A Brief Introduction to the
Federal Budget Process

Robert Keith
Government Division

Updated October 20, 1997

96-912 GOV

CONTENTS:

Summary
Introduction
Key Budget Concepts and Terms

Elementary Units of Budgeting

Spending
Revenues
Deficit and Surplus
Accounts and Funds

Budget Coverage and Classifications

On-Budget and Off-Budget Entities
Operating and Capital Funds
Functional Categories
Discretionary and Direct (Mandatory) Spending

The Fiscal Year Cycle

The Fiscal Year
The Current Year, the Budget Year, and the Outyears

The Budget Baseline

Executive Budgeting

Formulation and Content of the President's Budget
Executive Interaction With Congress

Congressional Budgeting

Formulation and Content of the Budget Resolution
Budget Resolution Enforcement

Budget Resolution Aggregates
Allocations of Spending to Committees
Scorekeeping and Cost Estimates
Points of Order

The Sequestration Process

Establishment of the Sequestration Process
Changes Made by the Budget Enforcement Acts of 1990 and 1997
The Timing of Sequestration Actions

Spending Legislation

The Annual Appropriations Process

Revenue and Debt-Limit Legislation

Revenue Legislation
Debt-Limit Legislation

Reconciliation Legislation

Reconciliation Directives
Development and Consideration of Reconciliation Measures

Impoundment and Line-Item Veto

Impoundment

Rescissions
Deferrals

Line-Item Veto

For Additional Reading

Glossaries
Congressional Research Service Products

Summary

Each year, the federal government raises and spends more than $1.5 trillion through its budget process. The federal budget process is widely regarded as a complex, time-consuming, and arcane set of activities often suffused with controversy, frustration, and delay. These characteristics of the process are attributable to various factors, including the vast scope and complexity of federal activities and the numerous types of financial transactions needed to fund them, the profusion of participants in the budget process and the wide dispersal of budgetary power, and the far-reaching economic and political consequences of budgetary decision-making.

The federal budget cycle begins each year with the preparation and submission to Congress of the President's budget. The President's budget is only a request to Congress; Congress is not required to adopt his recommendations. Nevertheless, the President's budgetary proposals often guide congressional revenue and spending decisions, though the extent of the influence varies from year to year and depends more on political and fiscal conditions than on the legal status of the budget.

The Congressional Budget and Impoundment Control Act of 1974, as amended, establishes the congressional budget process as the means by which Congress coordinates its various budget-related actions. The process is centered around an annual concurrent resolution on the budget that sets aggregate budget policies and functional priorities for a multiyear period. Because a concurrent resolution is not a law ' it cannot be signed or vetoed by the President ' the budget resolution does not have statutory effect; no money can be raised or spent pursuant to it. The main purpose of the budget resolution is to establish the framework within which Congress considers separate revenue, spending, and other budget-related legislation. Revenue and spending amounts set in the budget resolution establish the basis for the enforcement of congressional budget policies through points of order. The budget resolution also initiates the reconciliation process for conforming existing revenue and spending laws to congressional budget policies.

Budget resolution policies are implemented by Congress through the enactment of annual appropriation and other spending measures, revenue measures, debt-limit legislation, and reconciliation bills. Each class of budgetary legislation is considered under its own set of rules and procedures.

The President may avail himself of special authority to impound appropriated funds. Under the Impoundment Control Act of 1974, the President may propose the cancellation of spending; special procedures are included in the act to provide for House and Senate action on these proposals. Beginning in January of 1997, the President has had special line-item veto authority to cancel not only discretionary appropriations, but new entitlement spending and targeted tax benefits as well. The line-item veto procedures provide that the President's recommendations go into effect unless disapproved by Congress within a relatively short period of time.

Introduction

Each year, the federal government raises and spends more than $1.5 trillion through its budget process. The federal budget process is widely regarded as a complex, time- consuming, and arcane set of activities often suffused with controversy, frustration, and delay. These characteristics of the process are attributable to various factors, including the vast scope and complexity of federal activities and the numerous types of financial transactions needed to fund them, the profusion of participants in the budget process and the wide dispersal of budgetary power, and the far-reaching economic and political consequences of budgetary decision- making.

