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Congressional Research Service 7-5700 www.crs.gov 98-721 Summary Budgeting for the federal government is an enormously complex process. It entails dozens of subprocesses, countless rules and procedures, the efforts of tens of thousands of staff persons in the executive and legislative branches, millions of work hours each year, and the active participation of the President and congressional leaders, as well as other Members of Congress and executive officials. The enforcement of budgetary decisions involves a complex web of procedures that encompasses both congressional and executive actions. In the last four decades or so, these procedures have been rooted principally in two statutes—the Congressional Budget Act of 1974 and the Balanced Budget and Emergency Deficit Control Act of 1985. The 1974 act established a congressional budget process in which budget policies are enforced by Congress during the consideration of individual measures. The 1985 act embodies additional statutory enforcement procedures, substantially modified in 1990 and 1997, that have been used by the executive to enforce budget policies after the end of a congressional session. The 1997 iteration of these enforcement procedures were set aside in the latter years of their existence and effectively expired toward the end of the 107th Congress. Efforts to renew them in the 108th through 110th Congresses were not successful. In the 111th Congress, the pay-as-you-go procedures affecting direct spending and revenue legislation were restored in a modified version by the Statutory Pay-As-You-Go Act of 2010. More recently, in the 112th Congress, statutory limits on discretionary spending and a new automatic process to reduce spending were established by the Budget Control Act of 2011. The President's budget is required by law to be submitted to Congress early in the legislative session. While the budget is only a request to Congress, the power to formulate and submit the budget is a vital tool in the President's direction of the executive branch and of national policy. The President's proposals often influence congressional revenue and spending decisions, though the extent of the influence varies from year to year and depends more on political and fiscal conditions than on the legal status of the budget. The Congressional Budget Act of 1974 establishes the congressional budget process as the means by which Congress coordinates the various budget-related actions (such as the consideration of appropriations and revenue measures) taken by it during the course of the year. The process is centered on an annual concurrent resolution on the budget that sets aggregate budget policies and functional spending priorities for at least the next five fiscal years. Because a concurrent resolution is not a law—it cannot be signed or vetoed by the President—the budget resolution does not have statutory effect; no money can be raised or spent pursuant to it. Revenue and spending amounts set in the budget resolution establish the basis for the enforcement of congressional budget policies through points of order. Congress implements budget resolution policies through action on individual revenue and debt-limit measures, annual appropriations acts, and direct spending legislation. In some years, Congress considers reconciliation legislation pursuant to reconciliation instructions in the budget resolution. Reconciliation legislation is used mainly to bring existing revenue and direct spending laws into conformity with budget resolution policies. Initially, reconciliation was a major tool for deficit reduction; in later years, reconciliation was used mainly to reduce revenues. Contents The Evolution of Federal Budgeting 1 Basic Concepts of Federal Budgeting 2 Budget Authority and Outlays 2 Scope of the Budget 3 Deficit Reduction and the Rules of Congressional Budgeting 4 Budgeting for Discretionary and Direct Spending 6 Budgeting for Direct and Guaranteed Loans 8 The Budget Cycle 9 The Presidential Budget Process 9 Formulation and Content of the President's Budget 9 Executive Interaction with Congress 10 The Congressional Budget Process 11 Formulation and Content of the Budget Resolution 11 Budget Resolution Enforcement 13 Budget Resolution Aggregates 13 Allocations of Spending to Committees 14 Scoring and Cost Estimates 14 Points of Order 15 The Sequestration Process 15 Spending Legislation 18 Authorizing Measures 18 The Annual Appropriations Process 19 Revenue Legislation 21 Debt-Limit Legislation 22 Reconciliation Legislation 22 Reconciliation Directives 23 Development and Consideration of Reconciliation Measures 24 House and Senate Earmark Disclosure Rules 24 House of Representatives 25 The Senate 25 Impoundment and Line-Item Veto 26 Impoundment 26 Rescissions 27 Deferrals 27 Line-Item Veto 27 Tables Table 1. Congressional Budget Process Timetable 11 Contacts Author Contact Information 28 Acknowledgments 28 The Evolution of Federal Budgeting The "power of the purse" is a legislative power. The Constitution lists the power to lay and collect taxes and the power to borrow as powers of Congress; further, it provides that funds may be drawn from the Treasury only pursuant to appropriations made by law. The Constitution does not state how these legislative powers are to be exercised, nor does it expressly provide for the President to