How the Federal Budget Process Works

On March 11, 2024, the Biden administration formally announced its proposed federal budget for fiscal year (FY) 2025. The budget proposal is the product of work undertaken throughout the executive branch under the direction of the White House Office of Management and Budget (OMB) to determine the financial requirements for running the government.

It covers ongoing government activities as well as expenditures for any new programs sought by the president for the government’s next fiscal year. Upon its release by the White House, the budget is submitted to Congress, initiating a formal legislative process of evaluation, debate, and amendment intended to culminate in the budget’s enactment.

Key Takeaways

• Early in the calendar year, the president prepares the government’s budget for the next fiscal year, beginning Oct. 1.
• The budget always sets out detailed spending allocations for the entire government and sometimes includes tax proposals.
• The president submits the budget to Congress for review and passage by both chambers.
• If a large number of senators object to the budget, they may filibuster a bill—i.e., prevent a vote on it—unless 60 senators vote to end the filibuster and act on its passage.
• If a majority of senators—but fewer than 60—favor the bill, they can use a reconciliation process that allows passage by a majority vote.

President’s Budget Proposal

A president’s budget provides a projected expenditure figure that reflects the total cost of both discretionary and nondiscretionary government spending, including detailed lists of the expenditures associated with the operations and programs for every federal department and agency. The budget document contains an explanation of the president’s policy goals and proposals. It sets out projections of annual expenditures and tax revenues, as well as the anticipated levels of the federal deficit or surplus for the fiscal year and for the following 10 years. Additional economic analyses often are included.

Some federal programs must have their funding—i.e., appropriations—reenacted each year. These discretionary matters include funds for most government agencies, including defense, as well as a wide range of public services, including research, education, security, economic development, international aid, and more. These annually funded programs account for approximately one-third of the federal budget.

The federal budget contains mandatory spending commitments—entitlements, whose funding constitutes more than 50% of the budget. These expenditures support programs not controlled by annual appropriations, including Social Security, Medicare, and Medicaid; the Supplemental Nutrition Assistance Program (SNAP); federal military and civilian employee retirement benefits; veterans’ disability benefits; and unemployment insurance. Funding for additional programs may have continuing, multiyear funding required by prior-year congressional authorizations.

Some administrations’ budgets combine with expenditure plans a set of tax proposals reflecting the president’s tax policies and providing some or all the revenue needed for new spending programs. The U.S. Department of the Treasury publishes these tax proposals in a Green Book. The Biden Green Book for fiscal year 2022 is the first since 2016, when the Obama administration announced tax proposals along with its expenditures for fiscal year 2017.

Congressional Budget Process

The submission of the president’s budget to Congress sets the stage for a formal, extended legislative process. If the opposition party controls Congress, the White House budget is often characterized as dead on arrival (DOA). Senators and representatives from the other party will request and make changes before passing a federal budget. However, when the same political party controls the executive branch and the two chambers of Congress, the president’s budget is likely to be passed more quickly and with far fewer changes.

Members of both the legislative branch and executive branch usually focus most on new spending proposals and changes to ongoing programs, as well as—when included in the budget—proposals to revise taxation.

Congressional Budget Resolution

Once Congress receives the president’s budget, it is analyzed by the staff of the Congressional Budget Office (CBO). The CBO issues an economic and fiscal evaluation, usually including 10-year projections. Then Congress devises its own budget plan. The Budget Committees of the Senate and the House of Representatives propose budget resolutions that set spending and revenue targets for the next fiscal year.

Unlike the budget submitted by the president, congressional budget resolutions focus exclusively on the amounts to be spent for governmental functions and programs and the amount of revenue to be raised. Expenditures are described both in terms of budget authority, the amount of spending authorized by the resolution, and as outlays, amounts actually spent by the government.

For example, the budget resolution might authorize spending of $100 million for highway repairs and improvements, but the outlay for such highway costs for the fiscal year might be only $50 million because the projects take more than one year to complete.

After the House and the Senate each passes its own budget resolution, the differences are resolved in conference, and the conference version is resubmitted to both chambers. The resolution sets expenditure and revenue levels for various categories of expenditures. These levels govern the allocation of funding for each committee with jurisdiction over specific government programs and operations. Usually, the appropriations are reported for the next five years, although sometimes a longer period is used. The budget resolution is a concurrent resolution of Congress, not a bill to enact or change law, and thus is not sent to the president.

If the House and the Senate fail to adopt a concurrent resolution, as has happened in several recent years, each chamber instead establishes its own budget targets. When agreement is not achieved on a common resolution, the expenditure and revenue levels set in the last agreed-upon budget resolution are used. Sometimes both chambers of Congress agree to pass a Bipartisan Budget Act that establishes budget targets for a two-year period, not merely one year.

Once the congressional budget targets are set, the House and Senate Appropriations Committees set an expenditure level for each of their 12 subcommittees. The Appropriations subcommittees—which set the amounts allowed for specific agencies and departments—conduct hearings on specific proposals and divide their allocations among the programs within their jurisdiction. Separately, authorizing committees consider legislation to provide for substantive changes to mandatory programs and for any new programs within their jurisdiction.

Appropriations bills covering mandatory and discretionary spending are drafted, reported to the full Senate or House by their respective committees, and voted on in each chamber. Committee bills reported to the floor of either chamber that exceed the funding level set by the budget resolution may be subject to a point of order and rejected. The House of Representatives requires a majority vote to waive a point of order, but a Senate waiver requires 60 votes.

After each chamber passes its bills, members of both the House and the Senate resolve any differences in conference. Once differences are settled, the agreed-upon conference bill is submitted for final passage in both houses and, when passed, sent to the president for signature or veto.

