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The budget of the U.S. Government is developed according to principles and statutory requirements defined by the Constitution and subsequent laws, including the Budget and Accounting Act of 1921, which established the executive budget process, and the Congressional Budget and Impoundment Control Act of 1974, which defined the congressional budget process. Further federal budgeting laws followed to help the Congress and the President manage the budget process and enforce budget decisions.
Each year, through the budget process, the President and Congress have the opportunity to set priorities for the federal government, determining how much should be spent through appropriations for annually-funded programs, known as discretionary spending, and providing the opportunity to review entitlement programs and the tax code.
Somewhat surprisingly, a large portion of the budget is on autopilot: much of the tax code is permanent law and does not need legislative action to be implemented; half of all federal spending (including funding for the individual entitlement programs such as Medicare, Medicaid and Social Security) is classified as mandatory and, unless policy makers enact new legislation, spending for those programs is not directly affected by the annual process; and interest on the debt is paid automatically.
The annual budget process begins with the President’s budget, which outlines the President’s recommendations for spending programs and tax policy and is due to Congress the first Monday of February. To prepare the budget, federal agencies submit budget requests to the Office of Management and Budget (OMB). OMB reviews the requests and makes changes, subject to the President’s guidance, before combining those requests into the President’s budget.
The President’s budget lays out the administration’s policy proposals and budget priorities for each agency at account and sub-account level detail. It includes specific proposals for changing tax laws and reforming the budget process. The Administration’s estimates of the country’s economic outlook for the coming years influence its spending and revenue projections and are also incorporated into the budget.
The congressional budget resolution is the Congress’ fiscal blueprint and is used to guide legislative activity in each congressional session. It establishes overall revenue and spending totals, allocates spending among major functions of government (e.g., national defense, transportation, health, agriculture), set limits on resources for discretionary spending programs and establishes target levels for mandatory spending.
The House and Senate Budget Committees draft and manage the passage of their two respective budget resolutions. They are not required to follow the President’s budget, but they often use it as a starting point in drafting the budget resolutions. Once each chamber adopts a budget resolution, representatives from each body meet in conference. If they are able to resolve their differences then each body votes on the conference agreement, which, when passed, becomes the Congressional budget resolution. However, the congressional budget resolution is not submitted to the president for signature and does not become law.
The Congress does not need to adopt a budget resolution to consider legislation to fund the government. For instance, in recent years, partisan differences over budget priorities has made it increasingly difficult for the Congress to adopt budget resolutions, and there have been years when the House, the Senate, or both have failed to pass a budget resolution. However, levels set in the last-passed budget resolutions may still limit new funding bills. In any case, the authority for the government to spend money is granted through the enactment of annual appropriations for discretionary programs and permanent laws that authorize funding for entitlement and other mandatory programs and implement tax and other revenue collections.
The budget resolution can include "reconciliation" provisions that instruct the various authorizing and tax committees to draft legislation that adjusts — or reconciles — revenue and spending levels to meet those established in the budget resolution. Reconciliation can be a powerful vehicle for passing legislation because the amount of time allowed for debate of a reconciliation bill is limited once it reaches the floor of the House and Senate. This is a particularly important provision in the Senate where a filibuster can indefinitely prevent passage of legislation until 60 members vote to end it. Because a reconciliation bill is protected from filibuster, and only requires 51 votes for passage in the Senate, it can be an efficient legislative vehicle for reforms to entitlement programs and tax laws. (Senate rules about "germaneness" protect reconciliation bills from being amended by non-budgetary provisions, which could otherwise turn the legislation into a "Christmas tree," or a bill that is loaded up with extraneous items that have little chance of passage on their own.)
The Appropriations Committee in each chamber writes the legislation that actually provides government agencies and programs with money to spend on discretionary programs. The total amount of resources available to the committees is currently governed by spending caps — one for defense and one for non-defense activities — established by the Budget Control Act of 2011 (BCA). The House and Senate Appropriations Committees each have 12 subcommittees, and each subcommittee crafts an appropriations bill determining the budget — or, spending — authority for the programs under its jurisdiction. For example, the defense subcommittee drafts the bill that funds defense programs. These separate bills then go through the normal legislative process — subcommittee vote, full committee vote, floor vote, a conference to reconcile differences between the House and Senate bills, a vote in each house of the final conference bill, and then the bill finally goes to the President for signature (or veto).
Appropriation bills must be passed by the Congress and signed by the President by October 1st, the beginning of the fiscal year (FY), or else affected agencies will have to shut down operations that are funded through annual appropriations. Some activities are "exempt" from shutdown, including the military services and emergency and other personnel who protect lives and property. Entitlement and other mandatory activities do not shut down because they do not require annual appropriations.
If the Congress cannot agree on regular appropriation bills, policymakers can resort to a continuing resolution (CR) that continues funding at some specified level. CRs have been known to use the previous year’s enacted level, the prior year’s level minus some percentage, or a level that splits the difference between House and Senate-passed bills. CRs are meant to provide lawmakers with time to compromise differences and enact regular appropriations legislation, but full-year CRs have been adopted. To expedite enactment of appropriations, policy makers also combine the bills that have not passed into one omnibus appropriations bill.
Sequestration is a process that, when ordered, automatically cuts spending across-the-board to achieve statutory funding levels. Originally created by the Balanced Budget and Emergency Deficit Control Act of 1985 (known as "Gramm-Rudman-Hollings" after the senators who sponsored the legislation), sequestration was designed to be a blunt instrument, whose arbitrary effects would be so undesirable that they would compel policymakers to reach compromise on budget legislation rather than allow the cuts to go into effect.
The 2011 BCA uses sequestration to enforce its budgetary policies. Enacted in exchange for an agreement to raise the debt ceiling (see below), the BCA imposed limits on discretionary spending for FY 2012 through FY 2021, saving over $900 billion, and created a Joint Select Committee on Deficit Reduction (which came to be known as the “Supercommittee”), which it charged with proposing legislation to reduce the deficit by an additional $1.2 trillion (or more) over 10 years. Because the Supercommittee did not reach agreement on how to reduce the deficit by the amount required, on March 1, 2013, automatic spending reductions, including sequestration of $85 billion from many discretionary and mandatory programs, were triggered.
Further sequestration remains a possibility to enforce spending limits unless the Congress and President prevent it from going into effect through new legislation.
The "debt ceiling" is the statutory limit on the amount of debt the Treasury Department can issue. Congress sets the limit and must raise the amount the Treasury department can borrow when the government’s liabilities go beyond the limit, or the country will default on some of its obligations. Contrary to some misperceptions, the debt ceiling does not directly affect government spending decisions. Refusing to raise the debt ceiling only prevents the Treasury from issuing the debt necessary to pay obligations that have already been incurred through existing policy and legislation. Historically, raising the debt ceiling has been relatively easy, but lately it has become a more controversial act. While not part of the formal budget process, the debt ceiling has been used as a bargaining chip in budget negotiations. When this happens, uncertainty surrounding the risk of default can erode business and consumer confidence and damage the economy.