Budget Concepts
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Appropriations vs. Authorizations
Budget Authority vs. Outlays
Budget Baselines and Scorekeeping
Deficits vs. Debt
Discretionary Spending vs. Direct (Mandatory) Spending
Entitlements and Appropriated Entitlements
Functions
Gross Domestic Product
Pay-As-You-Go (PAYGO) Requirement
Revenues, Receipts, and Fees
Unified Budget vs. Separate Operating and Capital Budgets
Appropriations vs. Authorizations
Congressional legislation may be divided into two broad categories: appropriations and authorizations. The separation between appropriations and authorizations dates back to 1837.
Authorization laws, drafted by the 17 respective House and Senate authorizing committees, establish federal agencies and programs and “authorize appropriations” for subsequent appropriations action. Authorization bills sometimes authorize “such sums as may be necessary,” leaving the funding levels up to the discretion of the House and Senate Appropriations Committees; or they may authorize specific amounts for specific years. Also, in some instances, authorization bills circumvent the appropriations process and establish programs that legally entitle eligible individuals or states to formula-based payments—thereby creating “entitlements.” The largest entitlement programs are Social Security, Medicare, and Medicaid.
Appropriation laws, by contrast, are drafted by the House and Senate Appropriations Committees (and their 12 respective subcommittees). Each of the 12 bills, provide specific amounts of budget authority, by budget account, for federal agencies to enter into financial obligations that result in outlays. In general, the agencies, programs, projects, and activities receiving appropriations must be authorized by law, although Congress, often appropriates without up-to-date authorizations.
Budget Authority vs. Outlays
Spending levels in the federal budget consist of two types of numbers: “budget authority” and “outlays.” Outlays are actual disbursements by the Treasury. When the Treasury issues a check or makes an electronic payment, that is an outlay.
Budget authority, on the other hand, is the legal authority for an agency to enter into obligations that will result in outlays. When Congress appropriates funds for a particular program, it is enacting budget authority—not outlays. This fact often confuses observers of the budget process because estimated outlays—not budget authority—are used to calculate annual deficits.
Analysts sometimes explain budget authority and outlays as similar to deposits into, and withdrawals from, a bank account. When Congress enacts budget authority, it is similar to money going into a bank account, which gives an agency authority to enter into obligations. Outlays occur when the agency writes checks or makes electronic payments in fulfillment of the obligations.
Budget authority and outlays often occur in different years. When budget authority is enacted for a particular fiscal year, the outlays that flow from that budget authority can occur in the same fiscal year (for example, worker salaries and operating expenses), or over several fiscal years (for example, infrastructure and weapons systems).T he rate at which outlays flow from enacted budget authority is referred to as the “spend-out rate.” Spend-out rates are of particular interest because annual deficits are determined by outlays, not budget authority.
Budget Baselines and Scorekeeping
In order to formulate the President’s budget or a congressional budget resolution for the upcoming fiscal year, the President’s Office of Management and Budget (OMB) and the Senate and House Budget Committees, respectively, need to have a starting point—a “baseline.” 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 if existing spending programs and certain tax laws are continued—with spending adjusted for projected inflation and program utilization, and revenues adjusted for anticipated economic conditions. These projections, known as the “current services baseline,” are intended to reflect a budget that would maintain current levels of government services and operations.
Current services baselines are produced each year by the Office of Management and Budget and the Congressional Budget Office, respectively. Construction of the baselines follows a general set of “scorekeeping guidelines.”
The official scorekeepers for Congress are the House and Senate Budget Committees, although they typically rely on spending estimates provided by the nonpartisan Congressional Budget Office and revenue estimates provided by the nonpartisan Joint Committee on Taxation.
The Office of Management and Budget (OMB) is the principal scorekeeper for purposes of determining compliance with the Statutory PAYGO requirement and for execution of annual Budget Control Act mandatory sequesters. OMB’s Circular A-11, Section 21, sets forth an overview of how they execute their scorekeeping responsibilities.
The Office of Management and Budget and the Congressional Budget Office are required by statute to determine common budget scorekeeping guidelines in consultation with the House and Senate Budget Committees. The current guidelines are set forth in Appendix A of OMB Circular A-11 and are based on guidelines originally set forth in the joint explanatory statement accompanying the conference report on the Balanced Budget Act of 1997 (beginning on page 1007).
