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Budget process, federal

Originally published in the NTA Encyclopedia of Taxation and Tax Policy, Second Edition, edited by Joseph J. Cordes, Robert D. Ebel, and Jane G. Gravelle. The encyclopedia is available in paperback from the Urban Institute Press. Order online at www.uipress.org or call toll-free 1-877-847-7377

Al Davis
formerly, House Budget Committee
Updated by Philip Joyce
George Washington University

Annual procedures whereby the president submits a budget for congressional review and disposition.


The U.S. government has an annual budget cycle. The cycle normally begins when the president submits the budget to Congress early in the calendar year. The president’s budget translates many of his political priorities into a plan of action. Then Congress responds. At a minimum, Congress must pass annual appropriations bills or one or more "continuing resolutions" that may substitute for appropriations bills. In many years, Congress does more. It passes legislation that changes the permanent laws affecting revenues and spending, such as Medicare. The congressional budget process is used to coordinate budget-related congressional action.

Time horizon

In the 1970s, presidential and congressional budgets typically covered one year. During the 1980s, the budget time horizon grew longer. Five-year congressional budgets became the norm and are now required by law. Even longer projections have sometimes been made. For example, the budget resolution approved in 1996 covered a seven-year period. The new congressional majority wanted to balance the budget and it took seven years to show that the plan could achieve balance, relying as it did on savings to grow from cutting the rate of growth of spending.

A longer budget horizon promotes better planning and discourages gimmicks that create only onetime savings or onetime revenue gains. A longer horizon also discourages spending initiatives or tax cuts that are small for many years but balloon in later years. However, over a longer time period, technical estimating limitations become more severe. Moreover, the policies assumed in a very long-range budget may not be sustainable because the current Congress cannot tie the hands of future Congresses. This fact is particularly salient in the case of appropriations because they are made annually and do not become part of permanent law.

Economic assumptions

Underlying any federal government budget is a set of economic assumptions. For example, a president may decide that his program will be "good for the economy," and he may assume in his budget that economic growth will be higher, or inflation or unemployment lower, than in recent years. His assumptions may be more optimistic than the consensus of private economic forecasters. Congress is likewise free to decide on its own economic assumptions for the congressional budget resolution. The levels of revenues, entitlement spending, and deficits in the budget are quite sensitive to the underlying economic assumptions. Optimistic assumptions can bring budgets closer to balance and minimize the size of spending cuts or revenue increases needed to bring the budget into balance. Presidential budgeting during the late 1980s was criticized for using "rosy scenario" economic assumptions to make it look as if the president’s program would achieve a balanced budget.

The power of economic assumptions can be illustrated: in early 1997, the Congressional Budget Office (CBO) estimated that if interest rates became 1 percentage point lower than the CBO had projected through the year 2002, with no change in inflation, the budget deficit would be lower by $48 billion in 2002. In 1997, the congressional budget resolution assumed 34 Budget process, federal a deficit reduction of $34 billion in the year 2002 to come mainly from a reduction in interest rates. This reduction, in turn, was to come from law changes to reduce budget deficits. (Lower interest rates reduce the cost of federal debt service.) As a result, the congressional budget did not have to recommend law changes that by themselves would balance the budget. Once policies were recommended to move the budget close to balance, the assumption was that a dividend from lower debt service costs would bring the budget the rest of the way into balance.

So-called technical assumptions, such as those about patterns of medical service use, are also very important in making budget projections. Typically, the congressional budget process relies on the CBO to make these assumptions.

Economic and technical assumptions can change over time. These changes can greatly alter perceptions about budgetary problems and influence the federal government’s response. For example, in January 2001, CBO projected a fiscal year 2005 surplus of $433 billion and cumulative surpluses of $5.6 trillion between 2002 and 2011. This represented a substantial improvement in the budget outlook since even a year earlier (when the 2005 surplus was only projected at $268 billion, and the cumulative 10-year surpluses were estimated at approximately $3 trillion). This substantial improvement in the forecasted outlook was driven entirely by changes in economic and technical assumptions; no significant budget legislation had been enacted during 2000. The 2001 surplus forecast, however, helped to pave the way for the Bush tax cuts that were enacted during 2001. By January 2003, a deficit of $73 billion was forecast for fiscal year 2005. While a significant portion of this change resulted from policy changes (the Bush tax cut and spending for the war on terrorism), as much as half of it resulted from changes in the economy or in technical assumptions.

