Budget Process in a Nutshell

Budget Process in a Nutshell

© 2023 by Charles S. Konigsberg

Charles S. Konigsberg, J.D. founder of Appropriations.com, GovBudget.com, and Capitol Public Policy LLC served as Assistant Director at the Office of Management and Budget for three successive White House Budget Directors; General Counsel at the U.S. Senate Finance Committee where he managed $500 billion budget reconciliation legislation; Staff Director for Congressional Affairs at the Consumer Financial Protection Bureau; Chief Counsel, minority staff, at the U.S. Senate Rules & Administration Committee; Director of a blue ribbon bipartisan national budget task force; Staff Attorney at the U.S. Senate Budget Committee; and is author of  the forthcoming book Federal Budget Process and Procedure © 2023 and “America’s Priorities: How the U.S. Government Raises and Spends $3 Trillion Per Year” (© 2007, 431pp.). Mr. Konigsberg graduated magna cum laude and Phi Beta Kappa from Kenyon College and from the Case Western Reserve School of Law where he served as an executive editor of the Law Review.

Frequently Used Terms

APPROPRIATION: A statute, under the jurisdiction of the House and Senate Appropriations Committees, providing legal authority for federal agencies to enter into obligations that result in outlays. The 12 appropriations subcommittees in each chamber, respectively, draft an annual appropriations bill providing budget authority to the agencies and programs under their jurisdiction.

AUTHORIZING LEGISLATION: Bills reported by a standing committee of the House or Senate with legislative jurisdiction over the establishment, continuation and operations of federal programs or agencies. The House and Senate each have 17 authorizing committees. Their jurisdiction extends to “authorization of appropriation” provisions authorizing funding by the Appropriations Committees and creation of direct spending authority, such as entitlement programs and contract authority.

BA: Abbreviation for budget authority, which is the legal authority enacted by Congress for agencies to enter into obligations that results in outlays. The most common form of budget authority is appropriations.  Another type is contract authority enacted by authorizing committees.

BYRD RULE: A rule of the Senate, enacted as § 313 of the Budget Act, allowing a senator to strike “extraneous,” principally non-budgetary, provisions in a reconciliation bill, amendment, or conference report.

CBO: Abbreviation for the Congressional Budget Office which supports the congressional budget process by providing Congress with nonpartisan economic and program analyses and cost information on existing and proposed federal programs. The Budget and Appropriations Committees of the House and Senate are the major users of CBO reports.

CONTINUING RESOLUTION (CR): An appropriation act that provides budget authority for federal agencies to continue operations at a specified level–usually the prior fiscal year–when Congress and the President have not completed action on regular appropriation acts by the beginning of the new fiscal year.

DEFICIT CONTROL ACT:  Refers to the Balanced Budget and Emergency Deficit Control Act of 1985, Pub. L. No. 99-177, as amended, which is also referred to by the acronyms “BBEDCA” and “GRH” (for the bill sponsors, Senators Phil Gramm (R-TX), Warren Rudman (R-NH), and Ernest Hollings (D-SC).  New budget law typically amends either BBEDCA or the 1974 Budget Act.

DEBT LIMIT:  A statutory limit on total public debt, comprised of debt-held-by-the-public and debt held by government trust funds.

DEEMING RESOLUTION: A resolution or bill passed by one or both houses of Congress that, in years without a congressional budget resolution, serves for the chamber passing it as the budget resolution for purposes of budget points of order.

DISCRETIONARY SPENDING:  Nearly 30 percent of federal spending is called “discretionary spending,” because the amount of spending flows from annual discretionary funding decisions by the House and Senate Appropriations Committees. The respective Appropriations Committees write 12 annual appropriations bills that divide total discretionary spending among federal agencies and programs authorized to receive funding by authorization laws. The 12 bills are negotiated under two broad subcategories—defense discretionary spending, about $760 billion in FY 2022; and nondefense discretionary spending (NDD), about $962 billion in FY 2022. The annual defense bill funds the operations of the Defense Department and various intelligence agencies. The 11 non-defense discretionary bills fund a multitude of government programs including disaster relief, veterans’ healthcare, schools and special education, law enforcement, public health, homeland security, food and drug inspection, water projects, environmental protection, national parks, training programs, health research, housing assistance, international affairs, and many other functions of government. 

