Introduction

At the very heart of the legislative process is the federal budget. This is the only piece of legislation that Congress must enact each year. All the rest of congressional and executive activity is based upon the budget. An understanding of the federal budget and how it is developed is necessary for one to understand the legislative process.

The magnitude of the budget is staggering to those of us "outside the Beltway". In 1997 the estimated federal budget will be $122.9 billion. Of this 47% is mandatory spending moneys previously dedicated to such things as entitlements; 21% defense discretionary spending; 16% domestic discretionary spending; 14% interest on the federal debt; and 2% international aid.

The History of Federal Budgets

It is easier to understand budgeting when one knows the history of how the process developed. One can divide this history into 3 eras: legislative dominance 1789 - 1921; presidential dominance 1921-1974; deficit driven dominance 1974 - present.

The first Congress appropriated only $639,000 in the nation's first fiscal year. The Constitution gives Congress the power to levy taxes and provides that funds can be withdrawn from the treasury only for appropriations made by law. Therefore in the first legislatively dominated era all revenue raising (taxation & tariffs) and spending (appropriating) legislation was developed by Congress. In the House such legislation was developed by the Ways and Means Committee, and in the Senate the finance Committee.

Over time revenue and spending levels grew particularly during wartime. Deficits were commonly run up during wars and spent down in post war periods. New expenditures were made as the debt was retired. Most revenue came from tariffs.

The Civil War brought enormous need for revenue and expenditures. The increases were so great the old 2 committee structure could not deal with the work load. In the year prior to the war 1861 federal spending was $67 million. At the war's peak in 1865 it had risen to $1298 million an increase of 19 fold or 1850%. In 1867 spending had fallen to #358 million. To cope with this logistical problem the House in 1865 followed by the Senate in 1867 established Appropriations Committees, thus separating spending from raising revenue. The latter task still resided in the House Ways and Means and Senate Finance Committees. Later appropriations bills were further distributed to various specific committees of the House and Senate.

The Executive branch did its budgeting separately. Each federal agency submitted estimates for its annual spending directly to the relevant congressional committee. All of the individual agency requests were compiled in an annual Book of Estimates.

This new system was unable to keep pace with the demands of an ever expanding budget. Between 1894 and 1914 federal spending doubled, and in the 17 years from 1894 - 1910 spending exceeded revenue in 11 of those 17 years. It only got worse during W.W.I. We entered the war in 1914 with an annual budget of $700 million and a national debt of $1 billion. We exited the war with spending at $18,493 million in 1919, and a debt of $25 billion.

Presidential Dominance

In 1921 the Budget Accounting Act was passed. Its goal was to coordinate federal financial decisions. It did so by returning all spending bills to appropriations committees instead of having them spread out over a variety of disparate ones. It required the President to submit an annual budget to Congress each year. It established the Bureau of the Budget (now the Office of Management and Budget or OMB), to assist the President in developing and submitting the budget. Finally it required that federal agency budget requests go first to the President's budget staff instead of a congressional committee.

Congress still had to vote on the budget but now it was a comprehensive recommendation from the executive branch that the Congress would review and modify. It worked quite well as long as the economy was healthy. There was essentially no deficit spending from 1920 - 1930 and the national debt fell from $25 to $16 billion, and in 1930m there was a surplus of $1 billion.

The depression, new federal policies of the New Deal, and subsequent W.W.II put pressures on the budget that the new system could not control. Not only have revenues failed to keep up with expenditures since 1940, but the proportion of the gross domestic product (GDP) accounted for by government spending increased dramatically from 3% in 1929 to 10% in 1939 to 18% in 1950. It is approximately 30% today.

Thus as a result of Presidential dominance of the federal budget there was enormous influence by the President over the entire economy. As you might expect all of our fiscal problems are not simply due to spending more than we take in. Accepting responsibility for spending or not doing so created a new series of problems. The Viet Nam War was so unpopular that Congress was reluctant to pay for it by increasing taxes as they had done in previous conflicts. They used deficit spending to cover war costs, but because the war itself was unpopular deficit spending now became unpopular as well and considered "morally" inappropriate.

To complicate matters further after Viet Nam post war federal spending did not recede. AN increasing proportion of the budget was now used to cover mandatory payments for such things as: Social Security, Medicare, Medicaid, food stamps, veteran's benefits, and retirement for federal employees. Even though defense spending fell ($6 billion from 1969 - 1973) domestic spending rose by $50 billion in the same period.

The budget became driven largely by the eligibility rules and payment formulas. The develop a budget it was necessary to estimate the future costs of federal obligations very accurately. This estimation dominated the establishment of developing new programs and policies.

Deficit Dominance

A tremendous tension developed between Congress and the President as the budget process became more complex and difficult to develop. A concern that the process was very badly flawed led to the passage of the Congressional Budget Act of 1974. This required that Congress annually vote on a "budget resolution" which established parameters for what the total budget would be. This meant that each separate bill increasing revenue or appropriating money had to be compared to the budget as a whole.