This report provides a brief introduction to the federal budget process. (See Endnote 1.) Key budget concepts and terminology are defined and explained. The separate procedures that make up the federal budget process are identified and their salient features described. While a complete understanding of federal budgeting probably can be obtained only after much observation and study of the process in operation, broad exposure to its rudiments is a useful first step. Various resources 'for additional reading' are identified at the end of this report, which the reader may find helpful in exploring the subject in greater depth.

Key Budget Concepts and Terms

A thorough understanding of the federal budget process requires familiarity with dozens, if not hundreds, of concepts and terms. Some of the key concepts and terms relating to the elementary units of budgeting, budget coverage and classifications, the timing of budgetary actions, and the budget baseline are discussed below.

Elementary Units of Budgeting

Like any complex process, federal budgeting can be broken down into its fundamental units of activity and measurement.

Spending. The spending process encompasses three distinct phases involving budget authority, obligations, and outlays. Budget authority is enacted by Congress and the President in law. It provides the legal basis for federal agencies to make binding financial commitments in the form of obligations. Obligations stem from such agency actions such as entering into contracts, employing personnel, and submitting orders for goods and services. When obligations are liquidated, outlays ensue. Usually, outlays take the form of checks, electronic fund transfers, or other payments made by the Treasury Department.

Most of the new budget authority made available to agencies each year derives automatically from laws enacted during prior Congresses. The funds become available without the Congress taking any legislation action. For example, the funds necessary to pay Social Security benefits are provided automatically each year under a law enacted in the 1930s providing a permanent appropriation for the program. Other forms of budget authority which may bypass annual legislative action include borrowing authority and contract authority, under which agency heads may borrow funds or enter into contractual arrangements in advance of appropriations action, and the authority to spend offsetting collections (see discussion under Revenues, below).

The remaining new budget authority made available to agencies each year comes from currently enacted legislation, mostly in the form of measures providing annual appropriations. Many agencies have access to additional budget authority enacted in prior years that has carried over as unspent balances.

One of the most important characteristics of budget authority is the period during which it is available for obligation. Most budget authority for the routine operating expenses of the federal government is 'one-year' funding, meaning that it may be obligated only during the one fiscal year for which it is made available; after that, the funds lapse and no longer are available to be obligated. Budget authority enacted for procurement, construction, and similar long-term activities, on the other hand, often is 'multiyear' or 'no-year' funding, which may be obligated during a set number of fiscal years or an indefinite period. For all types of budget authority, outlays usually may be made for several fiscal years after the authority to obligate the funds has expired.

The measurement of the pace at which spending for particular programs occurs is referred to as the spendout rate. More precisely, this measures the rate at which budget authority becomes outlays during fiscal year periods. Spendout rates are determined largely by the timing of agency activity. Consequently, it is more difficult for Congress to control outlay levels than it is to control budget authority levels.

In the case of some spending programs, the federal government lends funds directly or guarantees them as a third party. For many years, the federal budget monitored such credit activities by tracking the level of direct loan obligations and loan guarantee commitments. Pursuant to the Federal Credit Reform Act of 1990 (incorporated into the Congressional Budget Act of 1974 as a new Title V by the Budget Enforcement Act of 1990), the federal budget now focuses on the subsidy element, rather than the cash flows, of these two types of programs. Loan subsidies now are recorded as budget authority and outlays.

Revenues. Revenues of the federal government (also referred to as receipts) derive from a number of sources. Individual and corporate income taxes account for about half of the receipts of the federal government, but social insurance taxes are an increasingly prominent source of revenues. Additional amounts accrue to the government from various excise taxes, customs fees, gifts, and miscellaneous receipts.

Some income to the federal government, which arises from business-like or market-oriented activities (such as the sale of electricity from federal power administrations), is referred to as offsetting collections. These funds are offset or deducted from federal spending instead of being counted as revenues.

Deviations from the 'normal' tax code (such as exemptions, deductions, and special rules) are known as tax expenditures. These devices provide a means of pursuing policy objectives in a manner analogous to spending programs. For example, the federal government promotes the goal of homeownership by providing a tax deduction for mortgage interest costs; comparable resources could be devoted to this goal through spending programs involving grants or loans.