DIRECT (MANDATORY) SPENDING: Refers to budget authority enacted by Congress outside the annual appropriations process, typically through permanent laws under the jurisdiction of authorizing committees. For example, Social Security benefits flow directly from eligibility formulas in the Social Security Act (which is under the jurisdiction of the House Ways & Means and Senate Finance Committees). “Direct spending” is synonymous with “mandatory spending.”

ENTITLEMENTS: The most common form of direct spending are entitlement programs established by authorizing legislation, such as the Social Security Act, legally obligating the federal government to pay specified benefits to eligible individuals. The fundamental characteristic of an entitlement is the absence of annual appropriations decisions on funding levels; instead, the level of expenditures flows directly from benefit formulas and eligibility rules set forth in permanent law. The largest entitlement programs are Social Security, Medicare, and Medicaid which together comprise nearly half the federal budget.

OMB:  The Office of Management and Budget is an agency within the Executive Office of the President that formulates the President’s Budget requests for transmittal to Congress, manages the “apportionment” (i.e., availability) of appropriated funds to agencies, and is the President’s agent for managing the overall operations of the Federal Government.

OUTLAYS:  Refers to the issuance of checks or electronic transfer of funds made to liquidate a federal obligation.

PAYGO:  This is the shorthand for the Pay-As-You-Go mechanism aimed at enforcing a rule of deficit neutrality for all new direct spending and revenue legislation. Under the Statutory Pay-As-You-Go Act of 2010 (S-PAYGO), if deficit effects are not offset, a sequester (across-the-board cuts) of nonexempt direct spending programs is triggered after the end of a congressional session to eliminate the net deficit effects from new legislation. PAYGO may also refer to pay-as-you-go rules in the House and Senate enforced through parliamentary points of order (although currently the House has a “CUTGO” rule that requires deficit neutrality only for new spending legislation, but does not apply to new tax cuts).

SEQUESTER: First enacted in 1985, the sequester mechanism applies uniform percentage reductions in nonexempt spending programs to eliminate breaches of deficit caps (enacted in 1985); discretionary spending caps (enacted in 1990 and again in 2011); the PAYGO deficit neutrality requirement (enacted in 1990 and again in 2010); and for implementation of Budget Control Act annual direct spending reductions in effect through FY 2031.

SHUTDOWN: Federal departments and agencies lacking appropriations are required by the Anti-Deficiency Act to shut down; only “excepted activities” relating to the “safety of human life or protection of property” may continue.

SUPER-MAJORITY: A vote of the Senate requiring three-fifths of all Senators, or 60 votes for passage. Supermajority votes are required to waive many of the budget points of order or to appeal a ruling of the Chair on the respective points of order.

UNIFIED BUDGET: Although most states have separate operating and capital (investment) budgets, the federal budget is generally treated as a single “unified budget”—a comprehensive budget in which all receipts and outlays are consolidated. The unified budget presents the full range of federal activities, enabling evaluation of the full macroeconomic impact of federal spending, revenues, and deficits (or surpluses) on the nation’s economy. Despite general adherence to the unified approach, two programs—Social Security and the operations of the Postal Service—were moved “off-budget” by statute. Consequently, the budget authority, outlays, and receipts of Social Security and the Postal Service are displayed separately as “off-budget,” although consolidated totals, including both on-budget and off-budget spending and receipts, continue to be used for most deliberations.

Introduction

The congressional budget process, established by the Congressional Budget and Impoundment Control Act of 1974 (Budget Act; P.L. 93-344), was designed to be result-neutral. It gave Congress tools to evaluate and make changes to fiscal policy including House and Senate Budget Committees, the Concurrent Resolution on the Budget (“Budget Resolution”) and the Congressional Budget Office (CBO). The Budget Act was not designed to promote a particular fiscal policy.

Subsequent budget laws have added new procedures aimed at specific fiscal objectives. In 1985, the Balanced Budget and Emergency Deficit Control Act (BBEDCA, P.L. 99-177) sought to balance the federal budget through declining maximum deficit amounts (deficit caps), and created the budget sequester mechanism—automatic across-the-board cuts in nonexempt budget accounts—to incentivize and enforce the intended result.

