Understanding the Federal Budget Process

Surprisingly, the U.S. Constitution makes no provisions for a federal budget and, in fact, the federal government operated without a comprehensive budget process until 1921.  The Budget and Accounting Act of 1921, which has been amended many times, provides for a federal budget system and requires the President to prepare and submit an annual budget to Congress each year.  The Act established the Bureau of the Budget—now the Office of Management and Budget (OMB)—to help the President prepare and implement the federal budget, and defines the role of the President and federal agencies in the process.

The federal budget process is a cyclical, multiyear activity that begins with the formulation of the president’s annual budget and concludes with an audit and review of expenditures.  The activities related to a single fiscal year typically stretch over a period of about two and a half calendar years, and thus at any given time federal agencies are dealing with budgets for three different fiscal years, as they implement the budget for the current fiscal year, seek funds for the next fiscal year, and plan for the fiscal year after that.

The formal process begins on or before the first Monday in February, when the President must submit to Congress a budget request—containing detailed information on spending and revenue proposals, as well as policy proposals and initiatives with significant budgetary implications—for the next fiscal year, which begins on Oct. 1.  During February and March, House and Senate Budget Committees consider that request and propose budget resolutions that set specific targets for spending and tax revenues.  These committees send their resolutions to the floor of each chamber for a vote and, following that vote, a House-Senate conference resolves any differences, after which both houses pass a conference report.  That budget resolution is supposed to be passed by April 15, but in recent years it has typically taken longer.

The President’s budget request includes both discretionary spending—which is subject to annual approval by Congress—and direct or mandatory spending—which, for the most part, involves entitlement programs.  All discretionary spending thus requires an annual appropriations bill, which falls under the jurisdiction of the House and Senate Appropriations Committees and 12 subcommittees.  Each subcommittee conducts hearings on the programs that fall within its jurisdiction and votes on a bill.  The full committee then marks up this bill and sends it to the floor.  Both chambers pass their bills and, again, iron out any differences in conference.  The conference report then goes to the president for his signature or veto.  Currently 12 appropriations bills must be passed each fiscal year, although multiple bills sometimes are combined into a single piece of legislation, known as an “omnibus appropriation.”  All appropriations bills are supposed to be signed by the President by October 1st but recently this has not gone according to schedule.  To avoid a government shutdown, a series of continuing resolutions must be approved to continue funding for federal agencies at existing or reduced levels.  Congress has had to pass continuing resolutions every year since 2007.

Want Capitol Markets articles delivered straight to your inbox?