Deficit and Surplus. The deficit or surplus is determined by the relationship of outlays to revenues. An excess of outlays over revenues is a deficit, while an excess of revenues over outlays is a surplus.

Accounts and Funds. Spending and revenues in the federal budget are recorded on the basis of accounts. In the case of annual appropriations, for example, each account usually corresponds to a separate heading in the legislation. Funds allocated to accounts are further divided by the programs, projects, activities, and objects of expenditure related to the account. In budget presentations, accounts are usually grouped together by the organizational unit (e.g.. the department or agency) that manages them. Some types of accounts, such as credit financing accounts, are included in budget presentations but are used only for accounting purposes; they do not reflect budgetary transactions.

Federal spending and revenues also may be characterized by the type of funds involved. The two basic types of funds in the budget are trust funds, which are used to carry out specific purposes in accordance with statutory requirements, and federal funds, which derive from the federal government's sovereign powers and are spent on the government's general activities.

Budget Coverage and Classifications

On-Budget and Off-Budget Entities. For the past several decades, the federal budget has merged together trust funds and federal funds into a single presentation, with certain exceptions. Entities included in the budget presentation are referred to as on-budget entities; those excluded are known as off-budget entities. At present, the Social Security trust funds and the postal service fund are the only off-budget entities. Despite their off-budget status, the President's budget includes information on the budgetary impact of these funds.

Operating and Capital Funds. The federal government does not use separate operating and capital budgets, unlike most state governments. Instead, funds for operating expenses and capital programs are merged together. However, the President's annual budget submission includes an analysis of such funds in the budget.

Functional Categories. One of the most long-standing methods of classifying federal spending is by functional category. The functional categories -- such as national defense, agriculture, transportation, and health -- are used to group together related spending accounts regardless of the agency or other unit that manages them. The functional categories thus represent a broad statement of budget priorities.

Discretionary and Direct (Mandatory) Spending. A more recent method of classifying federal spending, arising from the procedural requirements of the Budget Enforcement Act of 1990, depends on whether the spending is considered to be discretionary or direct. Discretionary spending is provided in annual appropriations acts, which fall under the jurisdiction of the House and Senate Appropriations committees. Direct spending, also called mandatory spending, is provided in substantive legislation, which is within the jurisdiction of the authorizing committees of the House and Senate. Most direct spending involves entitlement programs funded by permanent appropriations. Some entitlement programs, however, are funded in annual appropriations acts, but such spending is considered to be direct spending.

The Fiscal Year Cycle

The Fiscal Year. The federal budget process operates under a fiscal year cycle that is 12 months in length. The federal fiscal year begins on the October 1 preceding the calendar year for which the fiscal year is named (e.g., fiscal year 1999 begins on October 1, 1998, and ends on September 30, 1999). Most state governments use a fiscal year that runs from July 1 through June 30.

The Current Year, the Budget Year, and the Outyears. Federal budgeting uses a multiyear framework. At the time the budget is being considered, the fiscal year in progress is referred to as the current year; the upcoming fiscal year is called the budget year; and fiscal years after the budget year are known as the outyears.

The Budget Baseline

An important first step in the annual budget cycle is the preparation of a budget baseline. The baseline is the projection of revenue, spending, and deficit or surplus levels into future years based upon the status quo. Projections rest upon technical assumptions (e.g., changes in demographic patterns and program workloads) and economic assumptions (e.g., changes in the growth of the economy, inflation rates, and unemployment rates). They assume that policies consistent with existing law will be maintained. Thus, the baseline is an important tool for assessing policy changes inherent in budget proposals.

The executive and legislative branches each develop their own budget baselines. The baseline prepared for the President's budget is known as the current services estimates. Congress uses the baseline budget projections developed by the Congressional Budget Office.

Executive Budgeting

The President's budget, officially referred to as the Budget of the United States Government, is required to be submitted to Congress early in the legislative session, no later than the first Monday in February. The budget consists of estimates of spending, revenues, borrowing, and debt; policy and legislative recommendations; detailed estimates of the financial operations of federal agencies and programs; data on the actual and projected performance of the economy; and other information supporting the President's recommendations.