In 1990 Congress shifted its budget control strategy from deficit caps to controlling the growth of spending and deficits. The Budget Enforcement Act of 1990 (BEA; P.L. 101-508) established statutory limits on discretionary spending (programs funded through annual appropriations). The BEA also established a new “pay-as-you-go” (PAYGO) requirement that legislation providing new direct spending, or reducing revenues, must be paid for with offsets. Violation of the discretionary spending caps, or the PAYGO requirement, were enforced using the sequester mechanism.

With the emergence of budget surpluses in the late 1990s, spending caps and PAYGO were allowed to expire in FY2002. By the end of the decade, however, concerns over budget deficits in the wake of the financial crisis and recession led to enactment of a new, permanent PAYGO statute in 2010, and new budget control legislation in 2011.

The Budget Control Act of 2011 (BCA; P.L. 112-25) established new discretionary spending caps for each year through FY2021 estimated to save $917 billion over ten years. The BCA also established a Joint Select Committee on Deficit Reduction (Joint Committee) to negotiate another $1.5 trillion in budget savings by December of 2011. As a fallback, the BCA provided that automatic spending reductions would be triggered if Congress did not enact at least $1.2 trillion in Joint Committee budget savings by January 15, 2012.

The 2012 deadline was not met and $1.2 trillion in Joint Committee automatic reductions were triggered. The BCA applied most of the automatic budget savings to discretionary spending through reductions in the spending caps (often called “sequester caps”), and the remainder of the savings were applied to direct spending through annual sequestration (across-the-board cuts) of nonexempt direct spending programs and two percent annual cuts in Medicare.

Subsequent legislation (four Bipartisan Budget Acts or “BBAs” in 2013, 2015, 2018 and 2019) partially or fully rolled back the automatic discretionary cap reductions that were to take effect in each year through FY2021. However, the annual sequester of direct spending has been implemented each year—and extended 10 years through FY2031.

This publication provides a brief overview of the budget process. For a detailed explanation see the forthcoming publication of Federal Budget Process and Procedure by Charles S. Konigsberg © 2023.

The President’s Budget

The President’s Budget is ordinarily transmitted to Congress each year on the first Monday of February. Preparation of the President’s budget begins six to nine months prior to transmittal of the Budget to Congress. For example, preparation of the FY 2023 budget began in August of 2021 with OMB issuing guidance to the various departments and agencies of government to develop budget proposals based on the President’s priorities and policy objectives.

After several months examining program needs and priorities, each department and agency submits to OMB its initial budget request in early fall. OMB then conducts a review of agency budget requests and combines them—with OMB modifications—into a complete set of budget proposals.

Following an opportunity for agencies to review the OMB draft budget (called “passback”) and to appeal issues of concern to the OMB Director and the President, OMB makes final adjustments to the budget and transmits the multi-volume Budget to Congress on the first Monday of February (or later, in the case of new Administrations). At the same time, federal departments and agencies release detailed “congressional budget justifications” to explain their budget requests to the congressional committees and subcommittees with jurisdiction over their programs and operations.

Key elements of a President’s Budget are often incorporated into the State of the Union Address just prior to budget transmittal.

Congressional Budget Resolution

Following the State of the Union and transmittal of the President’s budget requests, Congress begins its own budget process for making fiscal policy decisions on total spending and revenues, spending for individual programs, and changes – if any – to entitlement programs and the tax code.

The Senate and House Budget Committees hold public hearings in February at which they receive testimony on the President’s Budget proposals from Administration officials, outside experts, advocacy groups, trade associations, other interest groups, Members of Congress, and the public. At the same time, the other committees of Congress review the President’s Budget proposals and justifications and transmit to the Budget Committees their “views and estimates” on appropriate spending or revenue levels for programs within their respective jurisdictions.

The Senate and House Budget Committees – using the President’s budget requests, information from their hearings, views and estimates from other committees of Congress, and projections from the Congressional Budget Office – draft their respective versions of a “Congressional Budget Resolution” in a series of working meetings known as committee “mark-ups.”  (However, in some years, the Budget Committees have opted not to proceed with a Budget Resolution when budget agreements are embedded in statutes, such as the Bipartisan Budget Acts of the 2010s; or political gridlock prevents bicameral agreement on a budget plan.)

