The FY 2012 budget was supposed to fund government operations for fiscal year 2012 (October 1, 2011 - September 30, 2012). However, it didn't follow the normal budget process, instead creating a debt ceiling crisis. Here's what happened, why, and what was actually spent.
First, the FY 2011 Budget Had to Be Approved:
In January, President Obama outlined his FY 2012 budget priorities in the 2011 State of the Union Address. Although he would keep spending at FY 2011 levels, House Republicans wanted to lower it to 2008 levels. The President submitted his FY 2012 budget to Congress on February 14 2011.
First, Congress had yet to approve the FY 2011 budget. It used stop-gap funding bills in March and April to keep the government funded. The Republicans now had a majority in the House, and they wanted to cut $61 billion from the Discretionary budget. They targeted child nutrition, college tuition, and food safety funding. If passed, it would have cost 800,000 jobs.
On April 18, Standard & Poor's cut its rating outlook on the U.S. debt. It doubted that Congress could agree on how to restrain deficit spending, which threatened to increase the debt to GDP ratio above 100%, and that there would be no effect until 2014 anyway. For more, see S&P Cut U.S. Outlook. The Dow immediately dropped 200 points.
Meanwhile, the FY 2012 Budget Stalled:
On April 5, 2011, House Republicans presented their budget, The Path to Prosperity. It cut $5.8 trillion in spending in Mandatory programs, while implementing $4.2 trillion in tax cuts. On April 13, 2011, President Obama outlined a new budget in a speech. It would cut deficits by $4 trillion over 12 years by capping increases in Medicare and Medicaid spending, and allowing the Bush tax cuts to expire for those with incomes over $200,000. On May 25, the Senate voted against the Republican plan. It also voted against the President's original FY 2012 budget, saying it had been replaced by his new budget outline. (Source: The Hill, President's Budget Sinks, 5/25/11)
Debt Ceiling Crisis:
In July, the bipartisan Gang of Six proposed a plan to cut the tax rate for higher income families. It also eliminated important tax deductions, like charitable giving and mortgage interest. Meanwhile, the debt was coming close to reaching the debt ceiling. With their plan defeated, tea party Republicans threatened to "Just Say No to the Debt Ceiling to force deficit reductions.
Both Senate Democrats and House Republicans proposed their own budgets, that included different plans to raise the debt ceiling.The House plan was defeated in the Senate.
On August 2, 2011, the debt ceiling was raised by $1.2 trillion, as part of the Budget Control Act. It required a Congressional Super Committee to create a proposal to reduce the debt by $1.5 trillion over ten years. If this wasn't successful, it would trigger a sequestration that would reduce spending by $1.2 trillion over 10 years through an across-the-board spending cut.
On September 2, the Bureau of Labor Statistics reported that exactly zero new jobs were created. in August. Although that number was later revised upwards, it indicated how severely the debt ceiling crisis had impacted the economy. On September 8, President Obama proposed the American Jobs Act.
The Super Committee met unsuccessfully in November, and was disbanded in January. The FY 2012 budget was passed in December 2011. (Source: Wikipedia, 2012 US Budget)
What Was Actually Spent in FY 2012
The actual revenue, spending and deficit for FY 2012 were reported in subsequent budgets. Here's a summary.
The Federal government received $2.450 trillion in revenue. Income taxes contributed the lion's share -- $1.132 trillion or 46.2%. Payroll taxes added 34.5%, as follows:
- Social Security - $570 billion
- Medicare -- $201 billion.
- Unemployment - $67 billion.
- Retirement -- $8 billion.
Corporate taxes added just $242 billion, or 9.8%. All other, including excise taxes, tariffs, and earnings on deposits at the Federal Reserve, contributed $215 billion. (Source: Office of Management and Budget, FY 2014 Budget, Table S-5 which provides the actual revenue collected.)
The government spent $3.537 trillion, less than the $3.7 trillion originally budgeted. More than half went toward Mandatory programs, such as Social Security, Medicare and Supplemental Security for the Disabled. These expenditures are mandated by law, and cannot be changed without an act from Congress. A whopping $225 billion was spent to pay the interest on the national debt.
Mandatory - Mandatory programs cost $2.032 trillion, or 57.4% of the U.S. Federal budget. Social Security was by far the most expensive, at $768 billion. Medicare was $466 billion, while Medicaid was $251 billion. All other programs, such as Food Stamps, Unemployment Compensation, Child Nutrition and Tax Credits, spent $548 billion. This included proposals enacted under the Economic Stimulus Act, which added $35 billion. (Source: OMB, FY 2014 Budget, Table S-5)
Discretionary - Just over a third of spending, or $1.285 trillion, went toward Discretionary programs. This percent will continue to decline because mandatory spending will only grow, leaving less money for all other government activities.This means there's less money that the President and Congress can appropriate each year.
Nearly half of that ($614 billion) was spent on all Federal government activities not related to defense. The largest non-security related departments ware: Health and Human Services ($78.3 billion), Education ($67.4 billion), Housing and Urban Development ($36.3 billion), Justice ($26.9 billion), and Agriculture ($23.7 billion). (Source: OMB, FY 2014 Budget, Table S-11)
Military - Half of the Discretionary budget, or $671 billion, was spent on defense. This included $530.4 billion for the Department of Defense base budget, and was an increase from the $528.3 billion spent in FY 2011. The budget focused on buying military equipment, including $2.2 billion in the nuclear weapons complex. It emphasized weapons research and cyber-security. Through some management and acquisition reforms, it planned to save $78 billion through 2016. Although that's a lot a money, it's still less than a 2% decrease in total security spending. It also included $126.5 billion in Overseas Contingency Operations, which paid for the War in Afghanistan.
Unlike Obama's prior budgets, this estimate did not include spending by other departments to support the DoD base budget. To accurately compare it to prior years, these things -- like the FBI (paid for by the Justice Department), the National Nuclear Security Administration (paid for by the Department of Energy) -- should be included. That added an additional $153.6 billion. Prior year budgets also included Homeland Security ($39.9 billion) and the Veterans Administration ($58.7 billion). When all these are added, the true cost of military spending was $909 billion. (Source: FY 2012 Department of Defense Budget; OMB, FY 2014 Budget, Table S-10 & Table S-11).
Budget Deficit Started to Improve:
The budget deficit in FY 2012 came in at $1.087 trillion, less than the $1.327 trillion expected and the lowest deficit since the 2008 financial crisis. The deficit was lower than expected because revenues actually came in about $150 billion higher than forecast, while spending was roughly $150 billion lower. Nevertheless, this deficit helped push the U.S. debt beyond total annual economic output. This concerned many elected officials.
In the short term, deficit spending stimulates the economy. This is especially true if businesses are operating below capacity, and the spending focuses on activities that are efficient in creating jobs. To compare all U.S. budget deficits since the country began, see Federal Budget Deficit.
However, continued deficit spending puts downward pressure on the dollar's value. As the dollar declines, the price of imports increases, as does the risk of inflation. As the debt approaches 100% of GDP, it increases the expectation that this debt won't be paid until sometime in the distant future. This expectation of future taxes actually puts downward pressure on economic growth. Article updated October 24, 2013