A Guide to the Federal Budget
By Sophie Evans
“It’s too many damn pages for any man to understand.” – Thomas Jefferson in Hamilton
There has been a lot of talk recently about President Biden’s proposed $6 trillion budget for 2022 and whether that amount of spending is responsible given the $5 trillion the government has already spent on Covid-19 relief in 2020 and 2021. These conversations about the federal budget tend to be contentious because they go right to the heart of the government’s major role: taxing and spending money. In fact, the main way most of us interact with the federal government is through paying taxes each year.
What happens after Tax Day is less well known. The actual budget process tends to be long and complicated. In that sense, it hasn’t changed that much since Thomas Jefferson called it “too many damn pages for any man to understand” in the notorious lyrics of Lin Manuel Miranda’s Hamilton. That said, or to be precise, rapped, Biden’s budget is a set of proposed targets for government spending, revenue, and borrowing for the next 10 years.
It also outlines the President’s particular priorities for the budget for October 1, 2021 to September 30, 2022, i.e., Fiscal Year 2022. The $6 trillion figure floating around is only the amount of proposed spending – the full budget also anticipates $4.2 trillion in revenue and a deficit of $1.8 trillion. A deficit is just the difference between spending and revenue ($6 trillion – $4.2 trillion = $1.8 trillion.) In other words, it is the amount the government must borrow to pay for all of its programs in a given year.
It is easy to balk at these numbers, especially when it comes to $1.8 trillion in government borrowing in the wake of $3.1 trillion in borrowing in 2020. But, just like a bank takes into account your entire financial situation before letting you borrow money, we need to think about the deficit in terms of the US’s financial situation as a country. Lenders care about a borrower’s ability to pay them back. That is true if a borrower is an individual or a government. Individuals can only pay back a loan with their future income, which is, obviously, limited by their lifespan.
Governments, however, can pay back their loans by taxing future generations. The amount of tax revenue the government will have on hand to pay back its loans depends on both the tax rates and the amount of taxable income generated by individuals and corporations. Revenue therefore varies according to the state of the economy – i.e., are we in a recession with high unemployment or a boom with new job opportunities. That is why we need to think about government borrowing in terms of the country’s “income,” formally known as its GDP. The government borrowed $3.1 trillion in 2020; US “income” for that year was $20.8 trillion. Similarly, the proposed borrowing for 2022 is $1.8 trillion; the expected “income” is $23.5 trillion.
Since there is no equivalent “lifespan” for the government, it can borrow and pay back money on a much longer timeline. The government does not need to balance its budget in the same way that individuals do, where, at some specific point, “money in” must equal “money out.” In fact, there are many instances where the government should run a deficit: helping businesses and individuals survive a pandemic is certainly one of them. That said, a government cannot borrow unlimited money forever. This limitation is what people mean by the “US debt problem,” which the accompanying fact sheetexplains by means of a bathtub analogy.
The government has to make choices about what it wants to spend money on, and, in terms of the budget, not all choices are equal. Of the $6 trillion in proposed spending, $4 trillion is required spending on programs like Medicare, Medicaid, Social Security, and Unemployment Insurance – i.e., “mandatory spending,” and $300 billion is interest payments on the outstanding debt. Just like when we borrow money, the government has to pay interest on all of the money it has borrowed and not yet paid back. The size of the payment depends on both the interest rate and the amount borrowed.
The remaining $1.7 trillion is for all major government functions like defense, transportation, education, etc. Here is where the now familiar American Jobs Plan and American Families Plan come in. For those worried that the “price tag” numbers are not adding up to $1.7 trillion, the two plans call for government spending over the next 10 years, not all at once in 2022.
This idea of long-term spending is why it’s important to think beyond the sticker shock associated with government programs, even though that is what dominates most headlines. The government does not have to pay for its programs immediately, but it will over time – that’s why the President puts forward a 10-year budget and why economists at the Congressional Budget Office think about government spending, revenue, and borrowing relative to US “income” (GDP) 30, 50, even 70 years into the future.
Taxpayers pay for a majority of government spending. This reality necessitates that we engage with the “pay for” questions: Is this program worth paying for? And how exactly will it be paid for? Some types of spending are straight-forward: the government gives money to a department or agency for a specific purpose. Once completed, the story ends. Other types of spending have a second chapter: the government gives money for a specific purpose, which, once completed, generates more government revenue in the future without any changes to the tax code. We actually make this same distinction in our daily lives when we consider investing or just spending our money.
Members of Congress are currently sorting out that distinction and deciding on the specific amounts the government will spend on each program in the budget, as is their right and responsibility. After all, it is called “discretionary spending” for a reason. In the meantime, we would be well served if we also thought about the “pay fors” and the pay-offs and what they mean for the US, and all of us, as a nation.
Sophie Evans is the Policy Director at Engage. You can reach her at email@example.com. For definitions of all key budget terms from the news, see the attached fact sheet, A Guide to the Federal Budget Debate.