The Federal Budget Process

Discretionary and mandatory spending

Most government spending – about 63 percent in 2017 – is mandatory. It covers programs the government must fund by law. These include Social Security and Medicare (programs for the elderly), which are directed by eligibility laws that Congress reviews from time to time. Food stamps and some transportation spending are also mandatory, as are veterans’ disability benefits and unemployment insurance.

Also mandatory is interest on the national debt – about 7.7 percent of spending in 2017. (Check out our national debt explainer.)

Discretionary spending, on the other hand, requires annual approval by Congress; it includes all defense spending and many public services, such as environmental protection, scientific research, education grants and foreign aid. It is here that a president can leave his mark.

It starts with the president

Though Congress has the power to make the budget, by the Budget and Accounting Act of 1921 it is the president who starts the process with a request up to 17 months before the budget takes effect, notes the National Conference of State Legislatures: “While this budget does not offer any binding language, it is still regarded as a powerful directive for the executive branch to offer national policy.”

After almost a year of research by the Office of Management and Budget (OMB), the president’s in-house budget advisers, the president submits his wish list to Congress around February 1 (or later if it is the president’s first year in office). The process should end with 12 spending bills awaiting his signature by September – in time for the fiscal year to begin October 1.

The appropriations process

After Congress receives the president’s proposal, the House and Senate budget committees hold hearings to question administration officials about the requests and then draft their own plans, known as “budget resolutions,” which are frameworks with overall spending caps. The full House and Senate each vote on these resolutions, which can be altered with a majority vote. A bicameral committee then reconciles any differences.

According to the Congressional Budget and Impoundment Control Act of 1974, the House and Senate should vote on the budget resolution by April 15, though the vote is often delayed.

Next, House and Senate appropriations committees determine spending for all discretionary programs. These two committees have 12 subcommittees (12 in the House and 12 in the Senate) that specialize in different areas – such as defense, agriculture or transportation – and work with input from the nonpartisan Congressional Budget Office (CBO). The CBO is often described as a scorekeeper because it determines how much a program will cost and if it will stay within the spending limit set by the budget resolution. Each subcommittee drafts an appropriation bill on which the full House or Senate eventually votes.

The House and the Senate each debate their versions of the 12 appropriations bills. After the 12 bills pass the full House or Senate, a bicameral conference committee reviews differences between the House and Senate versions of the bills. Once this conference committee agrees on a version of each of the 12 appropriations bills, these versions go to the full House and Senate for a vote. Only after the 12 bills pass both chambers of Congress can they go to the president for his signature.

If the process drags past October 1, Congress can pass an emergency resolution to provide stopgap funding to federal agencies. In 2013, Congress did not agree on such funding in time and the government shut down for 16 days.

Budget reconciliation

Sometimes Congress uses a “budget reconciliation,” an optional procedure, to bring tax or spending plans into conformity with the budget resolution or to push through spending resolutions that do not have broad enough bipartisan support in either chamber of Congress. “Reconciliation legislation is used to change budget authority or spending outlays of existing law. However, in recent years Congress has changed the reconciliation process to solely focus on deficit reduction,” explains the National Conference on State Legislatures. For example, since 2015 Congressional Republicans have been trying to use a budget reconciliation to repeal the Affordable Care Act, a.k.a. Obamacare, which as a federal law is not funded by decisions made in annual appropriations committees (the Republicans’ chances improved when Donald Trump was elected president). In 2010, Democrats used the procedure to fund some provisions of Obamacare. Congressional supporters of George W. Bush used it to pass his tax cuts in 2001 and 2003.

When the budget process doesn’t work

Congress did not pass a budget in Barack Obama’s last year in office. His last budget proposal, for 2017, died in Congress. Instead, in late 2016, Congress approved a “continuing resolution” to keep the government funded through the first quarter of the new Trump administration. At the time of this writing, details of Trump’s spending plans were beginning to surface, including, reportedly, a large increase in defense spending and cuts to the State Department and the Environmental Protection Agency. (The Committee for a Responsible Federal Budget, a Washington watchdog that campaigns for lower federal debt, keeps an updated page of news on the 2017 budget process.)