When the federal budget was far out of balance, the major limiting factors on congressional budget action were the difficulty in reaching agreement and lawmakers’ tolerance for painful cuts in spending or painful increases in taxes. If the federal budget comes to balance, the budget agenda may become more sensitive to small changes in budgetary projections. For example, if a $20 billion deficit is projected, Congress might want to eliminate the deficit. If a $20 billion surplus is projected, Congress might want to cut taxes or increase spending. Such swings in policy could occur, even though they would be driven by statistically tiny errors in budgetary projections, given that total spending and revenues currently exceed $2,000 billion.

President's budget

The president’s budget is not just a set of highlights and suggestions, or a presentation of the president’s political preferences - although it is surely that. The president’s budget is normally presented in great "line-item" detail. Large documents are printed and backed up with detailed supporting materials from the government agencies. Because of the president’s prominence as a nationwide elected official, his ability to marshal the resources of the executive branch, and, in comparison, Congress’s representation of so many varied points of view, the president’s budget is often the point of departure for subsequent congressional decisions.

Congressional budget

The present congressional budget process was implemented in the Congressional Budget Act of 1974. That legislation was partly a congressional response to concerns over President Nixon’s unilateral and aggressive withholding of authority to spend. The new budget act created a new, less one-sided mechanism. The legislation was also a response to the criticism that Congress lacked a mechanism for coordinating the response of its numerous committees to the president’s budget, or for coordinating an alternative budget. The drafters of that legislation did not wish to take away more power than necessary from the then-standing committees of Congress. When they created the new budget committees, they did not eliminate other committees, nor did they intend that the budget committees become creators of "line-item" authorization law changes or appropriations bills. The mission of the budget committees and the budget resolution is to provide guidelines and targets for the money-related actions of other committees. The budget resolution allows Congress to speak with one voice to its various committees.

The original budget act included a variety of procedural rules, and since its passage, the Senate has added its own special procedural rules, which are too extensive to discuss in this entry. The act also established the CBO, which produces baseline budget projections, studies related to the budget, and estimates of the budget effects of proposed legislation, except for changes in revenues, which are generally estimated by the Joint Committee on Taxation. The CBO is independent of the executive branch and is separate from the much smaller staffs of the House and Senate budget committees.

The congressional budget takes the form of a resolution that is voted on by the House and the Senate, first separately and then in response to a conference committee recommendation. The final budget resolution is not submitted to the president for his approval or veto. The congressional document is normally quite different in character from the president’s budget.

Content of a budget resolution

The report accompanying the budget resolution includes a statement of underlying economic assumptions. These are recommended by the budget committees and need not be identical to the president’s, or the same as the advisory assumptions normally suggested by the CBO.

The congressional budget resolution presents total spending, total revenues, the recommended change in revenues, the budget deficit (or surplus), and the implied level of federal debt that is subject to statutory limit. (If that level of debt is higher than the amount authorized by current law, Congress must later vote to raise the "debt ceiling," even though it has already voted on a budget that will create higher debt. This must-pass debt legislation often becomes a vehicle for legislative riders, one of which was the original Gramm-Rudman-Hollings (GRH) law discussed further on.) In the budget resolution, spending is broken down among 20 budget "functions" covering such categories as defense, international affairs, agriculture, transportation, Medicare, other health services, and net interest. The "functions" include many government programs and do not track one-for-one with congressional committee jurisdictions.

Officially, the amounts in the budget resolution no longer include the Social Security trust funds, which are expected to run surpluses for many years. Nevertheless, committee report language typically provides projections for the budget including Social Security, and the budget has been discussed in terms of the total, including Social Security. For example, when the 1997 budget resolution was presented as a plan for balancing the budget, that balance was achieved only with Social Security Trust Fund surpluses included. The official numbers in the budget resolution continued to show deficits because they did not include Social Security surpluses.

The report on a budget resolution also includes committee "allocations" (i.e., ceilings) and a revenue floor, and it may include "reconciliation instructions." Allocations and the floor on revenues are enforced through points of order in the House and Senate. Most often, it takes 60 votes in the 100-member Senate to waive a point of order against considering legislation that would cause spending to exceed a budget allocation or revenues to be cut below the floor. In the House, the "rule" controlling amendments and debate may waive points of order, and the rule is subject to a majority vote.

