The Federal Budget

The expenses of the operations and services provided by the federal government as well as the revenues to pay for those expenses make up the federal budget. Each government program, agency, and activity receives a certain amount of money; programs with a higher priority receive more funding than those considered less important. Preparing the budget and getting it through Congress is a complicated and, needless to say, very political process. The fights between Congress and the White House over spending priorities are annual events.

Preparing the budget

Since the Budget and Accounting Act of 1921, the president has had the authority to prepare the budget each year. The Office of Management and Budget (OMB), which was created in 1970 in the Executive Office of the White House, advises the president on budget policy and collects and analyzes the requests for funding from all government departments and agencies. The OMB then puts the budget together based on anticipated revenues and expenditures, and it is submitted to Congress in January.

Congress's role in determining budget policy increased with the passage of the Budget and Impoundment Control Act of 1974. The legislation set up budget committees in both the House and Senate, established the Congressional Budget Office (CBO) to give Congress access to expert advice to conduct a comprehensive budget review, and set a timetable for approval of the budget.

Balancing the budget

Debts and deficits are not the same thing. A deficit occurs when, in any given time period, spending exceeds revenue. A debt, on the other hand, is just the total amount one owes. So it is possible to run up a deficit in one year without going into debt, as long as excess money is available to cover the shortfall. And one can run up a surplus, and take in more revenue than gets spent, without necessarily erasing a large debt.

Individuals and families usually cannot run up deficits for long. They quickly become buried in debt and find themselves unable to borrow more money. A national government, by contrast, can support deficit spending for many years. Creditors trust that the government will pay back loans as promised, because declaring bankruptcy would exact severe costs to both the economy and to national prestige. U.S. deficit spending increased sharply in the 1980s through a combination of tax cuts and high defense expenditures, but the borrowing was able to continue for many years.

However, even governments eventually must balance their budgets. Too much debt requires exorbitant interest payments from the national treasury and can lower economic efficiency. By the mid-1980s, American leaders became worried about the mounting debt and set out to get deficit spending under control. In response, Congress passed the Balanced Budget and Emergency Deficit Control Act (1985), better known as the Gramm-Rudman-Hollings Bill after its sponsors, which was intended to reduce the deficit by automatic spending cuts. Its effectiveness was reduced by excluding entitlement programs such as Social Security and Medicare from the cuts. Subsequent amendments delayed the deadline for achieving a balanced budget.

The inability of Congress and the president to work out an effective approach to the budget convinced many that the only way to achieve a balanced budget was through a constitutional amendment. Even after Republicans gained control of Congress in 1994, a House proposal for the amendment failed in the Senate. The strong economy in the late 1990s made such drastic action unnecessary. In 1998, the federal budget recorded its first surplus in almost 30 years. The surplus grew over the next two years and then declined as the country entered a brief recession. Deficits returned after 2001 due to the Bush administration's tax cuts, increased spending on homeland security, and the escalating costs of the war in Iraq.