Federal Budget

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Federal Budget

An annual effort to balance federal spending in such areas as forestry, education, space technology, and the national defense, with revenue, which the United States collects largely through federal taxes.

Of the three branches of the U.S. government, Congress has the power to determine federal spending, pursuant to Article I, Section 9, of the U.S. Constitution, which states, "No money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law." The drafters of the Constitution sought to secure the federal Spending Power with legislators rather than the president, to keep separate the powers of purse and sword. In The Federalist No. 58, James Madison wrote, "This power of the purse may, in fact, be regarded as the most complete and effectual weapon with which any constitution can arm the immediate representatives of the people."

Still, the Constitution reserved for the president some role in legislative decisions regarding federal spending. The president may recommend budget allowances for what he considers "necessary and expedient," and if Congress does not heed these recommendations, the president may assert his qualified Veto power. But the ultimate determinations of federal expenditures belong to Congress.

When the federal government spends more money than it collects in a given year, a deficit occurs. By the mid-1990s, annual budget deficits were exceeding $200 billion, which alarmed the public and caused debate over how to balance the federal budget. President William Jefferson Clinton was successful in the latter years of his administration to provide a budget surplus, which reduced the national debt (the total amount the government owes after borrowing from the population, from foreign governments, or from international institutions) by several billion dollars. In 2000, Clinton announced a record $230 billion surplus, which exceeded the previous record surplus of $122.7 million set in 1999. However, the deficit returned under President george w. bush. In 2003, Bush announced an estimated $304 billion deficit, which established yet another record. He anticipated a deficit for 2004 of $307 billion.

To encourage better communication and cooperation between the president and Congress on matters concerning the federal budget, Congress has enacted laws formalizing the budget-making process. The first such law was passed in response to an enormous national debt following World War I. The Budget and Accounting Act of 1921 (31 U.S.C.A. § 501 et seq.) required the president to submit to Congress an annual budget outlining recommendations, or budget aggregates. Within budget aggregates recommended by the president, Congress then was to assign priorities. The 1921 act did not change the balance of powers assigned by the Constitution: Congress retained the right to ignore the president's recommendations, and the president retained the right to veto spending legislation. Rather, the act formalized and codified the roles of each branch.

Government Shutdown

Legal commentators have argued that by keeping separate the powers of purse and sword, drafters of the U.S. Constitution encouraged battles between Congress and the president. This friction between government branches is part of the constitutionally created system of checks and balances. Discord over federal budget priorities usually resolves in short order—no politician wants the reputation of jeopardizing the national or world economy. But on rare occasions in the 1990s, budget fights led to federal government shutdowns.

In October 1990, when Democrats in Congress sought to reduce the federal deficit by implementing a surtax on the income of millionaires, Republican President george h. w. bush followed through on a threat to Veto any budget legislation that included tax increases. The veto effectively shut down several federal agencies. The closures lasted only three days and occurred on a weekend. Fearing negative fallout from a more extensive government shutdown, Congress and the president reached a compromise plan to reduce the federal deficit without the surtax.

Major differences in political ideologies again surfaced in the fall of 1994, when control of Congress shifted from Democrats to Republicans. The new Congress set a goal of balancing the federal budget by the year 2002, a feat that had not occurred since 1969.

Republicans, buoyed by public sentiment favoring this goal, attempted to implement their balanced budget plan in the fall of 1995. But they faced opposition from many Democrats, among them President bill clinton. Although agreeing with the necessity of a balanced budget, Clinton opposed proposed cuts to entitlement programs such as Medicare, Medicaid, and Welfare. The dispute divided the branches of government as well as political parties, and in November 1995, an impasse led to the expiration of federal funding. Without adequate funding, much of the federal government—including agencies, museums, national parks, and research laboratories— ground to a halt. Some 800,000 government employees deemed "nonessential" were sent home.

Politicians on both sides of the issue faced disapproval from their constituents. Compromises were reached, and a week after it started, the shutdown was over.

Although ideological differences continued, Congress and the White House achieved a budget surplus of $69 billion in 1998. The surplus occurred three years after another partial government shutdown in December 1995 that lasted 21 days. The budget surplus increased to $122.7 billion in 1999 and $230 billion in 2000. Economists projected that the United States could pay off its debts by 2013 if the budget surpluses continued. Those surpluses, however, ended during the administration of President george w. bush. The Bush administration announced a record $304 billion deficit in 2003 and projected that the deficit in 2004 would be about $307 billion.

Further readings

Meyers, Roy T., ed. 1999. Handbook of Government Budgeting. San Francisco: Jossey-Bass.