have a role in the management of the nation's finances. During the nation's early years, the House and Senate devised procedures for the enactment of spending and revenue legislation. As these procedures evolved during the 19th century and the first decades of the 20th century, they led to highly fragmented legislative actions. In the course of each session, Congress passed many separate appropriations bills and other measures affecting the financial condition of the federal government. Neither the Constitution nor the procedures adopted by the House and Senate provided for a budget system—that is, for a coordinated set of actions covering all federal spending and revenues. As long as the federal government was small and its spending and revenues were stable, such a budget system was not considered necessary. Early in the 20th century, the incessant rise in federal spending and the recurrence of deficits (spending exceeded revenues in half of the 20 years preceding FY1920) led Congress to seek a more coordinated means of making financial decisions. The key legislation was the Budget and Accounting Act of 1921, which established the executive budget process. The 1921 act did not directly alter the procedures by which Congress makes revenue and spending decisions. The main impact was in the executive branch. The President was required to submit his budget recommendations to Congress each year, and the Bureau of the Budget—renamed the Office of Management and Budget (OMB) in 1970—was created to assist him in carrying out his budgetary responsibilities. Congress, it was expected, would be able to coordinate its revenue and spending decisions if it received comprehensive budget recommendations from the President. In line with this expectation, the House and Senate changed their rules to consolidate the jurisdiction of the Appropriations Committees over spending. The 1921 act also established the General Accounting Office (GAO), headed by the Comptroller General, and made it the principal auditing arm of the federal government. (The GAO recently was renamed the Government Accountability Office.) The 1921 act, as amended, remains the statutory basis for the presidential budget system. After World War II, the belief that the presidential budget sufficed to maintain fiscal control gave way to the view that Congress needed its own budget process. Some Members of Congress feared that dependence on the executive budget had bolstered the President's fiscal powers at the expense of Congress's; others felt that as long as its financial decisions were fragmented, Congress could not effectively control expenditures. The Congressional Budget and Impoundment Control Act of 1974 established a congressional budget process centered on a concurrent resolution on the budget, scheduled for adoption prior to legislative consideration of revenue or spending bills. The congressional budget process initiated in the 1970s did not replace the preexisting revenue and spending processes. Instead, it provided an overall legislative framework within which the many separate measures affecting the budget would be considered. The central purpose of the budget process established by the 1974 act is to coordinate the various revenue and spending decisions which are made in separate revenue, appropriations, and other budgetary measures. To assist Congress in making budget decisions, the 1974 act established the Congressional Budget Office (CBO) and directed it to provide data on and analyses of the federal budget. During the years that the congressional budget process has been in operation, its procedures have been adapted by Congress to changing circumstances. Following a decade of experience with the 1974 Congressional Budget Act, Congress made further changes in the budget process by enacting the Balanced Budget and Emergency Deficit Control Act of 1985 (also known as the Gramm-Rudman-Hollings Act), the Budget Enforcement Act of 1990 (BEA), the Line Item Veto Act in 1996, the Budget Enforcement Act of 1997, the Statutory Pay-As-You-Go Act of 2010, and the Budget Control Act of 2011, among other laws. The 1985 act prescribed declining deficit targets intended to achieve balance in FY1991; the targets were enforced by sequestration, a process involving automatic, across-the-board cuts in nonexempt spending programs if the targets were expected to be exceeded. The 1990 act replaced the deficit targets with caps on discretionary spending and a pay-as-you-go (PAYGO) requirement for revenue and direct spending legislation; sequestration was retained as the means of enforcing the two new mechanisms. The 1996 act authorized the President to cancel discretionary spending in appropriation acts, as well as new direct spending and limited tax benefits in other legislation, subject to expedited legislative procedures by which Congress could overturn the cancellations. (The Supreme Court struck down the Line Item Veto Act in June 1998 as unconstitutional.) The 1997 act extended the BEA procedures for several more years. Without a consensus on extending the control mechanisms under the BEA, however, they expired at the end of FY2002. The Statutory Pay-As-You-Go Act of 2010 restored a modified version of the PAYGO requirement for direct spending and revenue legislation. More recently, as part of an agreement to increase the statutory limit on the public debt, the Budget Control