Scorekeeping guidelines—in addition to governing how annual baselines are established—are used by the House and Senate Budget Committees, the Congressional Budget Office, and the Office of Management and Budget in evaluating legislative proposals with a budgetary impact. Scorekeeping guidelines determine whether new discretionary appropriations, new direct spending, or new revenue legislation will trigger: (1) points of order under the 1974 Budget Act, a budget resolution or other House or Senate rules; (2) a sequestration order to enforce Statutory PAYGO; or (3) a sequestration order to enforce discretionary spending limits when Congress has enacted limits for particular fiscal years.
Key among the scorekeeping rules are: (1) discretionary spending programs are assumed to continue into the new fiscal year at inflation-adjusted levels; (2) entitlements and other direct spending programs with outlays greater than $50 million are assumed to be extended, even if scheduled to expire under existing law; (3) administrative expenses for Medicare and other trust funds are assumed to increase to cover changes in the beneficiary population; and (4) excise taxes dedicated to a trust fund, if expiring, are assumed to be extended. For a complete list of guidelines, see the current Appendix A of OMB Circular A-11.
Deficits vs. Debt
A budget deficit or surplus is the difference between outlays and receipts for a given fiscal year.
In contrast to an annual deficit, the public debt is the accumulated debt of the federal government. When the federal government runs a budget deficit, the additional borrowing to finance the annual deficit adds to the accumulated debt.
By contrast, when the federal government runs a budget surplus, the public debt decreases because the Treasury can use the surplus to redeem outstanding debt. The most recent federal surpluses occurred in fiscal years 1998–2001.
Federal law contains a Statutory Limit on the Public Debt (“Debt Limit”) explained HERE.
Discretionary Spending vs. Direct (Mandatory) Spending
The Budget divides about $7 trillion in annual federal spending into three broad categories: (i) discretionary spending, (ii) direct (or mandatory) spending, and (iii) net interest payments on the public debt.
About one-quarter of federal spending is called “discretionary spending,” because the amount of spending flows from annual discretionary funding decisions by the House and Senate Appropriations Committees. The respective Appropriations Committees write 12 annual appropriations bills that allocate total discretionary spending among federal agencies and programs in account-level detail.
The 12 annual appropriations bills are negotiated under two broad subcategories—defense discretionary and non-defense discretionary spending (NDD). The annual defense appropriations bill funds the operations of the Department of Defense, nuclear programs at the Department of Energy and various defense-related activities at other agencies. The 11 non-defense appropriations bills fund a multitude of discretionary government operations and programs including law enforcement, disease and epidemic control, veterans’ healthcare, homeland security, education, prisons, highways and bridges, food and drug inspection, disaster relief, airports, health research, housing assistance, international affairs, space exploration and other scientific research, and many other functions of government.
The largest block of federal spending—about three-fifths of the budget—is called “direct spending” or “mandatory spending” because the outlays flow directly from legal obligations of the federal government established in permanent laws. Direct spending is under the control of Congress’s authorizing committees. For example, the House Ways & Means and Senate Finance Committees have jurisdiction over the Social Security Act which includes formulas that determine the amount of spending on Social Security benefits, Medicare payments to providers, and Medicaid payments to States. Most direct spending is comprised of entitlement programs.
Entitlements and Appropriated Entitlements
Entitlements legally obligate the United States to make formula-driven payments to eligible individuals or states; however, funds must still be appropriated to enable those payments. Some entitlement programs, such as Social Security and Medicare, are managed through trust funds that have permanent budget authority, i.e., the benefit payments are permanently appropriated.
Other entitlements, including Medicaid, Veterans compensation and pensions, and the Supplemental Nutrition Assistance Program (formerly Food Stamps), are annually appropriated and are referred to as “appropriated entitlements.” The amount of spending for appropriated entitlements is determined by benefit formulas in authorizing laws, but disbursements from the Treasury are made available annually in appropriation acts.
Permanently appropriated and annually appropriated entitlements share the common characteristic that the cost of the program has been determined outside of the discretionary appropriations process through the establishment in law of a formula-driven program. Although annually appropriated entitlements might appear to be subject to annual funding decisions of the Appropriations Committees, in reality, the entitlement payments are determined by laws under the jurisdiction of authorizing committees, and the appropriation amounts are automatic.