It is important to understand that the Budget Resolution does not become a law and therefore is not presented to the President for signature. Rather, it is a congressional blueprint to guide subsequent congressional action on specific spending and revenue measures. The Budget Resolution:

• sets total federal spending and revenue levels enforced by points of order;
• allocates spending authority to each committee, enforced by points of order, including a lump-sum to the Appropriations Committees for all “discretionary” spending;
• includes a nonbinding distribution of new budget authority and outlays among the 20 spending categories known as budget functions;
• may include optional “budget reconciliation instructions” aimed at expediting changes to entitlement programs or tax laws through a filibuster-proof “budget reconciliation bill”;
• may include optional “reserve funds” that  permit the Budget Committees to make adjustments to budget resolution aggregates and committee allocations for legislation on a specified subject that meets certain conditions (usually deficit-neutrality); and
• may include other budget enforcement procedures.

Budget Reconciliation Instructions to Change Entitlement Programs and Tax Law

Reconciliation instructions direct House and Senate authorizing committees to report, by a deadline, changes in direct spending or revenue programs within their jurisdiction that achieve specified spending, revenue, or deficit changes expressed as specific dollar amounts. While specific policy changes are “assumed” by the Budget Committee when the instructions are drafted, the authorizing committees need not – and often do not – follow the Budget Committee assumptions; the authorizing committees have complete discretion in how to achieve their reconciliation instructions as long as they meet their targets.

For example, the Budget Resolution could direct the Senate Finance and House Ways & Means Committees to report legislative provisions that make changes in programs within their jurisdiction that change spending levels by $__ billion, change revenue levels by $__ billion, or change deficit levels by $__ billion over a specified period of time (usually 5 or 10 years).  All of the programmatic details are determined by the committees receiving the instructions.

The Reconciliation process has been used frequently because it offers a way to package legislation from multiple committees and avoid Senate filibusters due to strict limits on debate time and amendments. During the 1980s and 1990s, Reconciliation bills were used for deficit reduction. However, beginning with the 2001 tax cuts, Reconciliation bills have typically been used for tax cuts and/or spending increases and have led to large increases in deficits and debt.

Adopting the Budget Resolution

When the House and Senate Budget Committees complete committee action on their respective Budget Resolutions, they report the resolutions to the full House and full Senate, respectively. Members of the House and Senate then have an opportunity to alter the work of their respective Budget Committees by offering amendments to the Budget Resolution during debate on the House and Senate Floors.

Senate debate often includes a long series of votes on non-binding policy statements – commonly called the “vote-a-rama.”  Unfortunately, the prevalence of non-binding “sense-of-the-Senate” statements in the vote-a-rama may obscure the importance of amendments that have serious policy impact – for example, changing the caps on total spending or allocations to committees, changing the revenue floor, or altering reconciliation instructions.

When the Senate and House have both passed their respective versions of the Budget Resolution, they appoint several of their Members to a House-Senate conference committee to resolve differences between the House- and Senate-passed resolutions. When differences have been resolved, each chamber must then vote on the compromise version of the Budget Resolution called a “conference report.”

Budget resolutions are not always adopted. Congress did not complete action on a budget resolution in 12 fiscal years since the Budget Act became law in 1974—primarily during the last decade due to enactment of four two-year Bipartisan Budget Acts in 2013, 2015, 2018, 2019.

Appropriation Bills

The joint explanatory statement accompanying a Budget Resolution conference report allocates total spending among the various committees of the House and Senate based on jurisdiction, with all discretionary spending allocated in one lump sum to the House and Senate Appropriations Committees, respectively.  (The committee allocations are called “302(a) allocations,” based on the applicable section of the Congressional Budget Act.)

Because the Budget Resolution determines the total amount of budget authority available to the Appropriations Committees, the Budget Act prohibits Congress from considering Appropriations bills prior to adoption of the Budget Resolution. (However, recognizing that the House and Senate may not always come to agreement on a Budget Resolution, the House is permitted to begin consideration of appropriations bills on May 15th even if a Budget Resolution has not been adopted.)

