Demystifying the Federal Budget Process
To prevent the U.S. from falling off the next fiscal cliff, Congress has to come up with a workable budget
Writing about the budget feels like having the curse of Cassandra: to utter true prophecies of impending disaster, but never to be believed. Three years ago, I warned that U.S. lawmakers had become too sanguine about the national debt. In both public and private, I urged Congress to enact reforms to reduce spending, raise revenue and boost economic growth. I also urged the Biden administration to refinance government debt to lock in ultra-low borrowing costs. Without substantial reforms to reduce the deficit, I predicted that inflation and interest rates would rise.
Alas, my advice went unheeded. The consumer price index has risen by 19.4% since the president took office, meaning that the consumer purchasing power of the dollar has fallen by nearly one-fifth. While the pace of price increases has slowed to about 3.5% per year, it remains stubbornly above the Federal Reserve’s 2% annual target. According to White House estimates, federal spending will exceed $6.9 trillion this fiscal year, an all-time high. Treasury will run a $1.9 trillion deficit, the third largest in our history. Net interest costs will account for roughly half of this deficit, and they have more than doubled since 2021.
Unless Congress acts, the federal government’s fiscal position will likely further deteriorate over the next 10 years. Two of the three major ratings agencies have already downgraded the U.S. sovereign credit rating, while the third has changed its outlook to “negative.” Clearly, something must be done—but how can the government reverse course? Unfortunately, there remains a great deal of public confusion over the budget process itself, which is esoteric. Shedding light on some of the lesser-known details about how Congress sets spending, taxes and borrowing is a key first step. We cannot change the outcome of a process that we do not understand.
The U.S. Constitution vests Congress with the power of the purse: to tax, spend, borrow and repay. As with its other constitutional powers, Congress exercises its purse power by passing bills. In that way, exercising the purse power works just like making any other law: craft a bill that gets a majority in the House, a majority in the Senate and the president’s signature. Specifically, Congress must pass 12 annual appropriations bills to permit the government to spend. Lawmakers on the House and Senate Appropriations Committees spearhead drafting these bills. In principle, the process is as simple as “Schoolhouse Rock!” In practice, it gets quite complicated.
First, the majority of federal spending is not subject to annual appropriations. In the past fiscal year, the government spent about $3.8 trillion for programs with “mandatory” budget authority (e.g., Social Security, Medicare and Medicaid) and $659 billion in interest on the federal debt. Altogether, these spending areas account for roughly 75% of the federal budget. Each year, the fiery debates in Congress only affect “discretionary” budget authorities. Last year, this amounted to $805 billion for defense and $917 billion for nondefense. While every dollar of savings helps, we cannot fix our budget imbalances by futzing with the growth of a minority share of spending.
Second, the Constitution requires that all bills for raising revenue originate in the House, but the requirement is a dead letter. The Senate can just take any House-passed bill transmitted to it, strip its content and add new content as the Senate wishes. The Affordable Care Act is one infamous example: The Senate rewrote a short, unrelated House bill into the act using a 2,406-page “amendment.”
Third, in practice, Senate passage requires a three-fifths supermajority. Under long-standing Senate rules, while a simple majority is sufficient to pass a bill, a three-fifths supermajority is required to “invoke cloture” (i.e., end debate and proceed to vote). Otherwise, senators can “filibuster” the consideration of the bill by refusing to end debate. (Unlike in the past, senators now do not need to make a continuous speech; they can just vote against the motion for cloture.) While the Senate has ended the filibuster’s use for judicial nominees, it remains in force for legislation.
Fourth, however, the Senate’s supermajority requirement can be bypassed for bills that only deal with spending, revenue and the statutory debt limit. For this “budget reconciliation” option to become available, the House and Senate must first pass identical budget resolutions that set topline spending and revenue figures. Under the Byrd rule (2 U.S.C. §644), senators can raise a point of order against any extraneous provision that (for example) does not change outlays or revenues; concerns a nonbudget topic that only incidentally changes outlays or revenues; or increases outlays or decreases revenues outside the budget window (usually a 10-year period). Debate can be temporarily extended by offering a flurry of amendments for votes (a so-called vote-a-rama).
