The Federal Budget

The Federal Budget:

• is a plan that outlines the expenditures and the revenues of the government for the period of one fiscal year

Fiscal Year:

• from October 1 to September 30 – Congress must pass a federal budget by September 30 to keep the government running

• In other words, the budget details where the government will get money from, and what it will spend that on

• The government uses budgets to execute public policy

For public policy to be executed, money must be appropriated – it matters what the government chooses to spend on

2 Types of Federal spending:

Mandatory spending (non discretionary):

• spending that is written into law and cannot be changed every year

• Programs such as: Social Security, Medicare, Medicaid/ACA/CHIP, Interest on debt

Discretionary spending:

• funding for federal agencies and programs, where Congress sets funding levels each year

Examples: defense (the military), and non defense (everything else)

The non-defense discretionary spending includes the following categories:

• environmental and conservation

• science and space

• international affairs

• transportation energy and agriculture

• education and job training

• economic security and social services

• veteran’s health

• justice and general government

• public health and medical research

• Congress gets the sole responsibility decide on this spending every year, including defense spending.

• But politics also plays a part: coordination between the president and his party in Congress

Government Revenue:

• The majority of the government’s revenue comes from taxes

There are 4 types of taxes:

Individual income taxes:

• taxes on paychecks, dividends and interests

Payroll taxes:

• another tax on your paycheck earmarked for Social Security, Medicare, Unemployment Insurance

Corporate income taxes:

• taxes on corporate profit

Other:

• tax on customs duties, estate and gift taxes, fines and fees…

Budget Deficit:

• Many years, the government spends more money that it gets in revenue

• This is called the budget deficit

• When the government goes into debt and then it has to find ways to pay get the money and pay

• The government usually borrows money close the gaps in the budget: these funds to are borrowed from banks and other countries, or by selling government bonds

• This money needs to get paid back, with interest

• If the government keeps operating on a budget deficit, the national debt (what the government owes) will grow every year and it does grow (currently at ~ $36 trillion)

Mandatory Spending – Social Security:

• Social Security: a government program that includes a pension for retired people, the disabled, and survivors

• It was created during the New Deal to reduce poverty for retired people

• People “pay in” with 12.4% of their income every year. Half individual, half employer.

• Doesn’t go to an account, but rather pays for people who are currently retired – it’s one pile of money that people take from according to their needs

• A major problem: Social Security might not be able to support all retired people in the future

Mandatory Spending – Healthcare Spending:

Healthcare is the single biggest set of U.S. federal spending – 3 government programs:

Medicare:

• Health insurance for the old

Medicaid:

• health insurance for the poor and disabled

CHIP :

• Health insurance for the Health insurance for poor children

  It is expected that healthcare spending will rise with time as well

Executive Branch Funding - Recap:

• The government need government funding in order to operate, pay its workers, and execute its missions

• Funding goes through the approval of a federal budget by Congress

Congress, as holder of the Power of the Purse, gets to decide on the federal budget; who gets funding, how much, and for what

• As noted earlier: the president can recommend budgets to Congress gets the final say , but Congress

• Funding is granted to the bureaucracy and the executive branch through legislation appropriations bills

• Appropriations bills (the budget) need to pass both the House and Senate to become law, and then be signed by the president – like any other legislation

Government Shutdown:

• Congress must pass 12 appropriations bills to fund the bureaucracy by the end of each fiscal year

• If the bills are not passed by the deadline, the federal government shuts down, except for emergency services

• Agencies will not have money to pay their workers or keep operations running – workers might be sent home, or forced to work without pay

• Regular citizens will not get many of the public services they deserve

2025 Federal Budget:

• The Republicans in congress have been approving temporary appropriations bills since September 2024

The last deadline was in March

• On Saturday, the Senate under Republican majority passed a new budget plan with a 51 48 vote, bypassing a filibuster through a process called reconciliation. the House. Now it goes to

• Passing a budget plan is the first step before drafting a whole budget bill – it’s like declaring what the principles of the new budget will be

• This whole process is taking time because of disagreements inside the Republican Party, and because of Democratic opposition in Congress

They submitted thousands of amendments, voting ended at ~2:30 AM

According to analysis by the Center on Budget and Policy Priorities, to include: the new budget is expected

• Big tax cuts (especially for corporations and the wealthy), and cuts in government spending

• Increased spending on defense and border security

• Extreme cuts in core programs for low-income Americans to pay for tax cuts: reduced spending on healthcare (Medicaid), food stamps (SNAP), education, child nutrition, climate

• This will result in higher poverty and hunger, cancelling disaster response…

• Federal Medicaid cuts will shift costs to states and reduce people’s access to coverage and care

State Budgets:

• Federal grants: are transfers of money from the federal government to the state and local governments

• These transfers, which do not have to be repaid, are designed to support the activities of the recipient governments, but also to encourage them to pursue federal policy objectives they might not otherwise adopt

In other words, the federal government gives a lot of money to states for programs that they administer, with strings

• By far, the largest federal grant program is Medicaid Other large grants are given for: food/cash aid to citizens, transportation, K12 education

Federal grants amount to 30% of state governments’ revenue

Federal Grants:

• Some states get more federal funding (grants + direct federal spending) than others

• States that get the most: Louisiana, Mississippi, Indiana, South Dakota, New Mexico, Kentucky, Alabama

• States that get the least: Wyoming, Hawaii, Connecticut, Delaware, Washington, and…Illinois

State Budgets: • In terms of revenue for the state governments: 30% comes from federal grants, 50% from state taxes, and 11% from service charges by the state

• The tax structure of states varies Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming do not have individual income taxes

But each state government must collect some mix of revenue in order to fund their chosen public services. These states find revenue through higher property taxes and through tax revenues related to tourism

• Federal tax cuts means that states will have to pay more for federal programs to keep them , they are unlikely to be able to do that, that means cuts in programs

• For example: Food stamps (SNAP) are currently 100% federally funded, it will change with the new budget with paying more if they want to keep them

Progressive Taxes:

• Progressive taxation : taxing higher-earners more than lower earners – as a way of executing redistributive policy

• Regressive taxation earners : taxing lower-earners more than higher • Most federal taxes are progressive. Some state taxes are regressive

• The U.S. has high wealth inequality also because the wealthy do not pay their fair share of taxes

The rich do not have a fixed income like all other people do, so they don’t have to pay income tax

Their wealth comes from their investments and holdings (stocks…) – they pay Capitals Gains Tax on them which is way lower than income tax