J. OF PUBLIC BUDGETING, ACCOUNTING & FINANCIAL MANAGEMENT, 15(2), 239-250
SUMMER 2003
THE EVOLUTION OF THE FEDERAL BUDGET PROCESS
Barry Anderson, Sandy Davis and Theresa Gullo*
ABSTRACT. The federal budget process is a compilation of many rules and
procedures, enacted primarily over the past century. Initially neutral as to
budget outcome, that process, by the mid-1980s, had evolved to emphasize
reducing the deficit. And the budget enforcement procedures put in place to
control deficits, combined with robust economic growth, helped to produce
historic budget surpluses by the end of 1990s. But in 2001, the economy slowed
significantly. The budgetary effects of that slowdown, of the terrorist attacks of
September 11, 2001, and other factors, brought a return of the deficit in 2002--ironically, just as the budget enforcement framework put in place to control
deficits expired. Now, lawmakers face the question of what new framework
should take its place. This article discusses the evolution of federal budgeting,
emphasizing the major characteristics of each period and what factors drove
reform efforts at each stage.
INTRODUCTION
The U.S. Constitution grants the power to tax and spend to the
Congress. Taxes may be levied and funds drawn from the Treasury only
after laws crafted by the Congress specifically for those purposes have
been enacted. James Madison, famed as the Father of the Constitution,
asserted that "[t]his power over the purse may, in fact, be regarded as the
most complete and effectual weapon with which any constitution can
arm the immediate representatives of the people, for obtaining a redress
of every grievance, and for carrying into effect every just and salutary
measure" (Madison, Federalist 58).
----------------------* Barry Anderson is Deputy Director, Congressional Budget Office. Sandy
Davis is a principle analyst, Budget Analysis Division, Congressional Budget
Office. Theresa Gullo is Chief, State and Local Government Cost Estimates
Unit, Budget Analysis Division of The Congressional Budget Office.
Copyright © 2003 by PrAcademics Press
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But beyond this broad grant of legislative authority to tax and spend,
the Constitution is silent about fiscal policy and budgeting. It does not
specify how tax or spending laws are to be formed or carried out,
provides no direct role for the President in fiscal matters (beyond his
power to veto legislation approved by the Congress), and says nothing
about a national budget system. That system has evolved over the years
through a combination of legislative procedures and practices, statutes,
and informal practices. Its evolution continues as lawmakers confront
new fiscal challenges and long-term budgetary pressures.
WHAT IS THE FEDERAL BUDGET?
People use the terms “federal budget” and “federal budget process”
as if those terms always mean the same thing to all people. This is
misleading on both counts. In the case of the “budget,” there are at least
three possible definitions: the budget as proposed by the President and
submitted to the Congress each year, the Congressional budget as
specified by the aggregate limits set in the annual budget resolution, or
the enacted budget. The enacted budget is what results from all the laws
on the books today that control the collection and use of funds plus all of
the laws passed by the Congress that affect taxing and spending for a
given fiscal year.
By the same token, there is no single “budget process”. Rather, that
term refers to all the rules and procedures affecting the Presidential
proposal and Congressional consideration of spending and tax
legislation. Almost all of the provisions that govern current consideration
of the budget were adopted in the last 75 years, and are the result
primarily of three laws–the Budget and Accounting Act of 1921, the
Congressional Budget and Impoundment Control Act of 1974, and more
recently, the Balanced Budget and Emergency Deficit Control Act of
1985.
To understand federal budgeting and the federal budget process,
however, one must start with the Constitution, where the “power of the
purse” is given to the legislative branch. Only Congress may levy and
collect taxes, borrow, and pass laws to spend the people’s money.
(United States Constitution, Article I, Section 8). The Constitution also
makes clear that funds can only be drawn from the U.S. Treasury
pursuant to appropriations made by law. (United States Constitution,
Article I, Section 9). The Constitution, however, does not provide
THE EVOLUTION OF THE FEDERAL BUDGET PROCESS
241
specifics about how these legislative functions are to be carried out, nor
does it assign a specific role to the President in managing the nation’s
money.
