Part 4: U.S. History & American History

How the Federal Government Creates and Manages Its Budget

Every year, Congress begins work on a federal budget for the next fiscal year. The federal government’s fiscal year runs from October 1 of one calendar year through September 30 of the next.

The work actually begins in the executive branch the year before the budget is to go into effect.

• Federal agencies create budget requests and submit them to the White House Office of Management and Budget (OMB).
• OMB refers to the agency requests as it develops the president’s budget proposal.

The president submits his budget proposal to Congress early the next year. Then Congress, which the Constitution puts in charge of spending and borrowing, starts its work.

Annual Funding Areas

The annual budget covers three spending areas:

• Federal agency funding, called discretionary spending—the area Congress sets annually. Discretionary spending typically accounts for around a third of all funding.
• Interest on the debt, which usually uses less than 10 percent of all funding
• Funding for Social Security, Medicare, veterans benefits, and other spending required by law. This is called mandatory spending and typically uses over half of all funding.

The Complex Role of Congress in the Budget Process

Authorization

For agencies and their programs to be funded, Congressional authorization committees must pass, and the president must sign, authorization bills giving agencies the legal authority to fund and operate their programs. Normally, without authorization, an agency or program cannot receive annual appropriated funding.

Authorization is not tied to the same schedule as the budget appropriations process; programs can be authorized at any time of year on an annual, multi-year, or permanent basis.

Budget Resolutions

Congress’s first task in the annual process is to pass a budget resolution creating a framework and setting overall spending limits. As with most things Congress does, its two chambers—the Senate and the House of Representatives—each draft their own budget resolution. The two plans are merged, and each chamber votes on the identical resolution.

Appropriations Bills

The appropriations committee for each chamber divides the amount allotted for federal agency funding between 12 subcommittees. Each subcommittee is in charge of funding for different functions of government, such as defense spending, energy and water, and interior and environment, and for the agencies involved.

The subcommittees conduct hearings with agency leaders about their budget requests and draft appropriations bills setting the funding for each. The full House and Senate vote on their bills, merge both versions of each one, and vote on the identical version of every bill. Each one, if passed, goes to the president for signature.  

Budget Completion or Government Shutdown

If Congress passes, and the president signs, all 12 bills by September 30—the last day of the current fiscal year—the country has a new budget in time for the start of the next fiscal year. If Congress can’t agree on 12 separate bills, it can pass an Omnibus bill with funding for multiple areas. If the budget is not completed by the new fiscal year, Congress must pass a continuing resolution authorizing temporary funding at the previous year’s levels or face a government shutdown.

In the event of a shutdown, the government stops issuing passports, closes national parks and monuments, halts NASA operations, and puts many other functions on hold.

When the budget process is finally complete or Congress passes a continuing resolution, the government resumes normal operations.

The Deficit, the Debt, and the Debt Ceiling

When the amount of money the government collects in taxes and other revenue in a given year is less than the amount it spends, the difference is called the deficit. If the government takes in more money than it spends, the excess is called a surplus.

The deficit is financed by the sale of Treasury securities (bonds, notes, and bills), which the government pays back with interest. Part of what the government spends money on each year is the interest owed on all years’ deficits combined, or the national debt.

The debt ceiling is the maximum amount of debt the government allows itself to hold. Congress can vote to raise the debt ceiling. If it doesn’t and the debt hits the ceiling, the government won’t be able to borrow any more money and it won’t be able to pay its bills.