Understanding the Federal Budget: A Primer

March 2, 2011

Quick links:   What is the Budget?    |    Revenues & Spending    |    The Process    |    Monitoring the Budget     |    Calendar of Key Dates

The federal budget helps determine how much money our libraries, schools, child care programs, health supports and many other services receive. The pages of the federal budget can, quite literally, mean the life or death of important programs in every community.

What is the Budget

The Federal budget is:

  • a plan for how the Government spends your money.

    It is, in many ways, a document outlining our nation’s priorities. What activities are funded? How much does the government spend for defense, national parks, the FBI, Medicare, children’s health and food inspection?

  • a plan for how the Government pays for its activities.
    How much revenue does it raise through different kinds of taxes?

The Federal Budget: A 411 Overview
from newshound

  • a plan for Government borrowing or repayment of borrowing from American and foreign investors.
  • a plan that affects the nation’s economy.

    Some types of spending on things like education and support for science and technology are done in the hope they will increase productivity and raise incomes in the future. Taxes, on the other hand, reduce incomes.

  • a plan that is affected by the nation’s economy.

    When the economy is doing well, people earn more and unemployment is low. When the reverse is true and unemployment is high, revenues decrease and deficits grow because the government borrows money to fill in revenue gaps. In this atmosphere, the government is focused on cutting spending to reduce deficits.

Revenues & Spending

PULL QUOTEThe money that the Federal Government uses to pay its bills—its revenues or receipts—comes mostly from taxes. Most revenues (90 percent) come from three main sources: (1) individual income taxes, (2) corporate income taxes and (3) payroll taxes, including Social Security taxes, Medicare taxes, unemployment insurance taxes and Federal employee retirement payments.

Other sources include "excise taxes" on various products, including alcohol, tobacco, transportation fuels, and telephone services. (The Government earmarks some of these taxes to support certain activities—including highways and airports—and deposits others in the general fund.)  A smaller share comes from estate and gift taxes, customs duties and miscellaneous revenues, for example, Federal Reserve earnings, fines, penalties, and forfeitures.


    The government has two types of spending: discretionary and entitlement (or mandatory).

    • Discretionary or "approriated" spending accounts for approximately one-third of all federal spending and includes money for items ranging from health education programs to highway projects, child care, community programs and education. Congress decides how much to spend on these programs each year through the appropriations process. If the federal budget process equates to a household budget, the appropriations process equates to determing the amounts and writing the checks for household needs.
    • Entitlement, or mandatory, spending is not subject to the annual appropriations process. Instead, this spending cannot be changed and is authorized by law and varies depending on the number of people enrolled in the programs. Mandatory spending programs include Social Security, Medicare, food stamps, military retirement benefits, veterans' disability benefits, unemployment insurance and others.

    Although mandatory spending is not subject to the annual appropriations process, the President can request changes to entitlement programs in his budget proposal. For example, when President Bush proposed adding a prescription drug benefit to Medicare, he had to show a corresponding increase in Medicare costs in his budget, relative to what Medicare would otherwise be projected, by law, to cost. (Thanks to CBPP for this example.)

    Think of it this way: For discretionary programs, Congress and the President must act each year to provide spending authority. For mandatory programs, they may act to change the spending that current laws require.

    How Our Tax Dollars are Used. The three largest areas account for one-fifth of the federal budget:

    • Defense and security: In 2010, some 20 percent of the budget paid for defense and security-related international activities. The bulk of the spending in this category reflects the underlying costs of the Department of Defense and other security-related activities. The total also includes the cost of supporting operations in Iraq and Afghanistan, which is totalled about $172 billion in 2010.
    • Social Security: Another 20 percent of the budget pays for Social Security, which provided retirement benefits averaging $1,117 per month to 37 million retired workers (and their eligible dependents) in December 2010. Social Security also provided survivors’ benefits to 6.4 million surviving children and spouses of deceased workers and disability benefits to 10.1 million disabled workers and their eligible dependents in December 2010. (Source: Social Security Administration)
    • Medicare, Medicaid, and CHIP: Three health insurance programs — Medicare, Medicaid, and the Children’s Health Insurance Program (CHIP)—together accounted for 21 percent of the budget in 2010. Nearly two-thirds of this amount goes to Medicare, which provides health coverage to around 46 million people who are over the age of 65 or have disabilities. The remainder of this category funds Medicaid and CHIP, which in a typical month in 2010 provided health care or long-term care to about 64 million low-income children, parents, elderly people, and people with disabilities. Both Medicaid and CHIP require matching payments from the states.