THE PROCESS PRIOR TO 1921
For the first one hundred years or so of the United States, the budget
process was as simple as the Congress deciding how much it wanted to
tax, spend, and if necessary, borrow. They passed a bill each year taking
these actions and presented it to the President for his signature (or
overriding his veto), and then watching as the Executive Branch carried
out the requirements of the enacted legislation. (For a more in-depth
discussion of the federal budget process prior to 1921, see: Luis Fisher,
Presidential Spending Power, 1975).
The first major statute enacted by the Congress to harness its
constitutional powers and to assert control over government spending
came in 1870 with the passage of the Anti-deficiency Act.
(Antideficiency Act of 1870, 31 U.S.C. 1341, 1342, 1517). That act
established the first legislative mechanisms to enforce the constitutional
requirements that the Congress provide appropriations each year before
agencies could spend money, and that agencies could not enter into
contracts for future payments in excess of those appropriations.
Prior to 1921, however, there was little or no coordination of the
budget requests that were presented by executive branch agencies to the
Congress. The Treasury department gathered the appropriation requests
by the executive departments and agencies and included them, without
review, in a “Book of Estimates”. Agency officials then justified their
requests before different Congressional committees with little
coordination. The President’s role in the budget process–except for
signing spending bills–was not formally specified. Thus, the extent of
each President’s formal participation in that process varied greatly.
Without a formal statutory role, he was limited in his ability to influence
or coordinate the efforts of cabinet members who were nominally
subordinate to him. In addition, there was no real effort by the President
to use the budget process to set policy priorities.
As the 20th century progressed, revolutionary changes in economic,
fiscal, and budgetary conditions made clear the need for a more orderly,
formal budget process at the national level. In 1913, the Federal Reserve
System was established to centralize regulation of the nation’s banking
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system, help control the money supply, and coordinate monetary policy.
In that same year, the 16th Amendment to the Constitution, which gave
the Congress the power to levy an income tax, was ratified by the states.
With the nation’s entry into World War I, federal expenditures rose
drastically–climbing from around $700 million annually before the war
to $18.5 billion in 1919 (with a deficit in that year of $13.4 billion).
(Schick, 2000, p. 14).
During this time, many states, increasingly concerned with economy
and efficiency, began adopting more formal budget systems that began
with a coordinated proposal submitted by the governor. Such efforts
stimulated calls for change at the federal level.
BUDGET AND ACCOUNTING ACT OF 1921
The Congress responded to these calls for reform by enacting the
Budget and Accounting Act of 1921. (The Budget and Accounting Act
of 1921, Public Law 67-13; 42 Stat 20-27.) That act focused for the first
time on the development of a coordinated budget system by requiring the
President to submit a single, consolidated budget proposal for
Congressional consideration each year. The Act also established the
Bureau of the Budget (predecessor of the current Office of Management
and Budget) to provide the President with the means necessary to
produce such a proposal, and the General Accounting Office, to provide
Congress with the ability to ensure accountability. The new act also
established a specific procedure (often violated) to keep the agencies
from lobbying for additional appropriations.
Congress acted at this time to consolidate jurisdiction over
appropriations within the appropriations committees. That jurisdiction
had been dispersed after the Civil War and had decreased spending
control. However, beginning with New Deal programs such as Social
Security, the portion of the budget under the direct control of the
Appropriations Committees began to shrink, especially through the use
of such techniques as mandatory or direct spending. Such spending is
not controlled in the annual appropriations process and many members of
Congress and observers of Congressional budgeting became increasingly
concerned that the piecemeal approach to considering the budget limited
the Congress’s ability to direct federal spending and make
comprehensive policy.
THE EVOLUTION OF THE FEDERAL BUDGET PROCESS
243
These problems came to a head in the early 1970s when President
Nixon asserted that he had the authority to impound (refuse to spend)
funds that had been appropriated by the Congress. Faced with such a
fundamental challenge to its spending authority, the Congress enacted
the Congressional Budget and Impoundment Control Act of 1974.
(Congressional Budget and Impoundment Control Act of 1974, Public
Law 93-344; 88 Stat 297-339).