Schick, Allen. 2000. The Federal Budget: Politics, Policy, and Process. Washington, D.C.: Brookings Institute.

As may be expected, the president and members of Congress do not always agree on federal budget issues. In the early 1970s, President richard m. nixon claimed Impoundment, which is an executive power to refuse to spend funds appropriated by Congress. Although Nixon argued that he had the right to impound in instances he believed were in the country's best interest, the U.S. Supreme Court affirmed a ruling by the Second Circuit Court of Appeals requiring Nixon to expend federal funds appropriated for the protection of the environment (Train v. New York, 420 U.S. 35, 95 S. Ct. 839, 43 L. Ed. 2d 1[1975]). However, this ruling was based on the terms of a federal Water Pollution law; the Court declined to address specifically whether the Executive Branch had the general power to impound funds appropriated by Congress.

Congress responded with the Congressional Budget and Impoundment Control Act of 1974 (2 U.S.C.A. § 190a-1 note et seq.; 31 U.S.C.A. § 702 et seq.). This act sought to restore and strengthen legislative control of the budget by requiring the approval of both the Senate and the House of Representatives for presidential recisions, or current-year cuts in funds appropriated by Congress. The 1974 act also established a budget committee in each congressional house and the Congressional Budget Office to provide technical information and support. Finally, this act required that Congress adopt budget resolutions setting limits on budget aggregates and allowing debates on spending priorities within those aggregates.

The 1974 act greatly reduced the president's role in the budget process—in particular, the president's responsibility of determining and recommending budget aggregates to Congress. Now, legislators could more readily ignore the president's recommendations and instead create for themselves, through budget resolutions, generous limits on budget aggregates. This arrangement allowed politicians more flexibility in setting spending priorities within the budget aggregates, thus pleasing their constituents. Not surprisingly, federal budget deficits grew.

In 1985, Congress reacted to the rising deficits by enacting the Balanced Budget and Emergency Deficit Control Act (popularly known as the Gramm-Rudman-Hollings Act) (Pub. L. No. 99-177, 99 Stat. 1038) (codified as amended in scattered sections of 2, 31, and 42 U.S.C.A.). The Gramm-Rudman-Hollings Act encouraged congressional conformity to deficit reduction targets specifically prescribed by the act. If, after the budget process has been completed, the budget exceeds deficit reduction targets, spending cuts are ordered by the president's Office of Management and Budget. The Gramm-Rudman-Hollings Act limited this executive power by providing congressionally mandated formulas for the spending cuts.

The Budget Enforcement Act of 1990 (2 U.S.C.A. § 601 et seq.; 15 U.S.C.A. § 1022) revised Gramm-Rudman-Hollings to make deficit targets flexible, not fixed. The 1990 act further required that reductions in defense and foreign spending cannot be used to increase domestic spending and vice versa. This requirement is known as the firewall. In addition, the 1990 act required that either revenue increases or spending cuts must balance increases in spending for entitlements, such as Aid to Families with Dependent Children. This requirement is known as pay-as-you-go.

The current federal budget process is extremely complex. Confusion and misunderstandings about the process contribute to disagreements over how to resolve the federal deficit. A very basic description of the process follows.

First, the president sends budget recommendations to Congress. Congress, which has the ultimate power to appropriate federal funds, may follow or ignore the president's recommendations.

Second, the House and Senate together devise an overall budget resolution, usually debating their differences at a conference committee. Following the guidelines of the budget resolution, House and Senate committees recommend spending for each of thirteen substantive areas. For the House of Representatives, these committees, which loosely correspond with the thirteen substantive areas, include Agriculture; Banking, Finance and Urban Affairs; Education and Labor; Energy and Commerce; Interior and Insular Affairs; Judiciary; Merchant Marine and Fisheries; Post Office and Civil Service; Public Works and Transportation; Science, Space, and Technology; Veterans Affairs; and Ways and Means. For the Senate, the committees, which also loosely correspond with the thirteen substantive areas, are Agriculture, Nutrition, and Forestry; Banking, Housing, and Urban Affairs; Commerce, Science, and Transportation; Energy and Natural Resources; Environment and Public Works; Finance; Governmental Affairs; Judiciary; Labor and Human Resources; and Veterans' Affairs. The full House and Senate together vote on the recommendations of the committees, following debate in a conference committee if necessary. The House and Senate then jointly send an authorization bill for each of the thirteen substantive areas to the president for signing. These bills merely establish guidelines for spending; they do not actually authorize spending.

