Federal Budget

Article byRutan Bhattacharyya
Reviewed byDheeraj Vaidya, CFA, FRM

What Is The Federal Budget?

The federal budget is an essential plan for a federal government’s projected spending and income for a specific fiscal year. It is the primary means of redistributing gross domestic product and national income to fulfill the requirements of economic growth.

Federal Budget

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It represents the objectives and activities of the government, thus reflecting debates surrounding multiple economic philosophies and historical debates. This budget is the source of the wages paid to federal contractors and employees and the equipment bought by the US military, among other endeavors. The compilation of this budget takes place every fiscal year.

Key Takeaways

  • The federal budget definition refers to a government estimate of the expenditure and revenue for a certain fiscal year. It helps the federal government set spending priorities and pay for them efficiently.
  • There are various federal budget challenges, for example, rebuilding the nation’s infrastructure and ensuring that the increasing medical expenses do not get out of hand.
  • Governments earn their revenue by levying taxes and import duties. Also, various countries earn income from state-owned companies.
  • The federal budget approval comes from the US Congress, and the president must sign it to release the money that funds every federal activity.

Federal Budget Process Explained

The federal budget definition refers to a financial plan that itemizes the public expenditure for the federal government every fiscal year, which begins on October 1 and ends on September 30 of the subsequent year. The US Congress gives federal budget approval, per the constitution of the US, and the president signs. Without the signature, utilizing the funds to meet the costs associated with federal activities is not possible.

The president asks every federal agency to submit budget requests, and the OMB or Office of Management and Budget compiles them. Then, the president submits their budget to Congress.

Typically, Congress uses it as a guideline to develop a budget resolution, which is then utilized to create appropriations bills, allocating funds for multiple government agency categories. The duration of the entire budget process is 18 months. This procedure came into existence in 1974 due to the Budget Control Act. However, one must remember that Congress does not always adhere to the schedule. When this happens, it keeps the government running until the approval of the budget by submitting a continuing resolution.

Federal budget expenditures are of two types — mandatory and discretionary spending. The former includes entitlement programs, for example, Social Security, and is stipulated by law. These expenses are permanent appropriations.

On the other hand, individual appropriation bills must approve discretionary spending. Congress must set the discretionary spending levels annually and fund all expenses for managing every government activity and agency. This type of expenditure is a part of the government’s fiscal policy. Moreover, it contrasts with compulsory programs, where individuals have the legal right to claim benefits if they are eligible.

In some nations, the expenditure category has a third component, interest on the national debt. This is the cost governments incur for taking on debt.

Most governments, including the US federal government, earn revenue through the imposition of taxes. The taxes include the ones levied on business earnings, family income, and imports, for example, tariffs and customs duties. This is a non-operating expense that one can find on the income statement. It represents the overall interest due on borrowings, for example, a line of credit, loan, bonds, etc.

Moreover, governments also levy taxes on gasoline to fund infrastructural development, which involves constructing and maintaining roads, building bridges, and more. Taxes may also include Pigouvian taxes, imposed on entities posing damages to society. For example, manufacturers polluting the river must pay additional taxes in certain countries.

In various nations, the government generates revenue through state-owned organizations, for example, oil companies. The income earned from such businesses is a direct source of revenue for these governments. A few examples of state-owned companies in the US are Farm Credit Banks, the United States Postal Service, and Federal Financing Bank.

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Purpose

This budget helps the federal government set its spending priorities, for example, national defense, education, Social Security, etc. Moreover, the budget helps it identify the best way to pay for such priorities using tax revenues.

Examples of Federal Budget

Let us look at these federal budget examples to understand the concept better.

Example #1

The federal budget of the US has two spending categories called mandatory and discretionary spending. Mandatory spending is the estimated amount the government must spend to keep offering the benefits established by Congress. Such benefits include Medicare, Social Security, Medicaid, etc. Only the US Congress can change this estimate.

Example #2

On December 29, US President Joe Biden signed a spending bill worth $1.7 trillion. It will help the US government operate till the end of the current federal budget year. Moreover, it will provide Ukraine with billions of dollars in new aid to help the nation fight against Russia’s armed forces.

Challenges

Let us look at some federal budget challenges:

  • Efficiently managing the costs associated with providing higher education
  • Securing and strengthening Social Security
  • Rebuilding the country’s infrastructure
  • Keeping the rising healthcare costs in check
  • Strengthening the national defense
  • Renewing federal investments, specifically in research and development
  • Reforming an outdated tax code

Frequently Asked Questions (FAQs)

1. What is the federal budget deficit?

A deficit arises when the federal government’s expenditure is more than its revenue. For instance, the expenditure of the US government exceeded its revenue by $336.1 billion in the fiscal year 2023. As a result, the country recorded a national deficit.

2. How to balance the federal budget?

There are various options and variations available for governments to balance the budget. For example, the federal government can increase taxes, cut taxes, increase spending or cut spending to balance the budget for a certain fiscal year.

3. What are the four phases of the federal budget cycle?

The entire budget procedure involves four phases:
– Budget formulation
– Congressional budget procedure
– The execution and control of the budget
– Audit and assessment

4. How much of the federal budget goes to the military?

According to the Congressional Budget Office or CBO, approximately one-sixth of the US government’s federal budget expenditures account for national defense.

This article has been a guide to what is Federal Budget. Here, we explain the topic in detail with its purpose, examples, and challenges. You may also find some useful articles here –

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