The President's budget is only a request to Congress; Congress is not required to adopt his recommendations. Nevertheless, the power to formulate and submit the budget is a vital tool in the President's direction of the executive branch and of national policy. The President's proposals often guide congressional revenue and spending decisions, though the extent of the influence varies from year to year and depends more on political and fiscal conditions than on the legal status of the budget.

The Constitution does not provide for a budget, nor does it require the President to make recommendations concerning the revenues and spending of the federal government. Until 1921, the federal government operated without a comprehensive presidential budget process. The Budget and Accounting Act of 1921 (P.L. 67-13; 42 Stat. 20-27), as amended, provides for a national budget system. Its basic requirement is that the President should prepare and submit a budget to Congress each year. The 1921 act established the Bureau of the Budget, now named the Office of Management and Budget (OMB), to assist the President in preparing and implementing the executive budget. Although it has been amended many times, this statute provides the legal basis for the presidential budget, prescribes much of its content, and defines the roles of the President and the agencies in the process.

Formulation and Content of the President's Budget

Preparation of the President's budget typically begins in the spring (or earlier) each year, at least nine months before the budget is submitted to Congress, about 17 months before the start of the fiscal year to which it pertains, and about 29 months before the close of that fiscal year. The early stages of budget preparation occur in federal agencies. When they begin work on the budget for a fiscal year, agencies already are implementing the budget for the fiscal year in progress and awaiting final appropriations actions and other legislative decisions for the fiscal year after that. The long lead times and the fact that appropriations have not yet been made for the next year mean that the budget is prepared with a great deal of uncertainty about economic conditions, presidential policies, and congressional actions.

As agencies formulate their budgets, they maintain continuing contact with the OMB examiners assigned to them. These contacts provide agencies with guidance in preparing their budgets and also enable them to alert OMB to any needs or problems that may loom ahead. Agency requests are submitted to OMB in late summer or early fall; these are reviewed by OMB staff in consultation with the President and his aides. The Budget and Accounting Act of 1921 bars agencies from submitting their budget requests directly to Congress. Moreover, OMB regulations provide for confidentiality in all budget requests and recommendations prior to the transmittal of the President's budget to Congress. However, it is quite common for internal budget documents to become public while the budget is still being formulated.

The format and content of the budget are partly determined by law, but the Budget and Accounting Act of 1921 authorizes the President to set forth the budget 'in such form and detail' as he may determine. Over the years, there has been an increase in the types of information and explanatory material presented in the budget documents.

In most years, the budget is submitted as a multi-volume set consisting of a main document setting forth the President's message to Congress and an analysis and justification of his major proposals (the Budget) and supplementary documents providing account and program level detail, historical information, and special budgetary analyses (the Budget Appendix, Historical Tables, and Analytical Perspectives), among other things.

Much of the budget is an estimate of requirements under existing law rather than a request for congressional action (approximately half of the budget authority in the budget becomes available without congressional action). The President submits a budget update (reflecting changed economic conditions, congressional actions, and other factors), referred to as the Mid-Session Review, by July 15 each year. The President may revise his recommendations any time during the year.

Executive Interaction With Congress

The President and his budget office have an important role once the budget is submitted to Congress. OMB officials and other presidential advisors appear before congressional committees to discuss overall policy and economic issues, but they generally leave formal discussions of specific programs to the affected agencies. Agencies thus bear the principal responsibility for defending the President's program recommendations at congressional hearings.

Agencies are supposed to justify the President's recommendations, not their own. OMB maintains an elaborate legislative clearance process to ensure that agency budget justifications, testimony, and other submissions are consistent with presidential policy.

Increasingly in recent years, the President and his chief budgetary aides have engaged in extensive negotiations with Congress over major budgetary legislation. These negotiations sometimes have occurred as formal budget 'summits' and at other times as less visible, behind-the-scenes activities.

ENDNOTES

(1) Substantial portions of this report are drawn from the Congressional Research Service's Manual on the Federal Budget Process, by Allen Schick, Robert Keith, and Edward Davis, CRS Report 91-902 GOV, December 24, 1991, 218 pages. A revised version of the manual will be available in 1998.