Next, the House and Senate Appropriations Committees together draft thirteen separate appropriations bills, which correspond to the authorization bills. The full House and Senate together approve or disapprove each appropriation, conduct debates in conference committees to resolve differences, and amend appropriations if necessary. They then jointly send the thirteen appropriations bills to the president to be signed. If the bills are signed, spending is approved.

Upon congressional funds appropriations, the branches and agencies of the federal government are required to spend the funds on the functions for which they were appropriated. Congress may supplement budget appropriations if conditions change following the budget process, but supplemental appropriation in excess of authorization bills must be accounted for with spending cuts, amendment of the individual authorization bills, or amendment of the overall budget bill containing all the individual authorization bills.

Several wrinkles complicate the federal budget process. For example, Congress and the president enact as law permanent authorization and spending appropriations for entitlement programs such as Medicare and Medicaid. Thus, appropriations for entitlement programs become automatic, requiring no further congressional action during the annual budget process.

Appropriations funding the principal and interest owed on the national debt are, practically speaking, also automatic. Unlike appropriations for entitlement programs, those for the national debt must be approved annually by Congress. But approval for funding this debt is always granted; to allow the United States to default would severely damage the national and world economies. In the debate over how to balance the federal budget, politicians and citizens often overlook automatic federal spending.

Also complicating the budget process is the method of accounting used by the federal government, known as the cash method. The cash method of accounting calculates expenditures based upon the date they are paid. This method differs from the accrual method of accounting, which calculates expenditures based on the date the obligation is incurred. Although this may seem to be a subtle distinction, the cash method by its nature leaves more room for error in budget appropriations, some of which is corrected by a government statistic called the National Income and Product Accounts. Economists, politicians, and concerned U.S. citizens disagree over which accounting method, cash or accrual, would better serve the U.S. budget and the national economy. Moreover, economics is an inexact science whose complexities are not well understood by the average voter.

Added to the public's general confusion is the difficulty in estimating the federal budget, both revenues and expenditures, before the start of a fiscal year. Future unemployment, inflation, and growth in the gross national product are variables that will affect actual federal spending. And although the Treasury Department and the Senate Finance Committee estimate future revenues, no accurate determination will be available until the fiscal year has already ended.

Largely because the budget process is so complex, there is little agreement as to how to balance the federal budget. As the federal deficit lingers each year, so does public support of a constitutional amendment requiring a balanced budget. Yet several attempts at such legislation— in 1984, 1990, 1992, and 1994—have failed to pass in Congress. One vocal proponent of a balanced budget amendment is Texas businessman H. Ross Perot, who ran unsuccessfully for president in 1992. Perot denounced mushrooming deficits, blaming politicians who approve current spending to appease constituents at the expense of future taxpayers: "[I]n 1992 alone we will add over $330 billion to the $4 trillion we've already piled on our children's shoulders…. The weight of that debt may destroy our children's futures."

Yet a balanced budget amendment would not be without obstacles. One problem is defining a balanced budget, especially given the confusion over federal accounting methods, automatic expenditures, and inaccurate estimates of revenue and spending. For example, a federal budget employing the cash method of accounting may show a far greater deficit than the same budget employing the accrual method of accounting.

Another problem is that of the enforceability of a balanced budget amendment, which hinges in part on taxpayer standing, or legal entitlement to sue. Would all taxpayers have standing to enforce a balanced budget amendment, or would only taxpayers who could demonstrate actual damage as a result of an unbalanced budget? Further, courts are reluctant to make determinations of what they consider political questions, or issues best decided by the legislative or executive branch of government. Many commentators consider the judicial branch incapable of effectively analyzing and deciding issues concerning the federal budget.

Perhaps the greatest impediments to a balanced budget amendment, or any other meaningful reform of the federal budget, are the sacrifices faced by U.S. citizens: to have their taxes raised and their spending programs cut. Whether Congress, the president, and the public will make these sacrifices to reduce and perhaps eliminate the federal deficit is an engaging Political Question.

Further readings

Bowen, James W. 1994. "Enforcing the Balanced Budget Amendment." Seton Hall Constitutional Law Journal 4:565.

Devins, Neal. 1990. "Budget Reform and the Balance of Powers." William and Mary Law Review 31.

Schick, Allen. 2000. The Federal Budget: Politics, Policy, and Process. Rev. ed. Washington, D.C.: Brookings Institution.

Shojai, Siamack, ed. 1999. Budget Deficits and Debt: A Global Perspective. Westport, Conn.: Praeger.

Cross-references

Accrual Basis; Cash Basis; Congress of the United States; Constitution of the United States; Independent Parties; Reform Party; Separation of Powers.

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