In May 2021, President Joe Biden released a $6.011 trillion federal budget proposal for fiscal year (FY) 2022. The U.S. government estimates it will receive $4.174 trillion in revenue, creating a $1.837 trillion deficit for October 1, 2021, through September 30, 2022.
Before President Biden's budget proposal was released, the Congressional Budget Office predicted that the deficit would be $2.3 trillion. As a result of the American Rescue Plan, the new estimate is $3.4 trillion.
Government spending is broken down into three categories: mandatory spending, budgeted at $4.018 trillion; discretionary spending, forecasted to be $1.688 trillion; and interest on the national debt, estimated to be $305 billion. Each category of spending has different subcategories.
- President Biden’s budget for FY 2022 totals $6.011 trillion, eclipsing all other previous budgets.
- Mandatory expenditures, such as Social Security, Medicare, and the Supplemental Nutrition Assistance Program account for about 65% of the budget.
- For FY 2022, budget expenditures exceed federal revenues by $1.873 trillion.
- Most of these revenues come from taxes and earnings from quantitative easing.
The federal government estimates it will receive $4.174 trillion in revenue in FY 2022. Most of the revenue is in the form of taxes, paid by taxpayers, either through income or payroll taxes. The estimate for each type of revenue is as follows:
- Income taxes contribute $2.039 trillion or 49% of total receipts.
- Social Security, Medicare, and other payroll taxes add $1.462 trillion or 35%.
- Corporate taxes supply $371 billion or 9%.
- Excise taxes and tariffs contribute $141 billion or 3%.
- Earnings from the Federal Reserve's holdings add $102 billion or 2%. Those are interest payments on the U.S. Treasury debt the Fed acquired through quantitative easing.
- Estate taxes and other miscellaneous revenue supply the remaining 2%.
The government expects to spend $6.011 trillion in 2022. More than 65% of that pays for mandated benefits such as Social Security, Medicare, and Medicaid.
Discretionary spending, which pays for everything else, will be $1.688 trillion. The U.S. Congress appropriates this amount each year, using the president's budget as a starting point.
Interest on the U.S. debt is estimated to be $305 billion. Interest on the approximate $28 trillion debt is the fastest-growing federal expense, expected to double by 2028.
The U.S. Treasury must pay the interest to avoid a U.S. debt default. A debt default by the U.S. has unknown consequences since it has never happened before.
Mandatory spending is estimated at $4.018 trillion in FY 2022. This category includes entitlement programs such as Social Security, Medicare, and unemployment compensation. It also includes welfare programs such as Medicaid.
Social Security will be the biggest expense, budgeted at $1.196 trillion. It's followed by Medicare at $766 billion and Medicaid at $571 billion.
Social Security costs are currently 100% covered by payroll taxes and interest on investments. Until 2010, there was more coming into the Social Security Trust Fund than being paid out. Thanks to its investments, the Trust Fund is still running a surplus.
The Social Security Board of Trustees estimates that Social Security's Trust Fund will be depleted by 2034. Social Security revenue, from payroll taxes and interest earned, will cover only 78% of the benefits promised to retirees.
Medicare is already underfunded because taxes withheld for the program don't pay for all benefits. Congress must use tax dollars to pay for a portion of it. Medicaid is 100% funded by the general fund, also known as "America's Checkbook." This account is used to finance daily activities and long-term operations of the government.
The discretionary budget for 2022 is $1.688 trillion. Much of it goes toward military spending, including Homeland Security, the Department of Veterans Affairs, and other defense-related departments. The rest must pay for all other domestic programs. The largest of these programs are Health and Human Services, Education, and Housing and Urban Development.
Historically, the Overseas Contingency Operations fund has paid for wars or continuing military actions. A growing portion of the discretionary budget is set aside for disaster relief such as hurricane and wildfire relief.
Budget requests for ongoing costs related to the wars in Iraq and Afghanistan have been listed separately in the Overseas Contingency Operations request since 2001. The FY 2022 budget is the first year in which these costs are included in the base budget request.
Military spending includes the Departments of Homeland Security, State, and Veterans Affairs. All of these military costs combined equaled $752.9 billion.
Each president and their administration is credited or blamed with increases in national debt due to the budgets their administration proposes. The approval of the budget is delegated to Congress. In other words, it's not the president alone who bears the burden of deficit creation and national debt generation—other elected officials do so as well.
How the Deficit Contributes to the National Debt
Each year, the deficit adds to the U.S. debt. To raise funds to cover the deficit, the government issues securities such as Treasury notes, which are purchased by many investors. Japan and China are two countries whose governments have purchased large amounts of U.S. debt, in a manner of speaking "owning" the U.S. debt.
An anticipated budget deficit can slow economic growth. It influences rising interest rates, as investors demand more return. Eventually, investors may become hesitant to purchase Treasury notes because they fear the U.S. government may not be able to repay the debt.
Congress created the budget process in 1974. The process is supposed to follow four steps:
- The Executive Office of Management and Budget prepares the budget.
- The president submits it to Congress on or before the first Monday in February.
- Congress responds with spending appropriation bills that go to the president by June 30.
- The president has 10 days to reply.
Congress has followed the budget process only twice since creating the FY 2010 budget. Since that time, the process and deadlines within it have been ignored, due to political disagreements, posturing, and government inefficiencies.
The hard deadline for budget approval is December 3. If Congress doesn't approve it by then, the government can shut down. It did just that in 2013, in January 2018, and in December 2018. To avoid shutdowns, Congress usually passes continuing resolutions, as they did September 30.
If the government does shut down, it signals a complete breakdown in the budget creation process.