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3. How Does the Government
Create a Budget?

The President and Congress both play major roles in developing the Federal budget.

The President’s Budget

The law specifies that, by the first Monday in February, the President submit to Congress his proposed Federal budget for the next fiscal year, which begins October 1.

In some years, it is not possible for the President to adhere to the normal schedule. The law does not require an outgoing President to transmit a budget, and it is impractical for an incoming President to complete a budget within a few days of taking office. President George W. Bush submitted a summary budget plan, A Blueprint for New Beginnings—A Responsible Budget for America's Priorities, to Congress on February 28, 2001.

President Bush’s detailed budget—which includes a main book and several accompanying books¹ —covers thousands of pages and provides an abundance of information. These books, which were submitted in April 2001, allow people from all walks of life to examine the budget from many different perspectives.

Action in Congress

Congress first passes a “budget resolution”—a framework within which the Members will make their decisions about spending and taxes. It includes targets for total spending, total revenues, and the surplus or deficit, and allocations within the spending target for the two types of spending— discretionary and mandatory—explained below.

• Discretionary spending, which accounts for one-third of all Federal spending, is what the President and Congress must decide to spend for the next year through the 13 annual appropriations bills. It includes money for such activities as the FBI and the Coast Guard, for housing and education, for space exploration and highway construction, and for defense and foreign aid.

• Mandatory spending, which accounts for two-thirds of all spending, is authorized by permanent laws, not by the 13 annual appropriations bills. It includes entitlements—such as Social Security, Medicare, veterans’ benefits, and Food Stamps—through which individuals receive benefits because they are eligible based on their age, income, or other criteria. It also includes interest on the national debt, which the Government pays to individuals and institutions that hold Treasury bonds and other Government securities. The President and Congress can change the law in order to change the spending on entitlements and other mandatory programs—but they don’t have to.

Think of it this way: For discretionary programs, Congress and the President must act each year to provide spending authority. For mandatory programs, they may act to change the spending that current laws require.

Currently, the law imposes limits, or “caps,” through 2002 on annual discretionary spending. The budget proposes to revise these caps beginning in 2001 to recognize changing fiscal conditions, and extend the caps at appropriate levels through 2006. Within the cap, however, the President and Congress can, and often do, change the spending levels from year to year for the thousands of individual Federal spending programs.

In addition, the law requires that legislation that would raise mandatory spending or lower revenues—compared to existing law—be offset by spending cuts or revenue increases. This requirement, called “pay-as-you-go,” or PAYGO, is designed to prevent new legislation from reducing the surplus or increasing the deficit. The budget also proposes extending the PAYGO system.

Once Congress passes the budget resolution, it turns its attention to passing the 13 annual appropriations bills and, if it chooses, “authorizing” bills to change the laws governing mandatory spending and revenues.

Congress begins by examining the President’s budget in detail. Scores of committees and subcommittees hold hearings on proposals under their jurisdiction. The House and Senate Armed Services Authorizing Committees, and the Defense and Military Construction Subcommittees of the Appropriations Committees, for instance, hold hearings on the President’s defense plan. To consider the budget’s proposed changes in taxes, the House Ways and Means and the Senate Finance Committees will hold hearings. The Budget Director, Cabinet officers, and other Administration officials work with Congress as it accepts some of the President’s proposals, rejects others, and changes still others. Congressional rules require that these committees and subcommittees take actions that are consistent with the budget resolution.

If you read through the President’s budget, the budget resolution, or the appropriations or authorizing bills that Congress drafts, you will notice that the Government measures spending in two ways—”budget authority” and “outlays.”

Budget authority (or BA) is what the law authorizes the Federal Government to spend for certain programs, projects, or activities. What the Government actually spends in a particular year, however, is an outlay. To see the difference, consider what happens when the Government decides to build a space exploration system.

The President and Congress may agree to spend $1 billion for the space system. Congress appropriates $1 billion in BA. But the system may take 10 years to build. Thus, the Government may spend $100 million in outlays in the first year to begin construction and the remaining $900 million over the next nine years as construction continues.

Monitoring the Budget

Once the President and Congress approve spending, the Government monitors the budget through:

• agency program managers and budget officials, including the Inspectors General, or IGs;

• the Office of Management and Budget;

• congressional committees; and

• the General Accounting Office, an auditing arm of Congress.

This oversight is designed to:

• ensure that agencies comply with legal limits on spending, and that they use budget authority only for the purposes intended;

• see that programs are operating consistently with legal requirements and existing policy; and

• ensure that programs are well managed and achieving the intended results.

Prodded by Congress, the Executive Branch has begun to pay more attention to good management of late, starting with the 1993 Government Performance and Results Act. This law is designed to improve Government programs by using better measurements of their results in order to evaluate their effectiveness.

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