CONGRESSIONAL BUDGET ACT OF 1974
The Budget Act attempted to strengthen the Congressional role in the
making of the budget by enhancing and centralizing its budgetary
capacity and providing additional committees and staff to manage the
budget process. The House and Senate Budget Committees were created
to coordinate the Congressional consideration of the budget. The
Congressional Budget Office also was established as a source of
nonpartisan analysis and information relating to the budget and the
economy.
The Act created a new instrument–the concurrent budget resolution-to coordinate the various parts of the Congressional budget. The
concurrent resolution is a form of Congressional decision making that
limits Congressional action but does not require a Presidential signature
and thus does not become law. Its purpose is to provide a blueprint for
the budget to guide the internal Congressional actions over the course of
a fiscal year. The concurrent budget resolution made a significant
difference in the way the budget was dealt with because it gave the
Congress an opportunity to formulate and vote in one package on its
overall vision for the federal budget. Prior to 1974, the Congress had no
such opportunity.
Finally, to curb the President’s ability to circumvent Congress’s
power to allocate funds through impoundment, the Act established a
procedure that only gave the President the authority to propose
impoundments–now called rescissions and deferrals–but prevented the
proposals from having any permanent effect unless the Congress
explicitly approved them.
The Congressional budget process, as enacted in 1974, was neutral
as to budget outcomes. It did not intend to curb spending or deficits,
which were not considered a great problem before the 1970's. Except
during periods of war or economic crisis, persistent deficits had been an
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aberration in the nation’s history. Levels of public debt were relatively
low and tended to shrink in relation to the overall size of the growing
economy during peace time.
Beginning in the early 1980s, however, federal deficits and debt
ballooned, and members of Congress as well as the President began to
advocate using the budget process to control both spending and deficits.
By the mid-1980s, the deficit took center stage in the budget debate,
driving yet another reform effort that focused on using the budget
process to control and eventually eliminate those deficits.
THE BALANCED BUDGET AND EMERGENCY DEFICIT CONTROL
ACT
The first event in the new era of deficit control was the passage in
1985 of the Balanced Budget and Emergency Deficit Control act,
popularly known as Gramm-Rudman-Hollings (GRH) after the major
Congressional co-sponsors of the bill. (Balanced Budget and Emergency
Deficit Control Act, Title II of Public Law 99-177; 99 Stat 1038-1101).
For the first time in federal budget history, GRH used a formula
approach to specifically constrain the deficit; an approach that was
designed to eliminate it by setting annually-declining targets.
GRH required the President’s budget to propose levels of revenues
and outlays consistent with the deficit targets. Congressional action
following receipt of the President’s budget also was to ensure that the
deficit target for that year was met. Finally, GRH introduced
sequestration as an enforcement mechanism. In the event that deficit
targets were exceeded, the President was required to withhold sufficient
budgetary resources to reduce spending by the requisite amount needed
to meet the targets. (A number of the largest and most popular programs,
most notably social security, were either fully or partially exempted from
sequestration). Presidential action in this regard was ministerial. He had
no choice but to apply the reduction rigidly according to a formula
specified by law. (Originally, Gramm-Rudman required that the
estimates and calculations that determine whether there is to be a
sequester were to be made by the Comptroller General of the General
Accounting Office, which is a Legislative Branch agency. The first
presidentially ordered sequester for the fiscal year 1986 was overturned
by the Supreme court bases on the ruling that the role for the Comptroller
General in the triggering of sequestration was unconstitutional. A
THE EVOLUTION OF THE FEDERAL BUDGET PROCESS
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subsequent law (Public Law 100-119) made the procedures constitutional
by substituting the director of the Office of Management and Budget and
reinstating the sequester.)
Faced with potentially large sequesters, GRH was amended in 1987
to revise the declining deficit targets and push the fiscal year in which
the budget had to be balanced further into the future (from fiscal year
1991 to fiscal year 1993). Over the next three years, however, while the
threat of sequester loomed each fiscal year, the goals of GRH were
largely thwarted through a combination of rosy economic assumptions
and gimmicks (such as shifting paydays and relying on one-time asset
sales that do nothing to address the structural deficit).
