What Is the Federal Budget?
How Does It Work?
The federal budget is the government's estimate of spending and revenue for each fiscal year. The revenue for most governments comes from taxes. These include taxes on family incomes, business profits, and imports (custom duties and tariffs). It also includes taxes on activities the government wants to discourage, such as cigarette smoking and alcohol use. Then there are taxes on activities, such as gasoline, to pay for related activities, such a building roads.
Some countries own businesses, such as oil companies. The revenue from these state-owned companies supplies revenue to these governments.
Federal spending is on activities that benefit the public good. Nearly all governments spend on public safety and defense, transportation, and trade. Most also provide some social welfare payments, whether for unemployment compensation, retirement, and healthcare. The amount spent reflects the values and priorities of the society.
When the government spends more than it takes in, it's known as deficit spending. It creates a budget deficit. A reduction of revenue with tax cuts also create deficits. Each year's deficit is added to the sovereign debt. Both are tools of expansionary fiscal policy. They expand the economy by pumping more money into it.
The money is borrowed from the future. If done right, an expansionary policy will boost the economy enough to easily pay off the debt when it comes due.
If done poorly, it will saddle future generations with an unsustainable debt load.
You can find out if a country has a sustainable debt load by looking at its debt-to-GDP ratio. GDP stands for gross domestic product, and it measures each year's total economic output. A healthy debt to GDP ratio should be 77 percent or less, according to the World Bank.
(Source: "Finding the Tipping Point," World Bank)
Spending that's lower than revenue creates a budget surplus. Tax increases can also create a surplus Both are used in contractionary fiscal policy to slow economic growth. That removes money from the current economy in return for paying off future debt. A budget surplus heads off a dangerous bubble when the economy is in the boom phase of the business cycle. It's also needed when the debt-to-GDP ratio is greater than 100 percent. Another term for a contractionary policy is austerity measures.
The U.S. Federal Budget
The U.S. federal budget is the amount of spending and revenue for the next fiscal year of the U.S. government. It runs from October 1 through September 30.
The U.S. federal budget has two categories of spending that are unusual. The mandatory budget pays for benefits established by prior Acts of Congress. These include Social Security, Medicare, Medicaid and other such benefits. This budget estimates the costs to administer the benefits. It cannot be changed without another Act of Congress. See Current Mandatory Spending.
The other category is discretionary spending. Most of this goes toward the military budget, the second-largest budget after Social Security. The rest funds management of all other government agencies. These include Health and Human Services, the Justice Department, and the U.S. Treasury. For more details, see Current U.S. Discretionary Spending.
The U.S. federal budget typically runs a deficit. That's because the President and Congress are engaging in expansionary policy. Find out the Current U.S. Budget Deficit. To see how this is different from prior years, see Deficit by President and Deficit by Year.
To see how the current budget all fits together, see the Current U.S. Federal Budget Breakdown.
Who Decides the Federal Budget?
The Constitution gives the U.S. Congress the power over the federal budget.
Article 1, Section 9, states, "No money shall be drawn from the Treasury, but in Consequences of Appropriations made by Law."
The president's role is to submit a budget proposal to Congress. He asks all federal agencies to submit their budget requests to him. The Office of Management and Budget compiles these requests. The president submit this budget to Congress. It usually follows this budget as a guideline to create its own budget resolution. That is used to create appropriations bill. These bills allocate funds for different categories of government agencies.
The budget process lasts 18 months. Here's the schedule for the FY 2018 budget, the first one to be submitted by President Trump.
- Early fall: Federal agencies submit budget requests to OMB.
- November: OMB sends its comments back to the agencies.
- December: Agencies submit the final budget request to OMB.
- January: OMB submits the budget to president.
- February: President submits the FY 2018 budget to Congress.
- April 15: Congress prepares its Budget Resolution.
- June 10: Congress creates Appropriation Bills.
- June 30: House approves all bills and submits them to the President.
- September 30: All bills must be signed into law.
That is the budgetary process set into law by the 1974 Budget Control Act. However, this schedule hasn't always been followed. When it isn't, then Congress submits a continuing resolution to keep the government running until a budget is approved. When that doesn't happen, the government shuts down.