Act of 2011 restored statutory limits on discretionary spending for each fiscal year through FY2021 and established an automatic process to reduce spending if subsequent legislation reducing the deficit by at least $1.2 trillion was not enacted, with spending reductions beginning in January 2013. Basic Concepts of Federal Budgeting The federal budget is a compilation of numbers about the revenues, spending, and borrowing and debt of the government. Revenues come largely from taxes, but stem from other sources as well (such as duties, fines, licenses, and gifts). Spending involves such concepts as budget authority, obligations, outlays, and offsetting collections. The numbers are computed according to rules and conventions that have accumulated over the years; they do not always conform to the way revenues and spending are accounted for in other processes. Budget Authority and Outlays When Congress appropriates money, it provides budget authority, that is, authority to enter into obligations. Budget authority also may be provided in legislation that does not go through the appropriations process (direct spending legislation). The key congressional spending decisions relate to the obligations that agencies are authorized to incur during a fiscal year, not to the outlays made during the year. (Obligations occur when agencies enter into contracts, submit purchase orders, employ personnel, and so forth; outlays occur when obligations are liquidated, primarily through the issuance of checks, electronic fund transfers, or the disbursement of cash.) The provision of budget authority is the key point at which Congress exercises control over federal spending, although the outlay level often receives greater public attention because of its bearing on the deficit. Congress does not directly control outlays; each year's outlays derive in part from new budget authority and in part from "carryover" budget authority provided in prior years. For example, President Barack Obama's initial budget submission for FY2013 estimated that outlays would total $3,803 billion for that year. Approximately $2,833 billion of this amount was estimated to come from new budget authority for the fiscal year, while the remainder ($970 billion) was estimated to come from budget authority enacted in prior years. The relation of budget authority to outlays varies from program to program and depends on spendout rates, the rates at which funds provided by Congress are obligated and payments disbursed. In a program with a high spendout rate, most new budget authority is expended during the fiscal year; if the spendout rate is low, however, most of the outlays occur in later years. Regardless of the spendout rate, the outlays in the budget are merely estimates of the amounts that will be disbursed during the year. If payments turn out to be higher than the budget estimate, outlays will be above the budgeted level. The President and Congress control outlays indirectly by deciding on the amount of budget authority to be provided or by limiting the amount of obligations to be incurred. Certain receipts of the federal government are accounted for as "offsets" against outlays rather than as revenues. Various fees collected by government agencies are deducted from outlays; similarly, income from the sale of certain assets are treated as offsetting receipts. Most such receipts are offsets against the outlays of the agencies that collect the money, but in the case of offshore oil leases and certain other activities, the revenues are deducted from the total outlays of the government. Scope of the Budget The budget consists of two main groups of funds: federal funds and trust funds. Federal funds—which comprise mainly the general fund—largely derive from the general exercise of the taxing power and general borrowing and for the most part are not earmarked by law to any specific program or agency. One component of federal funds, called special funds, is earmarked as to source and purpose. The use of federal funds is determined largely by appropriations acts. Trust funds are established, under the terms of statutes that designate them as trust funds, to account for funds earmarked by specific sources and purposes. The Social Security funds are the largest of the trust funds; revenues are collected under a Social Security payroll tax and are used to pay for Social Security benefits and related purposes. The unified budget includes both the federal funds and the trust funds. The balances in the trust funds are borrowed by the federal government; they are counted, therefore, in the federal debt. Because these balances offset a budget deficit but are included in the federal debt, the annual increase in the debt invariably exceeds the amount of the budget deficit. For the same reason, it is possible for the federal debt to rise when the federal government has a budget surplus. Capital and operating expenses are not segregated in the budget. Hence, monies paid for the operations of government agencies as well as for the acquisition of long-life assets (such as buildings, roads, and weapons systems) are reported as budget outlays. Proposals have been made from time to time to divide the budget into capital and operating accounts. While these proposals have not been adopted, the budget provides information showing the investment and operating outlays of the government. The budget totals