DR. MARILYN RUBINJOHN JAY COLLEGE

THE CITY UNIVERSITY OF NEW YORK

FEBRUARY 2013

The Fiscal Cliff: The Budget Process in the U.S. in

Action1

Topics to be Covered

Definition of government budgetsBudgeting in the United States

Structure of U.S. Government Budget Process in the U.S.

The Fiscal Cliff DefinedMoving off the Edge

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What is a Government Budget

The budget is a statement of the financial plan of a government. It shows the income and expenditure of the government during a fiscal year (FY).

In the U.S, the FY runs from October 1 to September 30.

In Colombia. the FY is the calendar year running from January 1 to December 31.

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Government Budgets

In most countries, the annual budget is the most important policy document that is issued each year.

Government budgets are far more important than those for businesses because they are expressions of public policy and often carry the authority of law, preventing public officials from spending outside their budgetary authority. 

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What Do Budgets Tell?

Revenues - How much is forecast to be collected in taxes and other revenues

Expenditures - How government resources are to be distributed

Debt - How much of the cost of government is to be borne by current or future generations

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Budgeting in the United States

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Context of Budgeting

To provide a context for budgeting in the U.S., I will begin with a discussion of the structure of government in the United States

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The U.S. Constitution: Since 1787

Establishes the rules and powers of the three separate and independent branches of the U.S. federal government – the executive, legislative and judicial.

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Executive Branch

Executive –the President, Vice President, department heads (cabinet members) and staff

The President’s cabinet is composed of the most senior appointed officers of the Executive Branch of government who are heads of the 15 permanent executive agencies of the government, e.g., Department of State and Department of the Treasury.

Cabinet officers are nominated by the President and confirmed or rejected by the Senate.

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The Other Two Branches

Legislative – Congress – 2 houses• House of representatives (435 members –

elected on basis of population in each of the 50 states)

• Senate (100 members – 2 from each of the 50 states)

• Judicial – Supreme Court - 9 members• Appointed by President and approved by

Senate

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The Other levels of Government

Article 4 of the Constitution delineates the relationship between the states and the federal government.

The United States federal government and the 50 state governments operate within a system of parallel sovereignty, i.e., states are not technically "divisions" created from the United States, but rather units that, together with the federal government, comprise the United States.

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Government Budgets in the U.S.

Each of the 50 states has its own budget.

Local governments in the U.S. also have their own budgets but are “creatures of the state” meaning that they budgetary decisions but many need state approval.

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Annual U.S. Federal Budget Process

Four phases: I. Budget Preparation and Submission - Executive

branch agencies under the President develop requests for funds and submit them to OMB – the President’s Central Budget Office. The President submits his budget to Congress

II. Congressional Consideration -The Congress reviews the President’s proposed budget, develops its own budget guidelines, and approves spending and revenue bills which are sent back to the President for his signature..

III. Budget Execution IV. Audit and Evaluation

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U.S. Budget Process: The President

The President is required by law to submit a budget to Congress every year.

This budget request details how much the President believes the country should spend across competing priorities and how much revenue is expected.

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President Presents Budget in 3 Ways

Current Services budget

Department Based Budget

Functional Area Budget (Program Budget)

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Current Services Budget

The Current Services budget is an estimate of spending, revenue, the deficit or surplus, and the public debt expected during a fiscal year under current laws and current policy.

The Current Services budget provides a benchmark for measuring the budgetary effects of proposed changes in revenue and spending.

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Department-based Budget

The Department-based budget is an estimate of funds needed to run federal government departments (and agencies) over the upcoming fiscal year.

The organizing mechanism is departments (and agencies)

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Departments in the Federal Government

Department of Agriculture (USDA)

Department of Commerce (DOC)

Department of Defense (DOD)

Department of Education (ED)

Department of Energy (DOE) Department of Health and Human Services (HHS)

Department of Homeland Security (DHS)

Department of Housing and Urban Development (HUD)

Department of Justice (DOJ)

Department of Labor (DOL)

Department of State (DOS) Department of the Interior

(DOI) Department of the

Treasury Department of

Transportation (DOT) Department of Veterans

Affairs (VA)

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Agencies: Department of Homeland Security

Federal Emergency Management Agency

Federal Law Enforcement Training Center

Transportation Security Administration

United States Citizenship and Immigration Services

United States Coast Guard

United States Customs and Border Protection

United States Immigration and Customs Enforcement

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U.S. Budget: Department-Based20

Department of Homeland Security: Agencies

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Functional Area Budget

The President’s Functional Area budget arranges budget resources to be aligned with the “national needs” that they address.

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Functional Area Budget (cont’d)

The President’s functional area budget is divided into categories known as budget functions, i.e. national defense, education, transportation.

These functions include all spending for a given goal of government regardless of the federal agency that oversees the individual federal program.

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Functions in the U.S. Budget

National Defense International Affairs General Science, Space,

and Technology Energy Natural Resources and

Environment Agriculture Commerce and Housing

Community and Regional Development

• Education, Training, Employment, and Social Services

• Health

• Medicare

• Income Security

• Social Security

• Veterans Benefits and Services

• Administration of Justice

• General Government

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U.S. Budget: Functional Area Based25

Functional Area: Administration of Justice

The Administration of Justice function consists of federal law enforcement programs, litigation and judicial activities, correctional operations, and state and local justice assistance.