When the House and Senate Appropriations Committees have received their  spending allocations, they subdivide their allocations among their 12 subcommittees, respectively. The allocations of discretionary spending (more than $1.7 trillion in FY 2023) among the 12 Appropriations subcommittees are called “302(b) allocations” and are a key decision point in the budget process. The 302(b) allocations determine how much spending is allocated to defense vs. health vs. schools vs. law enforcement etc.

Following 302(b) allocations, the 12 appropriations subcommittees “mark-up” detailed appropriations bills for the upcoming fiscal year. The bills then go to the full Appropriations Committees for consideration. Following full committee action, appropriations bills are reported to the House and Senate Floors, respectively, for consideration by the full chambers.

After Floor action, the appropriations bills then go to a House-Senate conference committee, generally comprised of senior members of the relevant appropriations subcommittees. The task of the conferees is to resolve all differences between the House and Senate versions of the respective bills, producing a conference report. The major constraints under which the conferees operate is to produce conference reports consistent with the 302(b) subcommittee allocations that can receive the support of a majority of House Members and at least 60 Senators (to avoid a filibuster).

Budget Reconciliation: Floor Consideration and the Byrd Rule

If a budget resolution includes “reconciliation instructions” to change direct spending or revenue levels, the authorizing committees named in the instructions are required to develop reconciliation legislation—usually during the same time frame the Appropriations Committees are assembling their appropriations bills.

Reconciliation mark-ups—where authorizing committee chairmen present draft legislative language for committee review and amendment—can be lengthy and challenging depending on the authorizing committees’ instructions. Moreover, because reconciliation bills are difficult to amend on the House or Senate Floor (due to germaneness restrictions), reconciliation mark-ups at the authorizing committees are the best—and often the only—opportunity to offer amendments to reconciliation bills.

After the authorizing committees mark-up their respective legislative provisions, they are reported to the respective House or Senate Budget Committees where they are packaged, without change, into a single reconciliation bill for House and Senate Floor consideration, respectively. The Budget Committees often package the language with a separate title for each authorizing committee. After the respective Budget Committees report their reconciliation bills to the full chamber, the bills are considered under special procedural protections set forth in the 1974 Budget Act. The special procedures are of particular importance in the Senate.

To explain the significance of budget reconciliation procedures, it is first important to understand how the Senate typically operates. The Standing Rules of the Senate generally protect the rights of all Senators to (1) engage in unlimited debate and (2) offer amendments without limitation.

Votes do not occur in the Senate until all debate on a matter is completed and all amendments have been offered. Consequently, opponents of a particular measure can block it by engaging in extended debate or continuing to offer amendments. The “filibuster” is simply the continuation of debate and amendments to prevent a final vote.

The only way to stop a filibuster in the Senate is by limiting debate and amendments with a procedure known as “cloture,” which requires 60 votes.  In recent years, filibusters have been threatened more frequently—almost routinely—leading to the popular misconception that legislation in the Senate requires the support of 60, not 51 Senators.

The budget reconciliation process effectively short-circuits Senate rules and precedents because the 1974 Budget Act protects reconciliation Bills with (1) a strict (20-hour) time limit on debate and (2) a germaneness restriction on the type of amendments that can be offered. The limit on debate means that reconciliation bills cannot be filibustered.

Consequently, no matter how controversial a reconciliation bill may be, passage in the Senate requires only 51 votes (or 50 when the Vice President votes to break a tie), rather than the 60 votes required to invoke cloture and end debate on non-reconciliation measures.

The “germaneness” restriction on amendments to reconciliation bills is also highly significant (though often overlooked). “Germaneness” is much stricter than mere relevance. An amendment is germane only if it strikes a provision, changes a number, limits some new authority provided in the legislation, or expresses the “sense of the Senate.” Effectively, this means that most substantive amendments offered to a reconciliation bill on the Senate Floor are likely to be nongermane and can only be considered if the restriction is waived by a vote of 60 Senators. This dramatically elevates the importance of the committee mark-up where the reconciliation language is developed.