do not include all the financial transactions of the federal government. The main exclusions fall into two categories—off-budget entities and government-sponsored enterprises. In addition, the budget includes direct and guaranteed loans on the basis of the accounting rules established by the Federal Credit Reform Act of 1990, which are discussed below. Off-budget entities are excluded by law from the budget totals. The receipts and disbursements of the Social Security trust funds (the Old-Age and Survivors Insurance Fund and the Disability Insurance Fund), as well as spending for the Postal Service Fund, are excluded from the budget totals. These transactions are shown separately in the budget. Thus, the budget now reports two deficit or surplus amounts—one excluding the Social Security trust funds and the Postal Service Fund, and the other (on a unified basis) including these entities. The latter is the main focus of discussion in both the President's budget and the congressional budget process. The transactions of government-owned corporations (excluding the Postal Service), as well as revolving funds, are included in the budget on a net basis. That is, the amount shown in the budget is the difference between receipts and outlays, not the total activity of the enterprise or revolving fund. If, for example, a revolving fund has annual income of $150 million and disbursements of $200 million, the budget would report $50 million as net outlays. Government-sponsored enterprises (GSEs) historically have been excluded from the budget because they were deemed to be private rather than public entities. The federal government did not own any equity in these enterprises, most of which received their financing from private sources. Although they were established by the federal government, their budgets were not reviewed by the President or Congress in the same manner as other programs. Most of these enterprises engaged in credit activities. They borrowed funds in capital markets and lent money to homeowners, farmers, and others. In total, these enterprises had assets and liabilities measured in trillions of dollars. Financial statements of the government-sponsored enterprises were published in the President's budget. Although some GSEs continue to operate on this basis, the economic downturn and credit instability that occurred in 2008 fundamentally changed the status of two GSEs that play a significant role in the home mortgage market, Fannie Mae and Freddie Mac. In September of 2008, the Federal Housing Finance Agency (FHFA) placed the two entities in conservatorship, thereby subjecting them to control by the Federal Government until the conservatorship eventually is brought to an end. Deficit Reduction and the Rules of Congressional Budgeting Between the early 1980s and the late 1990s, annual consideration of the budget was dominated by concern about the budget deficit. In the mid-1980s, the deficit exceeded $150 billion and amounted to about 6% of GDP at one point. In the early 1990s, the deficit approached the $300 billion level. Following four years of surpluses (FY1998-FY2001), the budget returned to deficit for FY2002. Current budget projections show sizeable deficits persisting over the coming years. The size of the deficit depends on how it is measured. The unified budget deficit combines all on-budget federal funds and trust funds with the off-budget entities (the Social Security trust funds and the Postal Service Fund). The unified budget deficit generally is regarded as the most comprehensive measure of the impact of the budget on the economy. A narrower measure of the deficit is derived by excluding the Social Security trust funds from the totals. This exclusion is mandated by law, although Social Security is counted in the budget in reports on the deficit. Excluding Social Security from computations of the deficit or surplus results in higher deficit or lower surplus figures. Regardless of the measure used, it is evident that the deficit was unusually high for an extended period of time. The chronic deficits of the 1980s prompted Congress to enact the Balanced Budget and Emergency Deficit Control Act of 1985. The 1985 act established deficit targets for each year through FY1991, when the budget was to be balanced, and a sequestration process under which budgetary resources would be canceled automatically (through largely across-the-board spending cuts) if the estimated deficit exceeded the amount allowed under the act. Even with the targets, the actual deficit for the covered years was above the targeted level. Failure to achieve the deficit targets, and other problems, led Congress to revise the process in the Budget Enforcement Act (BEA) of 1990. Sequestration procedures were retained, but the fixed deficit targets were replaced by adjustable ones (which expired at the end of FY1995), adjustable limits were imposed on discretionary spending, and a pay-as-you-go (PAYGO) process was established for revenues and direct spending. The discretionary spending limits and PAYGO process were extended (through FY1998) by the Omnibus Budget Reconciliation of 1993 and again (through FY2002) by the BEA of 1997. Under the discretionary spending limits, different categories of discretionary spending were used for different periods. Under the 1997 changes, discretionary spending limits applied separately to defense and nondefense