This function includes several components of the Department of Homeland Security such as border patrol.

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Functional area: Administration of Justice

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Phase II of the Federal Budget Process

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President Submits Budget to Congress

Under law, the President must submit a budget to Congress between the first Monday in January and the first Monday in February.

The 2014 budget, legally due to Congress by February 4, is be submitted late primarily due to fiscal cliff negotiations with Congress.

The 2013 budget http://www.whitehouse.gov/omb/budget/Overview

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President’s Budget & Congress

The President’s budget proposal is the "starting point“ for Congress.

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Congress At Work

Congress has to pass laws that establish how much money is available for the executive branch to spend on its programs and activities.

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Congress and the President’s Budget

Congress is under no obligation to adopt all or any of the President's budget proposals and often makes significant changes.

The Congress has different priorities than the President.

These different priorities led to what is known as the “Fiscal Cliff.”

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Here We Go!!!!!!!!33

The Fiscal Cliff34

What is the Fiscal Cliff?

The "fiscal cliff" is a term used to describe what was expected to happen to the U.S. economy when federal tax increases and spending cuts started to take effect in early 2013 if no action was taken to prevent the fall-off.

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How Did The U.S. Get to the Edge of the Cliff?

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The Fiscal Cliff: Background

The fiscal cliff is the culmination of a series of confrontational showdowns between the two major political parties in the U.S. - Democrat and Republican- over the last few years.

The “debt-ceiling fight” of August 2011 was the specific event that led to the showdown.

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The Debt Ceiling

Under U.S. law, the federal government can spend only if it has sufficient funds to pay for the spending. These funds can come either from revenue collected by the government or from borrowing by the U.S. Department of the Treasury.

Congress sets the debt limit, i.e., a so-called debt ceiling beyond which the Treasury cannot borrow to finance expenditures already approved by Congress and the President.

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Reaching the Debt Ceiling

Once the debt limit is reached, the Treasury Department is not able to borrow as it does routinely to finance federal operations and roll over existing debt.

If the debt limit is not increased, the Treasury would be unable to pay off maturing debt, putting the United States government — the global standard-setter for creditworthiness — into default.

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How Does the Debt Ceiling Get Lifted?

An increase in the debt ceiling requires the approval of both houses of Congress.

In August of 2011, Republicans and some Democrats insisted that an increase in the debt ceiling be coupled with a plan to reduce the growth in debt.

The compromise that was reached affected both the revenue and expenditure sides of the budget.

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On the Revenue (Tax) Side

On Jan. 1, 2013, current tax rates that reflected changes to the tax code made during the Bush administration and renewed during the first Obama administration were set to expire.

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Personal Income Tax

The U.S. Personal Income Tax is a progressive tax meaning that higher rates are paid by higher income people.

If the Bush/Obama tax cuts were not renewed, rates at all income levels would have been increased.

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Payroll (Social Security) Tax

The employee payroll tax rate, now 4.2 percent was scheduled to go back up to 6.2 percent.

This tax is paid by just about everyone who works in the U.S.

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On the Expenditure Side

Automatic spending cuts were scheduled to take place on January 2nd . This is called sequestering.

The sequestering was to come from the two types of

spending in the federal budget:

Discretionary spendingMandatory spending

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Discretionary Spending

This type of spending requires that Congress pass and the President sign an “Appropriations Bill” every year.

There are 12 of these bills and they fund a wide range of agencies including those responsible for homeland security and defense. The agencies cannot spend any money unless Congress passes these bill.

Discretionary spending accounts for approximately 40% of the U.S. Federal budget every year.

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Mandatory Spending

This type of spending does not require an annual law to be passed by Congress and signed by the President.

Mandatory spending requires that a law be passed authorizing the program and establishing eligibility requirements. If these requirements are met, the funds are given.

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The Proposed Cuts

Half of the scheduled annual cuts were to come directly from the national defense portion of discretionary spending , half from non-defense.

About 70 percent of mandatory spending was to be exempt from the cuts.

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The Fiscal Cliff: Moving Away from the Edge

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Moving Away from the Cliff

Congress and the President averted the cliff by agreeing to compromise.

Compromise included in the American Taxpayer Relief Act of 2012.

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The Compromise

The Bush administration's tax cuts for individuals earning less than $400,000 per year and couples earning less than $450,000 were left in place.

The 10 percent, 15 percent, 25 percent, and 28 percent income tax brackets from the Bush tax cuts were made permanent.

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High Income Taxpayers

Tax rates on the highest income earners were increased from 35% to 39.6%, bringing back a top tax bracket from the Clinton administration.

The increase is estimated to raise about $600 billion in new revenues over 10 years.

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Payroll Taxes

Social Security payroll tax cut: Restored the payroll tax to 6.2 percent.

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On the Expenditure Side

The spending reduction elements of the fiscal cliff are primarily contained in the Budget Control Act of 2011 which directed that both defense and non-defense discretionary spending be reduced by "sequestration" if Congress was unable to agree on other spending cuts of similar size.

The scope of the law excludesd major mandatory programs such as Social Security and Medicare.

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No Action Yet

As of January 2013, Congress was unable to reach agreement on spending cuts and the sequestration was delayed until March 2013 as part of the American Taxpayer Relief Act of 2012.

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Más Manana: Muchas Gracias55