By 1990, the deficit targets specified in GRH would have required
such large tax increases and/or spending cuts that the President and
Congress again became convinced that a change was necessary. That
change came through the passage of the Omnibus Budget Reconciliation
Act (OBRA) of 1990. OBRA 1990 accomplished two major things: it
enacted tax and spending changes that reduced the 1990-1995 deficits by
about $500 billion, and it established procedures to prevent those savings
from being eroded by subsequent legislation. Those enforcement
procedures are contained in Title XIII of OBRA, which was designated
as the Budget Enforcement Act of 1990 (BEA). (The Budget
Enforcement Act of 1990 (Title XIII of Public Law 101-508; 104 Stat
1388-573 through 630).
Many commentators have mistakenly suggested that the BEA was
intended to lead to balanced budgets. It was not. The BEA was designed
solely as a means of ensuring that the amount of deficit reduction
accomplished in OBRA would be achieved. It did that by instituting
several important procedures.
First, it abandoned the concept of fixed deficit targets that had been
the hallmark of GRH. The BEA only attempts to prevent increases in the
deficit that were the direct responsibility of the Present and Congress,
(i.e., legislation that decreased receipts or increased spending). Changes
in the deficit that were not directly controllable by the President and
Congress–those resulting from economic and technical re-estimates–
would be ignored. This was in reaction to the old GRH, under which
lawmakers would go home at the end of a session thinking they had
reduced the deficit to the required level, only to return in January for the
next session, to discover that economic and technical re-estimates had
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eaten up most or all of the enacted saving, making the next year’s target
all the more difficult to achieve.
Second, the BEA replaced across-the-board cuts with a scheme that
targeted enforcement only in the category of spending where a breach
occurs. That way, only the violators would be punished for breaching
targets. Congress limited total discretionary appropriations to a specified
level, and directed authorizing committees to report reconciliation
legislation that achieved a specified amount of savings in mandatory
(also know as entitlement or direct spending) programs. If all the
committees had adhered to these directions, sequestration would have
been avoided without unduly burdening one category of spending, but
since not all committees adhered to their reconciliation instructions,
some spending categories were unduly burdened. In some cases, even
though committees adhered to the spending targets and required cuts,
deteriorating economic conditions resulted in increased deficits anyway.
The Appropriations Committees generally kept annual appropriation
acts within the limits established in the budget resolution each year. But
spending for entitlement programs, which is within the jurisdiction of the
legislative or authorizing committees, climbed steadily during this
period. Entitlements, or the major federal benefit programs, are
generally provided for under permanent law. They do not require
periodic renewal and spending for them often rises automatically with
increases in the number of program beneficiaries, inflation, and other
price level indices. Spending increases for entitlements during this
period tended to outpace the legislative changes made in reconciliation
laws that were intended to rein them in. Therefore, each year a sequester
loomed as the session neared an end in large part because of growing
deficits driven by increases in permanent entitlement law. Since most
such spending was exempt from sequestration, discretionary programs
would have borne the brunt of the sequester, even though they had not
caused the targets to be breached in the first place.
The BEA solution generally worked. Caps were placed on
discretionary spending that during the deficit years were largely adhered
to. In addition, new mandatory programs or expansions that have been
enacted have generally been paid for by some form of receipt increases
or decreases in other mandatory spending.
This pay-as-you-go
enforcement requirement eventually became known as PAYGO.
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Finally, the BEA closed a loophole in GRH that allowed legislation
to be enacted without penalty, even though it increased the deficit for the
year above the deficit target. Under GRH, as long as the legislation was
enacted after October, when OMB issued its final sequester report for
that fiscal year, there would be no sequester. Under BEA, a breach for
discretionary programs is offset by sequestration-of current year
spending or reductions in the limits for the budget year depending on
when the legislation is enacted. For legislation affecting mandatory
spending or receipts, if the legislation increases the combined deficits for
the current year and the budget year, the increase is offset by
sequestration.
THE SURPLUS ALTERS THE BUDGET DEBATE.
By the late 1990s, a record peacetime economic expansion,
combined with the overall budget disciplined imposed by the BEA
framework, combined to produce the first budget surpluses at the federal
level in 30 years. Those surpluses grew to record levels by 2000.
