandatory spending program in U.S. history.

The Bottom Line

The federal budget is a contentious issue in the U.S. Federal expenditures have risen steeply since the 1980s.

That is mainly due to the increased requirements of mandatory spending on programs such as Social Security, Medicare, and Medicaid.

The federal government is legally obligated to disperse entitlement benefits to any citizen who qualifies. Therefore, mandatory spending depends on demographic factors as much as on politics. The population is growing larger, and it is living longer.

Since 2001, the nation has operated in deficit. That adds to the national debt—and the cost of servicing it—every year.