The U.S. budget reflects lawmakers’ decisions to tax and spend, borrow and lend, and consume and invest. The size and scope of those decisions make the federal budget process one of the most important and complex exercises in public policy making. The formulation of the U.S. budget is an annual process that involves Congress, the President, and virtually all federal agencies. From start to finish, the process of formulating, legislating, executing, and auditing one annual budget is complex and lasts over a period of four fiscal years.
Federal Spending
Each year, lawmakers determine how much the federal government will spend and where the money will be allocated among 15 cabinet departments and dozens of independent agencies and commissions. But the budget is more than just a tally of numbers. It also expresses the policy priorities of our government — and country.
In 2023, total federal spending was $6.1 trillion — nearly one quarter of the economy.
Federal Revenues
The federal government finances its operations with revenues, including taxes and other receipts collected from various sectors of the economy. In 2023, total federal receipts were $4.4 trillion, about 16.5 percent of gross domestic product. The largest sources of revenues are the individual income tax and payroll taxes, followed by the corporate income tax, customs duties, and excise taxes.
To cover any shortfalls between revenues and spending, the government issues debt. The underlying structural mismatch between revenues and spending is the primary driver of growing deficits in the future, posing significant challenges for our budget as well as our political system. Addressing our growing debt will require policymakers to face those choices, and delaying those reforms will make the challenge even more difficult because more time passes and more debt accumulates.
Unless lawmakers are able to overcome political divides and use the annual budget process to close the structural gap between revenues and spending, deficits will continue to rise in coming decades.
Policy Options
Federal budget process reform can help encourage responsible budgeting and improve accountability.
Adding a Long-Term Focus
When lawmakers consider the budgetary impact of new legislation, they almost always only look at a 10-year window. That can obscure the longer-term effects of legislation, which could either improve or worsen our fiscal outlook. Process reforms that require more information about the long-term budget impact could help lawmakers overcome the current, short-term focus. Some reforms include:
- Extending the time horizon for baseline budget projections and estimates of the budgetary effects of legislation to 25 years instead of the current 10 years.
- Requiring the Congressional Budget Office to evaluate the long-term impact of the President’s budget.
Setting Medium- and Long-Term Fiscal Targets
To encourage lawmakers to focus on improving the budget’s long-term outlook, the budget process could require Congress and the President to establish statutory medium- and long-term targets for the national debt, as the Peterson-Pew Commission on Budget Reform has recommended. Once an agreement is achieved, subsequent budgets from the President and congressional budget resolutions would also be required to include policies for reaching those targets and reporting on a regular basis about their progress toward achieving those goals.
Alternatively, policymakers could agree that the budget shortfall should be stable over the business cycle (that is, run larger deficits when the economy is weak, but reduce them significantly during stronger economic periods). If the total deficit grows more slowly than the economy, debt as a percentage of gross domestic product would decline over time.
Any targets should be set at levels that would be reasonably attainable and flexible enough to allow for unforeseen events, such as economic downturns, national emergencies, and major disasters.
Strengthening Budget Enforcement Provisions
Once policymakers reach an agreement about levels of revenues, spending, deficits and debt, they could use budget enforcement provisions to help keep fiscal policies on the agreed-upon path.
- Scale back budget exemptions. The existing pay-as-you-go (PAYGO) rules, which require any legislated changes to revenues and entitlement programs that increase deficits to be offset by changes to decrease deficits, could be strengthened by scaling back or eliminating the number of programs that are exempt from the PAYGO requirement and subsequent enforcement action through sequestration (across-the-board cuts).
- Limit discretionary spending. Statutory limits on discretionary spending, including both defense and non-defense spending, could be capped at realistic levels, based for example, on historic trends.
- Enforceable debt targets. A new enforcement procedure to back up agreed-upon debt targets could be added. As a last resort, this reform could use sequestration — across-the-board cuts — to enforce debt goals to encourage lawmakers to adopt policy changes to meet the targets.
Additional U.S. Budget Resources:
- Congressional Research Service, Budget Process Reform: In Brief
- Committee for a Responsible Federal Budget, Budget Process Reform Options
- Bipartisan Policy Center, Fixing Fiscal Myopia
- American Enterprise Institute, Reforming the Budget Process
- The Brookings Institution, Reforming the Budget: How to Fix the Congressional Budget Process