This was followed by the Balanced Budget and Emergency Deficit Control Act of 1985 more commonly referred to as Gram - Radioman - Holdings (GRH). This provided for the reduction of the deficit each year from 1986 - 1990, and a balanced budget in 1991. If the deficit was exceeded then no further spending was permitted in the fiscal year. Why isn't the budget balanced then one might ask? Well it gets even more convoluted.

GRH did not require that the actual deficit be within the targets, only that the projected or estimated deficit for that year be so. Budget estimates were manipulated to prevent the withholding of spending required by the new law. This situation lead to a new layer of legislation the Budget Enforcement Act of 1990 (BEA), which attempted to rectify the deficit growth by 3 methods.

The first was the establishment of adjustable deficit caps. This is a target for the amount of deficit permitted. It is developed by the President and OMB, and is based on the strength of the economy and incoming revenues rather than a fixed formula based on zero deficit by a certain year.

The second is the creation of caps on discretionary spending. Remember that the budget has direct spending costs based on previous legal commitments (interest on the debt, entitlements etc.) these are obligations. The discretionary costs are spending for things we would like to do, but are not legally obligated to do so. Sort of like the difference between your mortgage of car payment and your video rental bills.

The BEA sets limits on total discretionary spending. If those expenditures exceed those established by the BEA the President must sequester money to compensate for this. A uniform percentage is then removed from each discretionary program. The spending caps have been frozen at 1993 levels through 1998.

The third method is referred to as PAYGO, short for pay as you go. It required that legislation increasing spending or decreasing revenue must be offset so that the deficit is not increased. The offset can be done by increasing revenues (taxes), cutting spending, or sequestering funds from programs. At the end of each congressional session OMB determines if sequestration is necessary by comparing the impact of all legislation enacted in that congress on the budget.

Annual Budget Process

With this history in hand the annual budget process becomes a bit easier to comprehend. The first step in each congress is the submission of the President's Budget. All federal agencies requesting funds submit them to the OMB. The OMB reviews the requests and complies them into a budget. The President then submits this to Congress by early February each year. Congress promptly ignores it and develops their own.

Agencies start to develop their budgets in the spring and summer preceding submission to Congress. This process takes 8 - 10 months. While they are preparing their new budgets they are simultaneously administering the old ones and seeking funds for the year immediately ahead.

After submitting their proposed budgets to OMB in the fall. The OMB modifies them and they are "passed back" to the agencies. If an agency is not satisfied they can appeal to the President for more money.

The next step is the passage of the Congressional Budget Resolution. This provides a guide to consider all revenue and spending legislation and is put together by the various congressional budget committees. It is the only time the entire budget is voted on by Congress.

Raising Revenue

All revenue measures or taxing legislation is developed in the House by Ways and Means, or the Senate by the Finance Committee. There is no requirement for any legislation to be developed by these committees in any fiscal year.

Authorizing Legislation

Congress cannot dispense money unless it is "authorized" by a specific law. Authorizations may be permanent in which case the Congress only has to appropriate money, or they may be annual in which cases the Congress must pass both authorizing and appropriating legislation each year.

Appropriations Bills

There are 13 appropriations bills one developed by each of the 13 House and Senate Appropriations Subcommittees. After the President's budget is submitted each of the appropriation subcommittees hold hearings in which agency officials attempt to justify the amount of money requested.

The House and Senate Appropriations Committee divide discretionary funds among the subcommittees, (this is why the Chairs of the Appropriations Committees are some of the most powerful persons in Congress). Each subcommittee develops an appropriations bill and the House and Senate take these up individually usually beginning in June or July. All appropriations bills should be passed by October 1st which is the start of teh new fiscal year. If they fail to do so as happened in 1995, funding is provided in teh form of a "continuing resolution". This provides the Treasury with authority to dispense money to agency based on the previous years budget.

Budget Implementation

After a budget is passed by Congress the OMB apportions money out to agencies and programs at intervals throughout the year, usually in quarters.

This brief outline on the budget is designed to familiarize you with the process and some of the jargon commonly used on the "Hill". Though many pieces of legislation may be introduced and debated, the budget takes priority over all of them. The budget process drives the system, takes up the most time, requires the largest staffs and committees, and without which nothing else in government can be done.

In terms of health policy most of federal health expenditures are in the form of entitlements for Medicaid and Medicare. The entitlements as a whole (not just health spending) account for 47% of the budget, and it is an obligation which must be met by law. Congress is therefore left with only 16% of federal money to use in discretionary ways. Congress would like more discretionary funds, for after all this is where they can "pay back" their constituents. It is also where new programs can be developed and research and education dollars come from. Money spend for one discretionary program must come at the expense of some other program. The budget is now a "zero sum game". So when we ask for money for NIH it comes out of the hide of education etc. This pits what otherwise would be natural allies against each other. Yet collations are what is required to push any legislation forward. In this type of system with relatively limited resources wheeling and dealing become even more important.

Congress would generally like to reduce entitlements so that there are more discretionary funds for them to utilize. One can expect a strong effort to do so in which case funding for health care will probably take a beating.

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Mark S. Yerby M.D., M.P.H.
North Pacific Epilepsy Research
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