spending for FY1998-FY1999 and to violent crime reduction spending for FY1998-FY2000; for the remaining fiscal years, the 1997 changes merged all discretionary spending into a single, general purpose category. In 1998, as part of the Transportation Equity Act for the 21st Century, Congress added separate categories for highway and mass transit spending. Finally, in 2000, Congress added a category for conservation spending; unlike the other categories, the conservation spending category had six subcategories. The PAYGO process under the BEA required that the budgetary impact of revenue and direct spending legislation be recorded on a multiyear "PAYGO scorecard," and that in the net any such legislation not yield a negative balance for the upcoming fiscal year. Legislation reducing revenues or increasing direct spending for a fiscal year had to be offset (in the same or other legislation) by revenue increases or reductions in direct spending for that fiscal year so that the applicable balance on the PAYGO scorecard remained at or above zero. Under the BEA procedures, violations of the discretionary spending limits or the PAYGO requirement were to be enforced by sequestration. However, sequestration was not used for more than a decade, either because Congress and the President enacted budgetary legislation consistent with the discretionary spending limits and PAYGO requirement, or, during the latter years under the BEA, effectively waived these enforcement requirements. The BEA enforcement procedures effectively expired toward the end of the 107th Congress. As budget deficits persisted through the last decade, proposals to restore the BEA statutory procedures had been made from time to time by Members of Congress and the President, but none of the proposals were enacted until 2010. The Statutory Pay-As-You-Go Act of 2010 (P.L. 111-139) restored in statute a modified version of the PAYGO requirement for direct spending and revenue legislation. Subsequently, in 2011, the Budget Control Act (P.L. 112-25) established statutory limits on discretionary spending for each year through FY2021. Like the previous statutory PAYGO requirement under the BEA, the new statutory PAYGO requirement is intended to discourage or prevent Congress from taking certain legislative action that would increase the on-budget deficit. It generally requires that legislation affecting direct spending or revenues not increase the deficit over a 6-year period and an 11-year period. Likewise, the current statutory discretionary caps established under the Budget Control Act are similar to those under the BEA. The limits essentially cap the amount of spending provided and controlled through the annual appropriations process each year, with upward adjustments to these limits permitted for certain purposes, such as for Overseas Contingency Operations. The statutory PAYGO requirement and the statutory discretionary spending limits are enforced by sequestration—the cancellation of budgetary resources provided by laws affecting direct spending. Further information on sequestration is provided in the "The Sequestration Process" section, below. During the 1990s to the present, the Senate has supplemented the statutory PAYGO requirement with a special PAYGO rule included in annual budget resolutions; following the expiration of the BEA procedures, the Senate extended its PAYGO rule (currently through FY2017). The Senate PAYGO rule currently prohibits the consideration of any legislation that proposes changes in direct spending or revenue that increase the deficit over 6-year and 11-year time periods (including the current fiscal year). The House adopted its own PAYGO rule for the first time at the beginning of the 110th Congress. At the beginning of the 112th Congress, however, the House modified this rule, renaming it CutGo, or cut-as-you-go, to prohibit the consideration of any legislation that would have the net effect of increasing direct spending over the same two time periods. Budgeting for Discretionary and Direct Spending The distinction drawn by the BEA and the congressional budget process between discretionary spending (which is controlled through the annual appropriations process) and direct spending (which is provided outside of the annual appropriations process) recognized that the federal government has somewhat different, though overlapping, means of dealing with these two types of spending. One set of procedures pertained to discretionary spending, another to direct spending. Most of the direct spending subject to the PAYGO process under the BEA involved entitlement programs; the rest consisted of other forms of mandatory spending provided through authorizing legislation and interest payments. In fact, entitlements now account for about half of total federal spending (all direct spending, including net interest, accounts for about 60% of the total). The impressive feature of this trend is that most of the growth in spending and in the number of recipients has been built into existing law; for the most part, it has not been the result of new legislation. The procedures for discretionary and direct spending converge at two critical points in federal budgeting: formulation of the President's budget and formulation of the congressional budget resolution. Both of these policy statements encompass discretionary and direct spending, but the procedures used in budgeting