With the emergence of large surpluses, the BEA framework had a
different effect. In a time of surpluses, the discretionary caps and
PAYGO requirement generally bar spending or revenue laws that would
make projected surpluses lower. But large surpluses put new stresses on
the discretionary cap and PAYGO disciplines and led many lawmakers
and observers to question whether those disciplines in their current form
can continue to be effective. In the early to mid 1990s, the consensus to
reduce and eliminate the deficit made it easier for lawmakers to maintain
the budgetary disciplines they had put in place to carry out that
consensus. But no overall consensus emerged for the use of surpluses to
replace the one that had formed to eliminate the deficit. In that
environment, the discretionary caps and the PAYGO requirement, as set
in 1997, become essentially irrelevant.
To comply with the letter of the law while boosting discretionary
spending above the statutory limits, lawmakers used a number of
approaches—including advance appropriations, obligation and payment
delays, emergency designations, and specific legislative direction. For
example, in 1999 and 2000, lawmakers enacted emergency
appropriations totaling $34 billion and $44 billion, respectively—far
above the annual average for such spending from 1991 to 1998.
(Congressional Budget Office, The Budget and Economic Outlook:
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Fiscal Years 2004-2013, pp. 114-117.) Comparable amounts were
enacted for 2001 and 2002 mainly in response to the terrorist attacks of
September 11, 2001. During the first 6 years of the BEA (1991 through
1997), emergency appropriations totaled $52 billion; during the 4 years
following a surplus, emergency appropriations totaled more than 3 times
that amount.
To accommodate increased spending for 2001, lawmakers simply
increased the caps on budget authority and outlays by $99 billion and
$59 billion, respectively. The following year, they increased the limits
on budget authority and outlays by even larger amounts—$134 billion
and $133 billion, respectively. From 1998 through 2002, total
discretionary appropriations grew at an average annual rate of 8.5
percent; by comparison, from 1991 through 1997 such spending declined
at an average annual rate of 1.1 percent.
Similarly, after the emergence of surpluses, lawmakers enacted
legislation to increase mandatory spending or reduce revenues but used
legislative directives to statutorily comply with the PAYGO requirement.
Thus, for 2001 and later years, lawmakers eliminated more than $700
billion in positive balances---that is, amounts that would have triggered a
PAYGO sequestration. (Congressional Budget Office, The Budget and
Economic Outlook: Fiscal Years 2004-2013, p. 116) Most of that
amount stemmed from the estimated drop in revenues attributed to the
Economic Growth and Tax Relief Reconciliation Act of 2001. By
contrast, during the earlier years of the BEA, the balances on the
scorecard were zero or negative, and lawmakers statutorily removed
negative balances so that those savings could not be used to offset the
costs of new mandatory spending or revenue legislation.
CONCLUSION
In 2001, the twin effects of the slowing economy and the terrorist
attacks of September 11 combined to eliminate the surpluses that
emerged beginning in 1998. In 2002, after four consecutive years of
surpluses, the deficit returned. Now, the demands of the war on
terrorism and continuing efforts to stimulate the economy continue to
place pressure on the budget. Ironically, as these demands arose, the
BEA framework expired (at the end of fiscal year 2002).
THE EVOLUTION OF THE FEDERAL BUDGET PROCESS
249
Looming beyond the short-term budget horizon is a major problem:
the budgetary impact of the aging and retirement of the baby-boom
generation. That demographic phenomenon will dramatically increase
spending for federal health and retirement programs. At the same time,
those working to support the aging boomers will decline as a proportion
of the population, which will lead to a concurrent loss in the federal
payroll taxes that are needed under current law to support spending for
Social Security and Medicare. The combined effect of these phenomena
are likely to drive the budget back into sustained deficits over the longer
term (beyond 2011) unless changes are made to reverse those budgetary
trends.
Lawmakers face those and other pressures as they decide how or
whether to extend the BEA framework. In the past, a political consensus
on budget policy has been needed to impose successful budget
enforcement disciplines. That consensus appears to be the most
important factor in ensuring that the budget process---however it is
constructed---functions smoothly.
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Schick, A., Keith, R., & Davis, E. (1991, December). Manual on the
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Schick, A. (2000). The Federal budget: Politics, policy, process.
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