Each fiscal year, the President and Congress create the Federal Budget. It's a long, sorely-debated topic that takes nine months to approve -- in a good year! When the two parties are fighting for power, it can take longer. For example, the FY 2013 budget probably won't get approved until after the election, while the FY 2012 budget barely got approved by December 2011, two months behind schedule. The FY 2011 budget didn't get approved until April 2011 -- six months behind schedule. Many government agencies almost had to shut down.
The federal budget is important to you because it spends your hard-earned tax dollars -- lot's of them! Find out where your money goes, why the government overspends each year, and how this impacts the economy and you.
Taxes and Income
The Federal government plans to take in $2.902 trillion for FY2013. Most of the taxes are paid by you, either through income or payroll taxes:
- Income taxes contribute 46.8%.
- Social Security, Medicare and other payroll taxes are 33%.
- Corporate taxes are only 12%.
- Excise taxes, custom duties and other revenue make up the remaining 8.2%.
It's estimated that each taxpayer worked until April 12 last year to pay for all Federal tax revenue collected. This is known as Tax Freedom Day. Can you think of any other purchase you make that you've worked as hard and as long for? For more, see U.S. Federal Budget Income and Taxes.
Spending
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For FY 2013, budget spending is estimated at $3.803 trillion -- much more than the revenue being taken in. A whopping 60% of the budget must go towards mandatory programs, such as Social Security, Medicare and Military Retirement benefits. These expenditures are mandated by law, and cannot be changed.
Just over a third of the budget can be divvied up among all the discretionary programs which the President and Congress negotiate the amount each year. However, two-thirds of this is budgeted for military spending.
The remaining 6.5% of the budget must pay the interest on the national debt. The U.S. has been lucky because interest payments are currently very low, thanks to a flight to safety that has increased demand for Treasury notes. When the economy gets better, Treasury yields will rise -- and so will interest payments. For details, see U.S. Federal Budget Spending.
Discretionary Spending
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Discretionary spending is that part of the U.S. Federal Budget that is negotiated between the President and Congress each year as part of the budget process. Discretionary spending for FY 2013 is budgeted at $1.264 trillion. The OMB has budgeted more than half ($851 billion) on security spending, which pays for the Defense department, as well as defense-related functions of all other federal agencies. That leaves just $410 billion to pay for all other domestic programs, like Housing, Education and the Judicial system.
Military Spending
Mandatory Spending
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Mandatory Spending at $2.293 trillion in FY 2013, is 60% of the U.S. Federal Budget. The largest mandatory spending programs are Social Security and Medicare. Social Security costs are currently 100% covered by Social Security payroll taxes, and interest on past payroll taxes that have been invested. Until 2010, there was more coming into the Social Security Trust Fund than being paid out. Thanks to interest on investments, the Trust Fund is still running a surplus. However, the Board of the Fund estimates that the surplus will be depleted by 2036. Social Security revenue, from payroll taxes and interest earned, will cover only 77% of the benefits promised to retirees.
Medicare is already underfunded. Medicare taxes don't pay for all benefits, so this program relies on general tax dollars to pay for a portion of it.
The Deficit
In FY 2013, the budget deficit is estimated to be $901 billion, the difference between $2.902 trillion in revenue and $3.803 trillion in spending. This will be less than the projected FY 2012 deficit of $1.3 trillion, and the record deficit set in FY 2009 of $1.4 trillion. However, is deficit spending still necessary to boost the economy? Is it worth the increase to the national debt? What areas should be cut? Is there enough of an incentive for lawmakers to cut, or will politicians who cut popular programs be cut, themselves, in the next election? To find the answers, and the history of Federal budget deficits, see Federal Budget Deficit.
How the Deficit Contributes to the National Debt
Each year, the deficit adds to the National Debt, already more than $15 trillion. This puts downward pressure on the dollar, driving inflation in exports, and higher costs. More important, it's a tax on our children and grandchildren. This anticipated tax slows economic growth, like driving a car with the brakes on. For more, see U.S. Debt and Deficit.
Budget Process
The Executive Office of Management and Budget (OMB) prepares the budget. The President submits it to Congress on or before the first Monday in February. Congress responds with spending appropriation bills that go to the President by June 30. The President has ten days to reply. Most important, the deadline for budget approval is September 30. For more, see Who's Who in the Federal Budget Process.
The Value of the U.S. Dollar
The dollar has been weakening since 2002. What does this mean? How is it measured? Most important, how does it affect you?. (Article updated February 20, 2012)