When tax law changes are proposed as part of the budget, they are referred to the legislative committees with jurisdiction over the federal tax laws—i.e., the House Ways and Means Committee and the Senate Finance Committee. These committees conduct hearings, draft the tax bills, and report them to each chamber for passage. Differences in the House and Senate versions are resolved in a conference, and the conference agreement is sent to each chamber for passage, and when passed, to the president.

Reconciliation Process

Congress also can resort to a special process, called reconciliation, to expedite the consideration of budget-related legislation and overcome procedural difficulties, particularly in the Senate, challenging the passage of spending and tax legislation. The reconciliation process usually is prompted by opposition from a significant minority of senators to budget provisions supported by the majority party’s leadership.

Reconciliation permits the passage of bills with a simple majority in the Senate. Thus, it is easier, and usually faster, to advance reconciliation bills than bills considered under the generally applicable Senate rules. The general Senate procedures permit a filibuster rule that allows opponents of a measure to require 60 votes in favor of a measure to allow its consideration and enactment.

The reconciliation process permits the inclusion of multiple provisions—generally within the jurisdiction of several committees—in a single bill. To use the reconciliation process, legislators must include a reconciliation directive in the budget resolution. The directive, a set of instructions, requires that the Appropriations Committees report bills that meet specified spending and/or revenue targets to the full chambers by a set date. If the targets are not met, then Budget Committee members, or others, are entitled to amend the bills to conform to the directive.

Then, the Budget Committee combines all the bills in a single reconciliation bill that is subject to only limited amendments and is entitled to an up-or-down vote. A House-Senate conference committee resolves any differences in the two chambers’ bills; each chamber votes on passage of the conference bill. When both approve it, the bill is sent to the president for signing.

Prior to the Senate vote, however, any extraneous provision—i.e., one not related to the bill’s purpose—can be removed under the “Byrd Rule,” if a point of order is sustained. Extraneous matters include provisions that do not affect spending or revenue raising, fall outside the reporting committee’s jurisdiction, exceed or fall short of the committee’s targets set under the reconciliation directive, increase deficits in years beyond the subject fiscal year without including “pay-fors” to offset future years’ spending, or change Social Security programs. A waiver of the extraneous-provision rule requires at least 60 senators’ approval.

Failure to Pass Appropriations by Start of Fiscal Year

While Oct. 1, the beginning of a new fiscal year, creates a natural deadline for completion of the budget and appropriations process, enactment of all appropriations legislation by that date is rare. Usually, if one or more department or agency funding bills are still pending, then Congress will pass one or more continuing resolutions to maintain government funding for such functions at their current levels and to avoid funding gaps that require them to shut down.

Since the 1990s, Congress has failed to pass a continuing resolution on several occasions, resulting in funding gaps and shutdowns. Although most funding gaps and shutdowns have lasted only a few hours or a day or two, several recent shutdowns have been lengthy.

In 1995, a dispute between then-President Bill Clinton and Congress over the source of budgetary estimates for FY 1996 resulted in a funding gap of 21 days before a compromise was reached. During the Obama administration, a 16-day gap occurred in 2013 when Congress refused to fully fund certain FY 2014 programs, including the Affordable Care Act; ultimately, a continuing resolution deferred the issue. The largest number of funding gaps, five in all, as well as the longest shutdown, occurred during the Trump administration. The record shutdown lasted from Dec. 21, 2018, until Jan. 25, 2019, a total of 34 days.

President Biden’s Budget

President Biden’s proposed budget would spend $6 trillion and raise $4.1 trillion in revenue in FY 2022, which begins Oct. 21, 2021. Its complementary expenditure and revenue measures represent the first time since 2016, when the Obama administration issued its FY 2017 budget, that a president’s budget is accompanied by proposed tax law revisions. Together, the Biden tax and spending proposals are intended both to support and effectuate the administration’s policy goals.

Biden’s budget proposal would increase the level of nondefense discretionary spending, which has declined markedly for over a decade. It includes the president’s American Jobs Plan and American Families Plan, as well as expenditures already enacted in the American Rescue Plan, such as the tax credits and other relief provisions that extend into FY 2022.

The budget reflects the White House’s expansive definition of infrastructure with its plan to invest not only in traditional roads, ports, rail, and air facilities but also in programs that prepare and support individuals through education, job training, and improvements to housing, water systems, support for a “care economy,” and more.

Some legislators object to the spending required by the Biden administration’s budget and strongly oppose its nontraditional infrastructure proposal. A bipartisan legislative group successfully negotiated with Biden an alternative proposal solely for traditional infrastructure. At the same time, Biden indicated that he will continue to seek passage of his plans for nontraditional infrastructure.

It is not clear if the bipartisan proposal will attract a sufficient number of Senate supporters to avoid a filibuster. In that case, enactment of both the bipartisan infrastructure proposal and the administration’s nontraditional infrastructure plans may require use of the reconciliation process.  

On the revenue side, the Biden budget would increase the corporate tax rate; impose a corporate minimum tax, perhaps in alignment with a global corporate minimum tax under development by other Organisation for Economic Co-operation and Development (OECD) member states; increase taxes on both investment income and long-term capital gains for individuals with incomes of $400,000 or more; and make the recently increased child tax credit and expanded earned income credit (EIC) permanent.

The proposal would cut back tax benefits for carried interests and most like-kind exchanges and would revise the taxation of foreign income to discourage corporate profit-shifting offshore to low- or no-tax jurisdictions while encouraging investments in U.S. jobs, clean energy, and economic development. The Biden administration aims to avoid any tax increase on individuals whose incomes are less than $400,000.

The House passed the FY 2022 omnibus appropriations bill on March 9, 2022, and the Senate passed it a day later March 10. The President signed it into law on March 15, the same day when the final FY 2022 continuing resolution expired.

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