US Federal Budget Breakdown
The Budget Components and Impact on the US Economy
On Feb. 5, 2020, President Donald Trump released his budget request for fiscal year (FY) 2021. Under his proposal, the federal budget would be a record $4.829 trillion. The U.S. government estimates it will receive $3.863 trillion in revenue. That creates a $966 billion deficit for October 1, 2020, through September 30, 2021.
Government spending is broken down into three categories: mandatory spending, budgeted at $2.966 trillion; discretionary spending, forecasted to be $1.485 trillion; and interest on the national debt, estimated to be $378 billion. Each category of spending has different subcategories, outlined in the sections below.
- President Trump’s budget for FY 2021 totals $4.820 trillion, eclipsing all other previous budgets.
- Mandatory expenditures, such as Social Security, Medicare, and the Supplemental Nutrition Assistance Program. This will take 60% of the budget.
- For FY 2021, budget expenditures exceed federal revenues by a deficit of $966 billion.
- Most of these revenues come from taxes and earnings from quantitative easing.
The federal government estimated that it would receive $3.863 trillion in revenue in FY 2021. 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 $1.932 trillion or 50% of total receipts.
- Social Security, Medicare, and other payroll taxes add $1.373 trillion or 36%.
- Corporate taxes supply $284 billion or 7%.
- Excise taxes and tariffs contribute $141 billion or 4%.
- Earnings from the Federal Reserve's holdings add $71 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 1%.
It's estimated that each taxpayer works until late April each year to pay for all federal revenue collected. This day is known as Tax Freedom Day, in which taxpayers finally work for themselves after having worked for four months to pay taxes.
The government expects to spend $4.829 trillion in 2021. Almost 60% of that pays for mandated benefits such as Social Security, Medicare, and Medicaid.
Discretionary spending will be $1.485 trillion. It pays for everything else. 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 $378 billion. Interest on the approximate $23 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 $2.966 trillion in FY 2021. 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 $1.151 trillion. It's followed by Medicare at $722 billion and Medicaid at $448 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 Trust Fund’s Board estimates that this surplus will be depleted by 2034. Social Security revenue, from payroll taxes and interest earned, will cover only 79% 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 2021 is $1.485 trillion. More than half 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.
There is also the Overseas Contingency Operations fund that paysfor wars or continuing military actions. A growing portion of the discretionary budget is set aside for disaster relief such as hurricane and wildfire relief.
Overseas Contingency Operations are estimated to cost approximately $69 billion. It pays for the war on terror costs triggered by the 9/11 attacks. These include ongoing costs from the wars in Iraq and Afghanistan.
Military spending includes $228 billion for defense-related departments. These include Homeland Security, the State Department, and Veterans Affairs.
All these military costs combined equal $705 billion.
The budget deficit is estimated at $966 billion. That's the difference between $3.863 trillion in revenue and $4.829 trillion in spending. This shortfall is added to the existing national debt.
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.
Deficit spending is not needed since the recovery of the economy from the Great Recession. Government officials could work instead to create a budget surplus to reduce the national debt burden.
This is not happening, and may not ever happen. Politicians and law-makers would have to reduce spending on popular programs, which would lower their popularity with voters. Politicians who support decreased spending on entitlement programs generally have to find other lines of work.
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 only followed the budget process 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 September 30. If Congress doesn't approve it by then, the government can shut down. It did just that in 2013, January 2018, and in December 2018. To avoid shutdowns, Congress usually passes continuing resolutions.
These resolutions keep the government running at spending levels from the last budget. If the government does shut down, it signals a complete breakdown in the budget creation process.
The White House. “A Budget for America’s Future: FY 2021,” Table S-4. Accessed Feb. 13, 2020.
Committee for a Responsible Federal Budget. “Interest Spending is on Course to Triple.” Accessed Jan. 15, 2020.
Social Security. “Summary: Actuarial Status of the Social Security Trust Funds.” Accessed Jan. 15, 2020.
Bureau of the Fiscal Service. "The General Fund." Accessed Feb. 13, 2020.
U.S. Department of the Treasury. "Major Foreign Holders of Treasury Securities." Accessed Jan. 15, 2020
Office of Management and Budget. "Office of Management and Budget." Accessed Jan. 15, 2020.
Congress.gov. "H.R.4378 - Continuing Appropriations Act, 2020, and Health Extenders Act of 2019." Accessed Jan. 15, 2020.