One allocation is made to the Appropriations Committee. Appropriations are made each year for fixed dollar amounts. This one allocation covers a great deal of spending. For example, for fiscal year 1997, spending determined by appropriations was about $550 billion, one-third of total spending including Social Security. For a "budget year" (e.g., for calendar year 1997, the "budget year" was the coming fiscal year, 1998), this allocation is enforceable by a point of order. In the more than 20 years since the process began, total appropriations have been held quite closely to the allocation in the budget resolution.

Because there is only one budget resolution allocation for all appropriations, program-by-program assumptions that the budget committees may have used may not be very influential. On the other hand, if a major issue, such as a division of funds between defense and nondefense, were to be articulated and fully debated, the assumption associated with that decision might greatly influence the subsequent appropriations process.

The rest of the budget comprises revenues and "mandatory" spending. Mandatory spending includes "entitlements," which are created by laws that entitle certain classes of people to benefits. The largest entitlements are Social Security ($470 billion in 2003) and Medicare ($274 billion). Mandatory spending also includes obligatory spending, such as interest on the federal debt ($153 billion in 2003) and payments arising from court decisions. Typically, neither tax law nor underlying authorizations specify numerical amounts; rather, they set the terms and conditions under which individuals pay taxes and receive benefits such as Social Security. Unlike spending subject to appropriations, revenues and mandatory spending will be whatever results from the underlying law. For this reason, revenues and mandatory spending are more difficult to predict, and they are more difficult to control than spending subject to appropriations.

While detailed appropriations are the responsibility of a single committee in the House and Senate, responsibility for revenues and mandatory spending is spread among many committees. The report on a budget resolution creates allocations for each of the authorizing committees. These allocations cover the total amount of mandatory spending contemplated in the budget resolution. Because the authorizing committees have different program responsibilities, the program implications of these multiple allocations may be clearer than for the single allocation provided for annual appropriations. For example, if the Committee on Ways and Means has a spending allocation that is significantly below the current law level, Congress probably knows whether Medicare reductions are likely and, if so, the broad outlines of the probable changes.

Although there are points of order against considering legislation that would cause spending to exceed an allocation, or revenues to fall below the floor, points of order are powerless to reduce spending that would occur under existing law or to raise revenues. For this reason, management of mandatory spending, unlike appropriations, also takes place through "reconciliation instructions" to the various authorizing committees. These instructions do not have to be included in a budget resolution, but they frequently have been included since budget deficits became a concern. Reconciliation instructions are numerical targets stretching over several years. Recently, the time span has been five years or more.

From 1981 through 1993, the instructions were to reduce mandatory spending and/or raise revenues. After 1995, however, the new congressional majority began to include instructions for major tax cuts. Tax cuts were ultimately enacted in 1997, 2001, and 2002.

Historically, Congress has usually come quite close to meeting the reconciliation targets, although in one year a reconciliation effort was abandoned, and once, during the mid-1980s, reconciliation action was not completed until early in the next session of Congress. In 1995, reconciliation was not completed because the president vetoed the implementing legislation. In 1996, Congress completed action on only one of three reconciliation bills that were planned in the budget resolution.

Level of detail in a budget resolution

Much less detail is reported in budget resolutions than in the president’s budget. This is not to say that the numbers in a budget resolution are arbitrary. To win a majority of votes for budget resolutions, the budget committees, congressional leadership, committee chairs, and others must reach understandings about the assumptions behind the budget resolution’s numbers. Budget committee reports may or may not be specific about these understandings.

Reconciliation amounts are usually net numbers, and committees have frequently included both pluses and minuses in their reconciliation recommendations. For example, the taxwriting committees might have been reconciled to raise $50 billion in added revenue over several years. Such an instruction would not normally preclude tax cuts when they are paid for with other changes. For example, a committee might include $60 billion of added revenues and $10 billion of tax cuts to arrive at the net increase of $50 billion. A committee might even pay for tax cuts with spending reductions rather than tax increases.

Misunderstandings about the congressional budget process

The congressional budget process is sometimes misunderstood. As explained above, the congressional budget resolution frequently lacks the kind of detail that some observers desire. There may not be an up-or-down vote on a budget resolution that reflects the president’s budget submission. There is no one up-or-down vote that sends an entire congressional budget to the president for his signature (or veto). The budget resolution is not sent to the president.

A vote on a House-Senate conference agreement on the budget resolution is not the end of budget-related votes. After this vote, there are votes on up to 13 separate appropriations bills (House, Senate, and conference agreements). There may also be votes on interim appropriations measures called "continuing resolutions." Finally, there are often votes on a reconciliation bill.