Federal assistance to state and local governments 

A noteworthy chunk of discretionary spending is assistance to states and local governments that is administered through federal agencies such as the Department of Agriculture or the Department of Housing and Urban Development (HUD). The government’s Catalog of Federal Domestic Assistance describes 2,308 federal programs and provides contact information for the agencies that award the funding, which can come in the form of grants. The grants are often managed by state or local governments or other local groups.

When a president threatens to withhold federal funding from so-called “sanctuary cities” – cities that refuse to detain illegal immigrants – it is these programs he could target. A January 2017 Reuters analysis found the nation’s 10 largest cities stand to lose $2.27 billion annually in federal funds if they fail to enforce Trump’s immigration orders: “Among the funds at risk are $460 million that the federal government gave out to fund Head Start pre-school programs in the 10 largest ‘sanctuary cities’ in the most recent fiscal year, the analysis found. Washington also sent $238 million to municipalities to fund airport improvements and $153 million for HIV prevention and relief.”

Discretionary spending in charts

Discretionary spending is just over a third of the annual budget. This graph shows discretionary spending in Obama’s proposed 2017 budget (which is similar to recent years):

Here’s the total 2017 budget proposal, including mandatory programs and interest:

Taxes

Under Article 1 of the Constitution, Congress has the power to collect taxes and borrow. When Congress budgets more than the government takes in revenues, the Treasury borrows to fund the deficit by selling bonds.

In the 2017 fiscal year, total government revenues were expected to be $3.64 billion and spending $4.15 billion, according to the OMB. (The difference is the deficit.)

Taxes come largely in three forms: income tax paid by individuals (an estimated 49.6 percent of total revenue in 2017), corporate income taxes paid by businesses (9.9 percent), and payroll taxes paid by employers and their workers (32.7 percent), some of which go into trust funds like Social Security and Medicare. There are also customs duties, which are taxes on imports, and excise taxes, which target a specific product, like gasoline.

Tax expenditures

Revenues “lost” by the government due to deductions and other tax breaks are known as “tax expenditures.” When you deduct from your income taxes money you gave to charity or deduct the mortgage interest you paid on a home loan, these are tax expenditures.

The Treasury Department describes tax expenditures as “revenue losses attributable to provisions of Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability. These exceptions are often viewed as alternatives to other policy instruments, such as spending or regulatory programs.”

Tax expenditures do not require annual approval. Some are for set periods of time and some are basically permanent figures in the tax landscape. In recent years, they have surpassed all discretionary spending. Here is an estimate (in trillions of dollars) for 2017 compared with Obama’s estimated 2017 discretionary budget.
Government data sources

• To help it make decisions and define its powers under the Constitution, Congress created the Government Accountability Office (a nonpartisan agency that oversees government spending) and the Congressional Budget Office (for nonpartisan, objective analysis on government spending). The CBO publishes a handy glossary of budget terms.
• The Congressional Research Service, a nonpartisan think tank reporting to Congress, has a detailed explainer on the federal budget process.
• In the executive branch, the president has the Office of Management and Budget to help draft the initial proposal and understand what it costs. Trump’s OMB is here; Obama’s is here.
• The Internal Revenue Service (IRS) collects taxes and the Treasury Department borrows to raise funds.
• The Catalog of Federal Domestic Assistance describes 2,308 federal programs and provides contact information for the agencies that award the funding.
• The Bureau of Economic Analysis performs cost-benefit analyses of various programs affecting the U.S. economy.
• The Government Publishing Office posts budgets back to 1996 and the Federal Reserve Bank of St. Louis publishes them back to 1923.

Other resources, think tanks and advocacy groups

The Tax Policy Center, a nonpartisan think tank, has a free briefing book on how the budget works as well as regular cost-benefit analyses on government initiatives. As mentioned above, the National Conference on State Legislatures is also a good resource.

Other think tanks and campaigners monitoring the budget, some of whom have agendas, include The Center for Budget and Policy Priorities, the National Priorities Project and The Committee for a Responsible Federal Budget.