for these types of expenditure differ greatly. The distinctions have some notable exceptions. Some procedures associated with direct spending are applied to particular types of discretionary programs, and vice versa. Nevertheless, the generalizations presented here help to explain the complications of the budget process and explain how decisions are made. (1) Budgetary Impact of Authorizing Legislation. An authorization for a discretionary spending program is only a license to enact an appropriation. The amount of budgetary resources available for spending is determined in annual appropriations acts. For direct spending programs (principally entitlements), on the other hand, the authorizing legislation either provides, or effectively mandates the appropriation of, budget authority. In those entitlement programs that are subject to annual appropriation, the Appropriations Committees have little or no discretion as to the amounts they provide. (2) Committees That Provide or Mandate Budget Authority. The Appropriations Committees have jurisdiction and effective control over discretionary spending programs, while authorizing committees effectively control direct spending programs (including those funded in annual appropriations acts). In fact, committee jurisdiction determines whether a program is classified as discretionary or direct spending. All spending under the effective control of the Appropriations Committees is discretionary; everything else is direct spending. Accordingly, when legislation establishes a program as discretionary or direct spending, it not only determines the character of spending but the locus of congressional committee control as well. (3) Frequency of Decision-Making. Discretionary appropriations are, with few exceptions, made annually for the current or next fiscal year. Direct spending programs typically are established in permanent law that continues in effect until such time as it is revised or terminated by another law. The fact that many entitlements have annual appropriations does not diminish the permanence of the laws governing the amounts spent. It should be noted, however, that some direct spending programs, such as Medicare, have been subject to frequent legislative changes. The purpose of such legislation has been to modify existing law, not to provide annual funding. (4) Means of Enforcing the Budget Resolution. The procedures used by Congress to enforce the policies set forth in the annual budget resolution differ somewhat for discretionary and direct spending programs. For both types of spending, Congress relies on allocations made under Section 302 of the 1974 Congressional Budget Act to ensure that spending legislation reported by House and Senate committees conforms to established budget policies. But although this procedure is effective in controlling new legislation—both annual appropriations measures and new entitlement legislation—it is not an effective control on the spending that results from existing laws. Hence, Congress relies on reconciliation procedures to enforce budget policies with respect to existing spending and revenue laws. Reconciliation is not currently applied to discretionary programs funded in annual appropriations measures. (5) Statutory Controls. Discretionary programs have been subject to the spending limits set in the BEA. Direct spending has not been capped, but has operated under the PAYGO process, which required that direct spending and revenue legislation enacted for a fiscal year not cause the deficit to rise or the surplus to decrease. The lack of caps was due to the fact that most direct spending programs are open-ended, with spending determined by eligibility rules and payment formulas in existing law rather than by new legislation. Budget enforcement depends on timely information concerning the status of federal revenues and spending. When it acts on legislation, Congress must be informed of the estimated impact on future budgets. Measuring these impacts often is referred to as "scoring" or "scorekeeping." Scoring discretionary spending measures is a much simpler task than scoring direct spending and revenue legislation. In the latter case, scoring always is done in reference to baseline projections of future revenues and spending. Most appropriations are for a definite amount and the budget authority is provided for a single fiscal year. The main task is to estimate the outlays that will derive in the next year and beyond from the budget authority provided in the appropriations bill. CBO and the Appropriations Committees base these estimates on outlay (or spendout) rates—the percentage of budget authority that is spent in each year. These outlay rates vary by account and are based on historical records. For example, if $1 billion is appropriated to an account which has a spendout rate of 80% in the first fiscal year that funds become available, the outlay estimate for that fiscal year will be $800 million; the remaining $200 million will become outlays in one or more subsequent years. Scorekeeping is much more complex in enforcing budget rules, such as the PAYGO requirements, relating to direct spending and revenues. For one thing, unlike appropriations, revenue and direct spending legislation usually is open-ended; it does not specify the amount by which revenue or spending will be changed. For another, the impact of this type of legislation c