Because filibuster-proof reconciliation Bills are a radical departure from the way the Senate normally does its business, Senator Robert C. Byrd in 1985 created what came to be known as the “Byrd Rule” to limit what can be included in a reconciliation Bill.

Under the Byrd Rule, all legislation reported pursuant to reconciliation instructions must be budgetary in nature. Any matter that is not budgetary is considered to be “extraneous.”  The Byrd Rule defines as “extraneous” provisions that (1) have no cost or (2) are significant policy changes with “merely incidental” budgetary effects.  Senators may use a Byrd Rule point of order to strike specific “extraneous” provisions from a reconciliation bill or conference report.

The New Fiscal Year, Continuing Resolutions, and Shutdowns

Congress’ annual objective is to complete action on all 12 appropriations bills, as well as Budget Reconciliation legislation by October 1, when the new fiscal year begins. However, due to escalating disagreements on fiscal policy, it is rare for Congress to complete action on all 12 bills by October 1. The last time was 1996.

Instead, Congress often passes stop-gap measures, called “continuing resolutions,” to keep agencies operating at a particular level of funding (often the previous year’s funding level with some adjustments, or the lower of House- or Senate-passed bills) while they endeavor to complete appropriations action.

Sometimes, multiple CRs are adopted before final agreement on appropriations is reached.  And occasionally, political gridlock prevents adoption of a CR and the federal government shuts down.  Lengthy government shutdowns occurred in 1995, 2013, and Dec. 2018 – Jan. 2019. For more information, see: appropriations.com/government-shutdown.

Unlike the appropriations process, failure to complete Budget Reconciliation by October 1, does not have any immediate consequence.  A delay, due to continuing negotiations, means that reforms to taxes or direct spending have a later effective date, which does not typically interfere with government operations.

Budget Enforcement: Points of Order, PAYGO, and Sequestration

Senators and Representatives can raise parliamentary objections on the Senate or House Floors to block consideration of legislation that would cause a breach of the Budget Resolution’s total spending or revenue levels, committee allocations, or appropriations subcommittee allocations.  These parliamentary “points of order” are used most often to ensure that the 12 annual appropriations bills (containing the 30% of the budget that is “discretionary spending”) remain within their subcommittee allocations.

(In years when the House and Senate have not reached agreement on a Budget Resolution, the House and Senate have  adopted “deeming resolutions” to serve in place of an annual budget resolution for the purposes of establishing enforceable budget levels for the upcoming fiscal year.)

A different type of enforcement tool was established for direct spending legislation and tax legislation and is currently set forth in the Statutory Pay-As-You-Go Act of 2010 (usually known by the abbreviation “S-PAYGO”). The 2010 Act is the most recent incarnation of a PAYGO law, first adopted in 1990, aimed at enforcing a rule of deficit neutrality for new direct spending and revenue legislation.

The objective of PAYGO is to prevent new direct spending and revenue legislation from increasing deficits. This is accomplished by effectively requiring that new legislation contain budgetary offsets to “pay for” new tax cuts or new direct spending increases. Budgetary offsets can be provisions that increase revenues or cut direct spending, or a combination of the two.

Under PAYGO, the budgetary effects of newly enacted revenue and direct spending provisions are recorded by the Office of Management and Budget (OMB) on two PAYGO scorecards covering five-year and 10-year periods (in each new session, the periods covered by the scorecards roll forward one fiscal year). OMB displays on the scorecards the average budgetary effects of PAYGO legislation in each year over the 5-year and 10-year periods beginning with the budget year.

Shortly after a congressional session ends, OMB finalizes the two PAYGO scorecards and determines whether a violation of the PAYGO requirement has occurred (i.e., if a net deficit has been recorded for the budget year on either the 5-year or 10-year scorecard). If so, the President would be required to issue a sequestration order that implements largely across-the-board cuts in (nonexempt) direct spending programs sufficient to eliminate the violation. For a detailed explanation of how a sequestration order would operate, see OMB: The Statutory Pay-As-You-Go Act of 2010 – A Description.

