AP US GOVERNMENT
& POLITICS
UNIT 9 PUBLIC POLICY
POWERPOINT #16:
The Federal Budget Process
Economic policymaking
• The government’s tools / options for economic policy:
– Fiscal policy: the use of the federal budget (taxing, spending, &
borrowing) to influence the economy.
– Monetary policy: altering the supply of money in order to
modify the overall economy – carried out by the Federal
Reserve.
• The FED is an independent regulatory commission; although nominated
by the president and confirmed by the Senate the FED is isolated from
public opinion and electoral politics.
– Regulations ‐ by adding regulations on the participants engaged in the
free market (i.e. minimum wage) the economy can also be altered.
• For example the FDA (Food & Drug Administration) affects what
businesses can sell. Side note: The FDA is not an independent regulatory
commission because it is under the direction of a cabinet department.
– Protectionism – involves trade policy.
• Revenue: (input) the money that is brought in to
the government, i.e. taxes.
• Expenditures: (output) the money that the
government spends; i.e. social security checks.
• Budget: a policy document allocating burdens
(taxes) and benefits (expenditures).
The Budget Process
Revenue
Expenditures
• Over the past
several decades
the United States
has spent more
than it has
brought in through
revenue – budget
deficit, which has
added to our
national debt.
Revenue
• Personal Income Tax: Americans are required
to pay the government a portion of the money
they earn.  the major source of revenue!
– The income tax became law under the 16th
Amendment, 1913 (prior to this the government received most of
its revenue through custom duties)
– The income tax is progressive; each bracket of income
is taxed at a different rate
• Corporate Income Tax: Corporations like
people also pay an “income tax” (the corporate
income tax system is also somewhat progressive 15‐35%
rates).
• Social Insurance Taxes (Payroll taxes):
Employees have these taxes deducted from their
paychecks and employers are required to match
it; these funds go directly to paying for Social
Security and Medicare.
• The government also collects revenue through custom
duties, excise taxes, and other fees.
• Due to budget deficits the government must also
borrow money to make ends meet.
– The government sells bonds (individuals, corporations, and
foreign countries can buy these)
– They borrow money from government trust funds
(Social Security); “intragovernmental debt”
• Often revenue amounts fall short of expectations
due to tax expenditures: special exemptions,
exclusions, and deductions that allow taxpayers
to pay less than expected.
• Such deductions are often referred to as
“loopholes;” they normally benefit middle class
and upper class Americans (Elite theory? The powerful get
what they want?)
• Examples:
– Taxpayers can deduct contributions they made to charities
– Homeowners can deduct their mortgage interest
– Businesses that invest in new plans and equipment can deduct
these expenses.
Expenditures
• Social Security: program that provides the
elderly with monetary assistance to prevent them
from falling into poverty.
– The program began under the
New Deal
– In the 1950s the program
expanded to include workers who
were disabled
– The average recipient receives about
$1,200 a month
• Medicare: program that provides health
insurance for the elderly.
– The program begin the 1960s, Johnson’s Great Society
– In 2003 Congress added a prescription drug benefit to the
program
• Both Social Security and Medicare have been
putting an increasing strain on the federal budget
due to aging baby boomers.
• National Defense: During the Cold War the
U.S. began to dramatically increase the amount of
funds related to the military.
– Defense contractors (interest groups) regularly lobby
for additional spending even during peace time
Why don’t we just balance the budget?
• Revenue collection is unpredictable (ex: We don’t know
who will apply for each deduction or who might get a raise at work)
• Spending can be unpredictable (ex: grandma might break
her hip and need to use her Medicare or we might have to go to
war)
• We might have to adjust taxation or government
spending to stimulate the economy.
• Entitlements are not up for negotiation.
Entitlements: policies for which Congress has obligated
itself to pay “X” level of benefits to “Y” number of
recipients. For example, Social Security.
The Budget Process
• Although the power of the purse belongs to
Congress, the budget process begins and ends
with the president.
The President
Submits to Congress
his/her budget
requests to run the
federal bureaucracy
Congress
The President
Makes
adjustments to
the proposal
Signs the budget and
uses the funds to run
the executive branch
• The budget process is far from simple, it starts
long before the fiscal year begins and because
multiple players act in their own self‐interest the
process is muddled.
Agencies & special
interests start lobbying
for the following year’s
budget
Bureaucratic Agencies looking for more $
Interest Groups looking for tax breaks and more $
State govts. want more grants
Public opinion
The President
Submits to Congress
his/her budget
requests to run the
federal bureaucracy
Congress
The President
Makes
adjustments to
the proposal
Signs the budget
and uses the
funds to run the
executive branch
Committees
OMB
CBO
GAO
The major players in the budget process:
• The President
• Congress
• Congressional committees
– House Ways & Means: House committee that
originates tax codes
– Senate Finance Committee: Senate committee that
originates the tax codes
– Appropriations: These committees exist in
both houses, they decide who gets what in
terms of federal money
• Office of Management & Budget (OMB): they
supervise the preparation of the federal budget
for the president.
• Congressional Budget Office (CBO): nonpartisan
agency that reports economic data to Congress,
usually the implications of their fiscal policies.
Do things go smoothly? usually no.
• Continuing Resolutions: When Congress cannot
come to a budget agreement, a CR can be passed
to allow agencies to continue spending money at
the previous year’s level.
• Reconciliation: toward the end of the budget
process some programs are revised to meet new
requirements. Since budgets cannot be
filibustered, some lawmakers push controversial
laws through the reconciliation process.
Can we make predictions about the what a
final budget will look like?
• Incrementalism: the best predictor of this
year’s budget is last year’s budget, plus a little
bit more.