Fifth, the budget resolution does not need the president’s signature. Nonetheless, the process is kicked off by the president’s budget request and then the Economic Report of the President. The budget is due to Congress by the first Monday in February (31 U.S.C. §1105) but is usually late. The House and Senate Budget Committees also seek input from other congressional committees by requesting “views and estimates” letters concerning their respective jurisdictions. Congress’ Joint Economic Committee also is required by law to respond to the president’s views and policy recommendations with the annual Joint Economic Report, usually published a few months later.
Sixth, while House passage only requires a simple majority regardless, a bill passed out of committee or sent from the Senate generally requires the House Rules Committee to pass a “special rule” for its consideration. Because the House does not have the Senate’s standing rules governing debate (including the procedure for invoking cloture), a special rule is required to govern the consideration of each bill (e.g., specifying the time for the debate and restrictions on amendments). While the House Speaker can instead have the body consider a bill under suspension of the rules, the threshold for passage rises to a two-thirds supermajority. As such, it is possible for the Rules Committee to kill a bill with majority support in the House.
Seventh, while rare, Congress can override a presidential veto with two-thirds supermajorities in both houses. The last override occurred in 2020 when Congress overrode President Trump’s veto of the National Defense Authorization Act, which he opposed (in part) because it did not repeal Section 230 of the Communications Decency Act. (An authorization directs agencies about how appropriated funds should or should not be spent.)
Eighth, because authorizations such as the National Defense Authorization Act are considered “must-pass” legislation, lawmakers attempt to include a slew of amendments. These amendments are often riders unrelated to the underlying legislation. By precedent, drafters of must-pass legislation include riders that have the approval of the chairs and ranking members of the committees of jurisdiction for that rider. Rather than voting on individual amendments, members can only vote the whole bill up or down.
Ninth, Congress has not actually passed its required 12 individual annual appropriations bills since 1997. Instead, Congress tends to pass an omnibus (a single bill that appropriates for all 12 functions) or a continuing resolution (extending the appropriations from the prior year, generally at the same levels). If Congress does not pass appropriations in some form before government funding expires, then the still-unfunded portions of the government “shut down.” Again, there are exceptions—lawmakers and senior staff essential to resolving the shutdown, for example, continue to work.
Tenth, a government shutdown is not the same as hitting the debt limit, although they have occurred at the same time. A government shutdown occurs when Congress has not appropriated spending; the debt limit is reached when Congress has not authorized the Treasury to borrow enough to meet Congress’ existing payment obligations. The level of borrowing is determined by Congress’ tax and spend policies. Raising the debt limit does not increase the deficit, but failing to raise it risks delinquency on U.S. payment obligations even if Treasury were to “prioritize” certain payments, such as interest payments to avoid default on U.S. debt.
I will end with another prognostication. As we head into an uncertain and contentious election, we may find ourselves running over the mother of all fiscal cliffs. Republicans and Democrats hold razor-thin majorities in the House and Senate, respectively. Passing appropriations before the start of the new fiscal year (October 1) will require leadership and good faith from both sides. While the broad, bipartisan vote against removing Speaker Johnson is a positive sign for the House’s ability to move legislation, there is a risk that sweet feelings will sour closer to November.
Moreover, the current debt limit suspension expires at the start of the new calendar year. The 118th Congress could kick the can, relying on the 119th Congress to find a solution while Treasury’s “extraordinary measures” allow the government to continue borrowing for a limited time. I urge against that choice. Instead, I would recommend enacting a modest deficit reduction package that extends the debt limit suspension into the spring. This kind of serious, incremental and bipartisan lawmaking would help restore market confidence in U.S. governance.
Note: All views expressed in this piece are the author’s alone.