Functions
In the President’s Budget and the congressional budget resolution, federal spending (i.e., budget authority and outlays) is divided into 20 conceptual categories known as “budget functions.” This is a system of classifying spending according to the national needs being addressed without regard to department or agency. For example, the National Defense function, Function 050, includes expenditures of the Department of Defense, as well as defense-related activities of the Energy Department and other agencies. Functions are further divided into subfunctions.
The President’s Budget and congressional budget resolution allocate budget authority and outlays among the 20 functions in the federal budget. However, while the “functional” distribution of federal resources is a useful analytical tool for examining priorities, the budget functions have little practical impact on the annual process of allocating budget authority among federal programs, projects, and activities—decisions which are made by the House and Senate Appropriations Committees and their subcommittees. Similarly, budget functions do not impact the allocation of direct (mandatory) spending which is determined by laws under the jurisdiction of the House and Senate authorizing committees.
Gross Domestic Product
For analytical purposes, federal spending categories and revenues are often displayed as percentages of the economy, or “Gross Domestic Product” (GDP) in order to compare year-to-year trends. GDP is the total market value of goods and services produced domestically during a given period. The components of GDP are consumption (both household and government), gross investment (both private and government), and net exports.
Pay-As-You-Go (PAYGO) Requirement
Pay-As-You-Go (PAYGO) is a budgetary enforcement mechanism originally set forth in the Budget Enforcement Act of 1990 (BEA) intended to ensure that laws affecting direct spending or revenues are deficit neutral—effectively requiring budgetary offsets for new direct spending and tax cuts.
In the absence of offsets, net deficit increases will show up on a cumulative PAYGO scorecard, triggering sequestration—automatic across-the-board reductions in nonexempt direct spending programs sufficient to eliminate the net deficit in the applicable budget year.
The PAYGO requirement effectively expired at the end of FY 2002, but was resuscitated in the Statutory Pay-As-You-Go Act of 2010—although the President and Congress have routinely overridden enforcement sequesters through legislative action.
PAYGO may also refer to the Senate rule (first established in 1993) or the House rule (first established in 2007) that prohibits consideration of direct spending or revenue legislation that is not deficit neutral within specified time periods.
Revenues, Receipts, and Fees
Federal revenues—often used interchangeably in the congressional budget process with “governmental receipts”—consist of money received by the federal government through exercise of its sovereign taxing power. This includes individual and corporate income taxes, payroll taxes, excise taxes, estate and gift taxes, and customs duties.
Revenues do not include receipts received by the federal government for the sale of products or services rendered, for example, the sale of timber from federal lands or entrance fees for national parks. Such receipts are netted against federal spending and are called “offsetting receipts.”
The distinction between revenues and offsetting receipts is significant for two reasons. First, revenues fall under the jurisdiction of the House and Senate tax-writing committees, while offsetting receipts fall under the jurisdiction of the authorizing committees that oversee the federal agencies or programs collecting the receipts. Second, revenues are subject to budget resolution revenue floors, as well as PAYGO requirements, while offsetting receipts are scored as negative offsets on the spending side of the budget.
Unified Budget vs. Separate Operating and Capital Budgets
Under budget concepts set forth in the Report of the President’s Commission on Budget Concepts (1967) [link to the report HERE or HERE], 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 total 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 often displayed in unified budget totals.
This federal practice of unifying all expenditures and revenues under a single budget stands in stark contrast to the practices of nearly all states which have separate operating and capital budgets. As used by most states, a capital budget segregates capital investments from the operating budget’s expenditures. In such a budget, the capital investments are excluded from the operating budget and do not count towards calculating the operating budget’s surplus or deficit.
States that use capital budgets normally finance the capital investment from borrowing and then charge amortization (interest and debt repayment) to the operating budget.
Advocates for a federal capital budget argue that long-term federal investments, projected to yield long-term returns should be treated separately from annual operating expenses, while supporters of the unified budget argue that federal deficits (and surpluses) should include all federal outlays and revenues in order to ascertain the budget’s macroeconomic effects on the economy.
For an in-depth discussion of this important topic, see the Report of the President’s Commission to Study Capital Budgeting and Capital Budgeting in the States by the National Association of State Budget Officers.