    State and Local Budgets
    The federal budget is not the only budget that affects the economy or the American people; state and local budgets have a big impact on our lives and our communities. State and local governments are independent of the federal government and have their own sources of revenue (primarily taxes and borrowing). The federal government supplements these revenues with federal funding grants to the states.

    Unlike the federal government, states must balance their budgets each year, which means their spending must match their revenues, and they cannot carry a deficit.

    Understanding the Process

    In some ways, the government plans its budgets in much the same way as families do. The President and Congress determine how much money they expect the government to receive in each of the next several years, where it will come from, and how much to spend to reach their goals. (Unlike the Government though, a family can’t just decide to take money from its neighbors when it wants to spend more than it takes in.)

    1. The President’s Budget

    The law specifies that by the first Monday in February, the President submit to Congress his proposed federal budget for the next fiscal year, which begins October 1. (Note: the law does not require an outgoing President to transmit a budget, and it is impractical for an incoming President to complete a budget within a few days of taking office.)

    2. Action in Congress

    Congress first passes a “budget resolution”—a framework within which the Members will make their decisions about spending and taxes. It includes targets for total spending, total revenues, and the surplus or deficit as well as targets for the two types of spending: discretionary and mandatory.

    Appropriations process: once it has passed the budget resolution, Congress must then enact 13 separate appropriations bills to set specific funding levels for all the functions of the federal government—from agriculture and energy to Labor, Health and Human Services, education, etc. 

    Congress begins by examining the President’s budget in detail. The House Committee on Appropriations and the Senate Appropriations Committee divide their budgets among their committees and subcommittees, which hold hearings to finalize the proposals under their jurisdiction. For example, the House Ways and Means and the Senate Finance Committees hold hearings on the proposed changes to taxes. These committees and subcommittees must work within the budget resolution that Congress passed.

    As the committees and subcommittees finish their work, they "report out" their spending bills. Most years, the House committees report out their bills in May or June and the Senate committees report theirs in June or July. Most House bills are passed by early August, and the Senate passes most of its appropriations bills by mid-September.

    Conference Committee and Report. The House and Sentate then come together for conferences and hearings to resolve differences between the two bills, with September 30th as the deadline for final action.  The final 'conference report' is voted on by both chambers before it is sent to the President for his signature, enactment or veto.

    The goal is to finish the process by September 30, since the fiscal year starts on October 1.

    If Congress hasn't agreed on a final budget by this deadline, members of Congress must pass a continuing resolution (CR) in order to keep the federal government operating while they work to complete the appropriations process.

    Monitoring the Budget

    Once the President and Congress approve spending, the Government monitors the budget through:

    • agency program managers and budget officials, including the Inspectors General, or IGs;
    • the Office of Management and Budget;
    • congressional committees; and
    • the General Accounting Office, an auditing arm of Congress.

    This oversight is designed to ensure that agencies comply with legal limits on spending, and that they use budget authority only for the purposes intended; see that programs are operating consistently with legal requirements and existing policy; and ensure that programs are well managed and achieving the intended results.

    Budget Calendar at a Glance

    Early fall
    Agencies send initial budget requests to the Office of Management and Budget (OMB).

    OMB reviews, modifies, and sends back to agencies.

    Agencies make final appeals to OMB.

    OMB resolves appeals and assembles the final budget request.