Gramm-Rudman-Hollings fixed deficit targets

In 1985, budget law took a new turn when the Gramm- Rudman-Hollings (GRH) law was enacted. This law pushed budget statutes beyond establishing institutions and procedures. It required that budget deficits be brought down to specified amounts. The budget was to be balanced in 1991 (a later amendment to the Gramm-Rudman Hollings law delayed the target date for a balanced budget to 1993). If Congress did not enact legislation sufficient to do so, automatic spending cuts would be triggered. This automatic mechanism did not include tax increases. The manner in which spending would be cut was specified by formula, and some programs were exempted - for example, Social Security. GRH did not achieve its original aims; in fact, the actual deficit for fiscal year 1993 (the year in which GRH projected a balanced budget) was $255 billion.

In 1990, the 1985 GRH law was replaced by the Budget Enforcement Act (BEA). Before 1990, Congress had delayed and revised the targets. In 1990, Congress passed major deficit-reduction legislation and changed the law to emphasize prevention of future legislation that would increase budget deficits. The pursuit of further deficit reduction then became, once again, a matter of judgment, rather than law.

"Pay as you go" and caps

The BEA established a two-part control mechanism. Spending subject to appropriation was made subject to a separate series of annual limits, or caps on both budget authority and outlays. If this spending exceeded the cap in any year, there would be an automatic cut in programs subject to appropriation.

The second part of the mechanism was called "pay as you go." Pay as you go covered the rest of the budget: mandatory spending and revenues. In simplified terms, if the cumulative effect of mandatory spending and revenue legislation is to raise the budget deficit in any one year, then "sequestration" is triggered. Mandatory spending programs like Medicaid and farm price supports are cut across the board, except that Medicare can be cut by no more than 4 percent, and numerous programs, such as Social Security and unemployment compensation, are exempt. There is no automatic increase in revenues. In 1993, as part of another deficit-reduction bill, the caps and pay-asyou-go mechanisms were extended. In 1997, the mechanisms were again extended as part of another deficit-reduction bill.

Constitutional amendment to balance the budget

In the early 1990s, a major budget process issue became a proposed constitutional amendment to require a balanced budget. In the Senate, in both 1995 and 1996, that amendment fell a few votes short of the necessary two-thirds needed to send it to the states for possible ratification. However, since 1997, the constitutional amendment has seemed less urgent to supporters because of the passage of legislation that reduced program spending enough to balance the budget.

Line-item veto

In 1996, Congress passed a law (the Line Item Veto Act of 1996) to give the president the power to react to enacted legislation by canceling funding for items drawing upon appropriations, to cancel new items of mandatory spending, or to cancel "limited tax benefits," if the president found that such cancellations would reduce budget deficits. After cancellations by a president, the burden is on Congress to enact legislation overturning the cancellations. The law provides for expedited congressional procedures to make it less difficult than normal for Congress to work its will in this matter. In 1997, the president canceled a number of items that were included in appropriations bills, one item of added direct spending from a budget reconciliation bill, and two "limited tax benefits" from a tax bill. In June 1998, the Supreme Court declared the new law to be unconstitutional.

Current budget projections

The federal budget, which had been in deficit continually between fiscal year 1969 to fiscal year 1997, experienced surpluses in each year from fiscal year 1998 ($69 billion, or 1.1 percent of GDP) to fiscal year 2001 ($127 billion, or 1.4 percent of GDP). Starting in fiscal year 2002, however, a dramatic turnaround occurred. In fact, the government experienced a fiscal year 2002 deficit of $158 billion, a dramatic $285 billion turnaround in one year. For fiscal year 2003, the deficit ballooned again to $375 billion, and the forecast is for a deficit approaching $500 billion for fiscal year 2004. This reversal in fiscal fortunes resulted from a number of factors, including the aforementioned tax cut, the wars on terrorism and Iraq, and deterioration in the economy in the early 2000s. While there have been calls for additional fiscal discipline, no specific disciplinary measures have been enacted.

ADDITIONAL READINGS

  • Congressional Budget Office, The Budget and Economic Outlook. Washington, DC: U.S. Government Printing Office, annual.
  • Council of Economic Advisers. Annual Report of the Council of Economic Advisers and Economic Report of the President. Washington, DC: U.S. Government Printing Office, annual.
  • Office of Management and Budget. Budget of the United States Government. Washington, DC: U.S. Government Printing Office, annual.