July 31, 2010

How does the government spend money? (What’s the process?)

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All bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills.

Constitution of the United States, Article I, Section 7

While the federal government has been raising and spending money since the birth of the Republic, for most of those years spending took place in a piecemeal, ad hoc fashion. This worked reasonably well for many years, but as the government grew, Congress became concerned about the amount money it was spending and whether it was spending the money wisely.

Thus, the story of the modern budget process begins in 1974 with the Budget Control and Impoundment Act (the Act). The law’s purpose is to make sure Congress knows exactly what it is spending and to make sure the president is following the spending directives from Congress. Under the terms of the Act, the president starts the budget process by submitting a budget proposal to Congress each year on the first Monday of February. Notice that at this stage, the budget is in proposal form, it is not yet “the budget”, as it is commonly called in the news media. By February 15, the Congressional Budget Office (CBO) submits its spending estimates for the year. In late February, the House budget committee holds hearings in which the heads of various government agencies, the treasury secretary, the heads of certain other cabinet departments, and other knowledgeable people testify before the committee regarding their views on necessary levels of spending for the year ahead. The Senate budget committee follows a similar routine of hearings. Meanwhile individual congressional committees that are responsible for oversight of different parts of the government’s functions submit their budget estimates to the budget committees of their respective chambers.

After holding hearings and taking into consideration the information received from the CBO and the individual committees, the budget committees act by adopting a budget resolution. The resolutions then go to the floors of the House and Senate for approval in each chamber. Once each chamber has approved its version of the budget, the two versions go to a conference committee.

In a conference committee, several senior members of the House and Senate meet to negotiate the differences between the two versions. Once the conferees agree, they create a conference report outlining the agreement. Each chamber then votes on the conference report. If a majority in each chamber votes to adopt the budget conference report, then what is contained in the report becomes the budget of the United States for the fiscal year.

Despite being the official budget of the United States, this document does not actually determine how much the government will spend in a year. It is not the law of the land, nor a narrative that lays out how much government will spend on particular items, or even the final word on spending by the government.

In fact, the budget is in part a political statement (because it shows what the ruling party in Congress considers spending priorities) and in part a blueprint for federal spending, designed to guide Congress for some of the spending the government does each year.

The budget is a blueprint for only some of the spending, because the budget does not cover the largest parts of government spending, entitlement programs. Entitlement programs, like Social Security and Medicare, encompass nearly 40 percent of all spending by the U.S. government. These programs are called entitlements because, as a matter of law, a person is entitled to receive the benefit by meeting certain criteria such as reaching a particular age and having paid a set amount of taxes into the system.

One can think of entitlement spending like a recurring charge on a credit card. If a person has signed up for an automatic bill payment online, the money just goes out of the bank account without the person actively writing a check or, perhaps, even bothering to look at the expenditure. The payment to the credit card company, the bank, or the Internet provider is owed to them as a matter of law and payment is automatically made.

So it is with entitlements, but the problem is that, over the years, the charge on the national credit card paying for these programs has dramatically increased. In addition, instead of looking at costs and working to slow down their growth, Congress has added more and more spending by expanding the programs and basically ignored the costs, The government borrows the money to cover the part of the spending not covered by taxes. The difference between what is covered by taxes and what has to be borrowed is the annual budget deficit. Like any loan, this amount borrowed has to be repaid with interest.