Federal revenues consist of the money taken in by the Government through exercise of its sovereign taxing power. This includes individual and corporate income taxes, social insurance taxes (such as social security payroll taxes), excise taxes, estate and gift taxes, and customs duties.
Revenues do not include receipts received by the Federal Government for sale of products or services rendered (such as sale of timber from Federal lands or entrance fees for national parks). Such receipts are netted against the Federal spending totals in the budget and are thus called “offsetting receipts.”
Federal Spending: Budget Authority, and Outlays
Spending levels in congressional budget resolutions consist of two types of numbers: budget authority and outlays. Outlays are disbursements by the Treasury. When the Treasury issues a check in fiscal year 2018, that is a fiscal year 2018 outlay. Budget authority, on the other hand, is legal authority for an agency to enter into obligations which will result in outlays. When Congress appropriates funds for a particular program, it is enacting budget authority—not outlays.
To illustrate the relationship of budget authority to outlays, assume that the Congress has decided to build a ship costing $1 billion. The Congress would appropriate $1 billion of new budget authority for a ship in the defense appropriation bill for the new fiscal year. This means that the Department of Defense has legal authority to enter into obligations totaling $1 billion during the new fiscal year. However, this budget authority will only result in outlays when the shipbuilders are issued checks by the Treasury. If the contractors are paid only upon completion of each stage of the construction, the $1 billion of budget authority could result in outlays over several years.
In other cases, new budget authority appropriated for a fiscal year results in outlays during the same fiscal year. An example of this is appropriations for salaries of Federal workers.
Chart 12-1 below illustrates the overall relationship of budget authority to outlays. In this diagram taken from the President’s fiscal year 2013 budget, $3.667 trillion in new budget authority is requested for fiscal year 2013. It is estimated that this new authority to obligate the Federal Government during fiscal year 2013 would result in outlays of $2.833 trillion in fiscal year 2013 and outlays of $834 billion in future years. The remaining $970 billion within the $3.803 trillion in total outlays estimated for fiscal year 2013 comes from budget authority enacted in prior fiscal years.
The basic forms of budget authority include (1) appropriations, (2) borrowing authority, (3) contract authority, and (4) authority to obligate and expend offsetting receipts and collections.
Budget authority includes the credit subsidy cost for direct loan and loan guarantee programs.
Budget authority may be classified by its duration (1-year, multiple-year, or no-year), by the timing provided in the legislation (current or permanent), by the manner of
determining the amount available (definite or indefinite), or by its availability for new obligations.
Budget Deficit/Surplus and the Federal Debt
A budget deficit or surplus is calculated by figuring the difference between outlays and receipts for a given fiscal year. For example, in fiscal year 2017, receipts were $3.316 trillion and outlays were $3.982 trillion, yielding a budget deficit of $665.4 billion.
In contrast to an annual deficit, the Federal debt is the accumulated debt of the Federal Government. Whenever the Federal Government runs a budget deficit, the additional borrowing to finance the deficit adds to the Federal debt. By contrast, whenever the Federal Government runs a budget surplus, the Federal debt decreases because the Treasury can use the surplus to redeem some of the outstanding debt.
Federal law contains a statutory limit on the Federal debt, commonly called the “debt ceiling.” If the activities of the Government require a higher limit, Congress must enact a law to raise the debt ceiling. Most recently, the debt limit issue was addressed when the Bipartisan Budget Act of 2018 (BBA 2018; P.L. 115-123) was enacted on February 9, 2018. Section 30301 of the BBA 2018 suspended the debt limit through March 1, 2019.
In order to formulate the President’s Budget or a congressional Budget Resolution, the President’s Office of Management and Budget and the Senate and House Budget Committees need to have a starting point. The starting point they most often use is a set of projections showing the levels of spending and revenues that would occur for the upcoming fiscal year and beyond if existing programs and policies are continued unchanged, with all programs adjusted for inflation so that existing levels of activity are maintained. These projections are known as a “current policy” or “current services” baseline. (An alternative baseline that has been used by Congress from time to time adjusts programs for inflation only where required by law. This is usually called a “current law” baseline.) In considering proposed levels of spending and revenues, Senators and Members of Congress usually describe their proposals as being above, below, or equal to the baseline.
Major Types of Federal Spending
Senators and Members of Congress sometimes propose budget plans which divide Federal spending into four conceptual components: entitlements/mandatory spending; defense discretionary spending; non-defense discretionary spending (NDD); and interest payments.
Entitlements are laws which require the Government to pay specified benefits to qualifying individuals. The fundamental characteristic of an entitlement is the absence of annual decisions on funding levels. Instead, formulas included in laws establishing the entitlements determine how much money the Government has obligated itself to spend. For example, the Social Security laws prescribe formulas under which retired workers receive benefits based on the length of time they have worked and their earnings. The cost of Social Security for a given fiscal year is thus determined by the number of qualifying retirees rather than by annual appropriations decisions. Consequently, entitlement programs are regarded as “mandatory spending” — since their funding requirements are determined by federal law and not by annual funding decisions.
In addition to entitlements, other types of mandatory spending include interest on the debt and payments that are required by law and are not subject to appropriations decisions.
By contrast, non-defense discretionary spending (NDD) refers to those nondefense programs which are subject to annual funding decisions in the appropriations process. If the Congress decides to lower funding for a program of this type, it can simply reduce the annual appropriation. Unlike entitlement programs, there are no formulas which have to be changed to alter funding levels.
Defense discretionary spending refers to Federal spending for the national defense. Nearly all defense spending is discretionary in nature.
Under budget concepts set forth in the Report of the President’s Commission on Budget Concepts (1967), the Federal Budget is presented as a “unified budget” — a comprehensive budget in which all receipts and all outlays (including the Social Security and other Trust funds) are consolidated. The unified budget, as conceived by the President’s Commission, presents the full range of federal activities — enabling evaluation of the impact of federal fiscal policies on the nation’s economy.
By law, budget authority, outlays, and receipts of “off-budget programs” (the Postal Service and Social Security) are technically excluded from the budget, but data relating to off-budget programs are nevertheless displayed in the unified budget totals.