The US budget is one of the most pressing matters concerning all Americans. As the federal budget is funded mainly through American tax dollars, the federal government must ensure every cent is appropriately accounted for and used solely for the benefit of the people. For experts and non-experts alike, take a look at this guide to the US budget and federal spending for your tax dollars.
Understanding the US Budget
The US budget outlines the federal government’s accurate plans for its annual spending, revenue, federal pay, subsidies, and appropriations, among other things. The federal budget is deliberated by Congress and approved by the President to take into effect for the fiscal year, which begins every October 1st and ends every September 30th of the following year.
The federal budget comes from a variety of revenue streams, but an overwhelming majority comes from taxes, namely social insurance, corporate, consumption, property, and individual taxes. Other funding sources for the US budget include revenues from admission to parks and museums, leases to federal properties, licensing and usage fees, and more.
Defining US Budget Surplus, Deficits, and Debts
In an ideal world, government revenues must match government spending. This guarantees the money circulating in the economy is funded and used for the American people. However, real-world problems such as calamities, terrorist attacks, and health crises, among others, may cause a mismatch between federal spending and federal revenue.
Budget surplus
A budget surplus happens when the government spends less than the collected revenue. During a surplus, the economy generally experiences lower inflation rates and lower interest rates, resulting in more investments, higher employment numbers, and an overall more robust economy. Most of all, a surplus prevents the government from borrowing money, decreasing the US debt.
Budget deficit
A budget deficit occurs when the government spends more than the collected revenue. To continue funding public services amid a deficit, the federal government borrows money from the Federal Reserve, allies, businesses, and individuals. A deficit slows economic growth, balloons inflation, increases interest rates, and multiplies the US’ already-high debt.
Listing the Types of Government Spending
Knowing the government spending or outlays is just as important as determining the US budget. Mostly, the federal government spends a huge sum to fund a broad scope of social programs, services, public infrastructure, and contracts. Considerable federal spending also goes into paying incurred interests from the debt of the United States.
Government spending can be classified into two primary categories: mandatory and discretionary spending. Both these spending types are finalized and enacted before the start of the upcoming fiscal year. Otherwise, supplemental spending is a special consideration related to spending, which isn’t deliberated before the start of the fiscal year.
Mandatory spending
Mandatory spending, also known as permanent appropriations, is an unavoidable expense of the federal government. They are stipulated by law, meaning they don’t require an annual vote by Congress and are approved immediately by the President. Nearly two-thirds of the federal budget goes to mandatory spending programs, including:
—Social Security
—Healthcare programs (Medicare, Medicaid, Premium Tax Credits and Related Spending, and Children’s Health Insurance Program)
—Income Security Programs (Supplemental Nutrition Assistance Program, Unemployment Insurance, Earned Income Tax Credits, Child Tax Credits, Refundable Tax Credits)
—Incurred interests in federal debt
Here’s an outlook on the approval process for mandatory spending:
- A mandatory budget is appropriated based on existing laws for mandatory spending.
- The Department of the Treasury allocates the budget to federal agencies, entitlement programs, direct payments, loans, grants, and financial assistance.
- Mandatory spending commences throughout the fiscal year.
Discretionary spending
Discretionary spending requires approval by Congress and the President in the annual appropriations process. More than half of the discretionary budget funds go to national defense, while the rest goes to various government programs such as education, housing, transportation, social services, and science and development. The federal budget process for discretionary spending includes the following:
- The President submits recommendations under the President’s budget for the federal budget in the upcoming fiscal year.
- The legislative branch deliberates the budget during federal appropriations, subjecting the recommendations to review, revision, and voting.
- After Congress finalizes the appropriations bill, the President must sign the budget into law.
- Once signed into law, the Department of the Treasury issues appropriations to federal agencies, primarily related to national defense, education, and transportation.
- All discretionary spending activities are allocated a discretionary budget and are paid within the fiscal year unless an amendment is materialized.
Supplemental spending
Supplemental spending is utilized by the federal government for urgent appropriations only. It’s not included in regular appropriations processes and enacted solely during emergencies, natural disasters, and other crisis measures. At the height of the global pandemic, Congress passed four supplemental appropriations to address the threats of COVID-19.
While still subject to deliberation, supplemental spending has a relatively quicker approval process to address immediate issues at hand. Take a look at the approval process for supplemental spending.
- The legislative branch proposes, deliberates, and approves supplemental appropriations legislation as quickly as possible.
- Once Congress finalizes the appropriations, the President is set to sign the bill into law to enact supplemental funds to involved agencies immediately.
- Federal agencies associated with the supplemental appropriations law receive funding to administer work, address urgent needs, and solve current issues in the nation.
Breaking down the US Budget Functions
As one of the biggest consumers in the world, the federal government spends money on a wide array of goods and services across various industries. Anything from military equipment, aircraft, buildings, highways, and livestock is part of federal spending by the United States. Look at this overview of the US’ common budget functions.
Note: Values included in the charts are based on USAspending.gov data, which may vary depending on the date of reading. For a real-time comprehensive list of federal spending, visit USAspending.gov.
Although the United States is known for spending a considerable percentage of its revenue on national defense, Social Security takes the largest portion of the federal budget at 23%. The US seeks to double down on funding support for entitlement programs, such as Social Security, Medicare, and Income Security, to support the nation’s population, which is a gradual and constant upward trend.
The increase in funding for the government’s entitlement programs has led to a surge in the budget of agencies responsible for managing these programs: the Department of Health and Human Services and Social Security Administration, taking up 28% and 23%, respectively. As the government shifts its priorities to support the nation’s aging population, funding for these agencies may increase even more.
Spending Trends: The US Budget
Amid the federal government experiencing relatively stable growth in its revenue, the United States is on a streak of deficit due to a broad scope of reasons, such as ballooning interests in debts, global and national politics, wars and crises, and more. A budget outlook for FY2023 shows a budget deficit, which sums up to a staggering $1.3 trillion.
Note: Values included in the chart are based on the Congressional Budget Office, which may vary depending on the date of reading. For a real-time comprehensive list of federal spending, visit the Congressional Budget Office.
One of the many ways the federal government supplies the gap in the federal budget is to borrow money from the Federal Reserve, international organizations, allies, and individuals. However, it’s not a sustainable solution, as the government still has to pay its credit and interest. It creates a cycle that balloons the federal government’s internal and external debt.
Amendments in economic policies, shifts in priorities, diversification of investments, and smarter budget allocation, among others, can change the deficit trend of the United States. Although fully paying off federal debt is a task possibly lasting several lifetimes, a strong political will can reform national budget trends, resulting in more efficient spending for American tax dollars.
The federal budget and government spending is one of the most complex topics in the federal landscape. Here’s what you may need to know in case of a government shutdown.