    February to March
    President submits budget request to Congress.
    Administration and agency officials testify in support of the budget request.
    Appropriations subcommittees (House and Senate) hold hearings with agency heads and outside public witnesses.

    House and Senate adopt budget resolutions prepared by Budget Committees.
    Appropriations Committees in the House and Senate make allocations.

    House Appropriations Subcommittees prepare appropriations bills.
    Senate Appropriations Subcommittees revise the House-passed bills.

    House passes spending bills; Senate passes revised bills.

    House-Senate conference committees resolve differences and agree on final versions of spending bills.
    President signs or vetoes final bills.

    October 1
    Beginning of fiscal year.

    If necessary, Congress passes continuing resolution(s) to maintain funding for any agencies affected by appropriations bills that have not been passed and signed by the beginning of the fiscal year.








    <p>Thanks for spelling out how the Federal Budget works. I understand it a little better now. I have to give a lot of time and attention to studying what everything really means in the budget. I can only imagine the time and attendancespent in creating a Federal budget. When you said that , "In some ways, the government plans its budgets in much the same way as families do." I think that may hold truth if you are comparing the Federal budget to a family budget that is living over their payroll amount and in deep debt. LOL.</p>

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    Thanks a lot for describing how all works regarding the Federal budget. not sure what role have those agencies and what&;s the purpose of them, other than that I think it&;s a good lesson for everyone to learn more about this stuff.

    Really great post nice work i love your work and its really helped me in my research.Thanks

    Really great post nice work i love your work and its really helped me in my research.Thanks

    Wow. Great post, you&;ve cleared a lot of things up in this post. I can finally say I understand the federal budget, which will come in handy the coming holidays when politics will be sure to come up! lol. The schedule of the process is also great to know. Certain issues are extremely time sensitive and it helps knowing at what stage in the process the federal budget is being done. If only there was a GPS Tracker for all of the different bills being passed so we know where it is at all times!

    You are so cool! I don&;t suppose I&;ve truly read a single thing like that before. So great to find somebody with a few original thoughts on this subject matter. Really.. thanks for starting this up. This website is something that is needed on the internet, someone with a bit of originality!

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    All aspects can be affected by economic crisis so for sure, it will bring disturbance to most businesses and firms.

    It&;s funny to me that education isn&;t on the mandatory budget because our countries prosperity is totally tied to the knowledge worker. If you check with any stock trading resource you will see that so many of our businesses are service based and internet based, so it would make sense to allow more spending for the education of our next generation of knowledge workers. People overseas will work for much less, and knowledge itself is easy to transfer (especially with the internet), so if we don&;t have an edge over people who will work for less and know the same amount of information as we do, we&;re bound to lose!

    It is hard to understand the federal budget, but got some knowledge from your post, thanks!

    when Chair Dub-ya planned adding a prescription drug goodness to Medicare, he had to exhibit a like gain in Medicare costs in his budget, concentrator to what Medicare would otherwise be sticking life status

    The wealth that the national Government uses to pay its bill—its revenues or proceeds. even though obligatory expenditure is not matter to the annual appropriations process, the President can request change to prerogative program in his financial statement application

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    Infact these days budgets planning is very important for any nation success and people must think outside the box before planing this thing

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    Not sure what role have those agencies and what&;s the purpose of them, other than that I think it&;s a good lesson for everyone to learn more closely this stuff. Your blog is very interesting. I appreciate your work.

    Congress decides how much to spend on these programs each year through the appropriations process.

    The government just spends money whenever they feel the need. I don&;t understand how they can justify spending trillions every real on frivolous things. Typical government I guess.

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    The federal budget is not the only budget that affects the economy or the American people; state and local budgets have a big impact on our lives and our communities.

    Plain and simple. No further explanation required. We pay taxes, they budget the money that will be spent for our benefits and they take a huge slab of it and spend it somewhere else...plain and simple. no further explanation required.


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    There&;s one thing I can say about all of this...Obamacare.

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