There has never been a PAYGO sequester under the 2010 statute due to exceptions included in the law, as well as subsequent legislative provisions enacted to avoid a sequester: 

1. Legislation designated as emergencies are always exempt from PAYGO; they are not placed on either scorecard and cannot trigger a sequester.
2. Congress can exempt any bill from the PAYGO requirement by including a provision stating that “the budgetary effects of this section (or bill) shall not be entered on the PAYGO scorecard…”
3. Congress can enact a bill that zeroes out net deficits on the scorecards, preventing a sequester.
4. Congress can enact a bill that shifts net deficits on the scorecards to years after the budget year in order to avoid triggering a sequester.
5. The automatic sequestration mechanism, itself, has exemptions. If an “across-the-board” sequester of direct spending programs is required, it is not really “across-the-board.” Automatic cuts in the Medicare program would be  limited to 4 percent and many other direct spending programs are entirely exempted from sequestration including Social Security, federal retirement, interest payments, most unemployment benefits, veterans’ programs, and low-income programs including Medicaid, food stamps (now called SNAP), children’s health insurance (CHIP), refundable income tax credits, Temporary Assistance for Needy Families (TANF), and Supplemental Security Income (SSI).

Although Congress has passed legislation increasing the deficit numerous times since enactment of Statutory PAYGO in 2010, a sequester has never been triggered due to exemptions, “zeroing out,” and shifting balances to later years. Nevertheless, a PAYGO sequester will be automatically triggered in early 2025, absent congressional action, as explained below.

The FY 2025 PAYGO Cliff

In May 2021, Congress enacted the American Rescue Plan Act (ARPA; P.L. 117-2) of 2021, a $1.9 trillion COVID-19 relief package. As required by S-PAYGO, OMB recorded the costs of the $1.856 trillion legislation, averaged over 5 years and 10 years, on the two PAYGO scorecards. Normally, this would have triggered a PAYGO sequester in January of 2022, however, in order to avoid a sequester, Congress enacted a provision transferring the PAYGO balances from 2022 to 2023:

For the purposes of the annual report issued pursuant to section 5 of the Statutory Pay-As-You-Go Act of 2010 (2 U.S.C. 934) after adjournment of the first session of the 117th Congress, and for determining whether a sequestration order is necessary under such section, the debit for the budget year on the 5-year scorecard, if any, and the 10-year scorecard, if any, shall be deducted from such scorecard in 2022 and added to such scorecard in 2023.

Consequently, there was an exceptionally large PAYGO deficit on the 5-year scorecard for 2023 (see the scorecard in Appendix M). When ARPA was enacted without offsets, the deficit effects were averaged over 5 years, adding $370.6 billion to each of fiscal years 2022 through 2026 on the OMB scorecard. When the provision cited above was enacted at the end of 2021, the $370.6 billion in 2022 was moved to 2023, resulting in a combined 2023 PAYGO deficit of $741.3 billion.

In order to avoid an enormous sequester of nonexempt direct spending programs in January of 2023, Congress included in section 1001 of the Consolidated Appropriations Act, 2023 (P.L. 117-328), provisions to shift the PAYGO deficits from fiscal years 2023 and 2024 to FY 2025:

Section 1001(d). BALANCES ON THE PAYGO SCORECARDS.–
(1) FISCAL YEAR 2023.—For the purposes of the annual report issued pursuant to section 5 of the Statutory Pay-As-You-Go Act of 2010 (2 U.S.C. 934) after adjournment of the second session of the 117th Congress, and for determining whether a sequestration order is necessary under such section, the debit for the budget year on the 5-year scorecard, if any, and the 10-year scorecard, if any, shall be deducted from such scorecards in 2023 and added to such scorecards in 2025.

(2) FISCAL YEAR 2024.—For the purposes of the annual report issued pursuant to section 5 of the Statutory Pay-As-You-Go Act of 2010 (2 U.S.C. 934) after adjournment of the first session of the 118th Congress, and for determining whether a sequestration order is necessary under such section, the debit for the budget year on the 5-year scorecard, if any, and the 10-year scorecard, if any, shall be deducted from such scorecards in 2024 and added to such scorecards in 2025.

The shifting of PAYGO deficits to FY 2025 will create an immense PAYGO deficit in FY 2025—close to $1.5 trillion—a “PAYGO cliff” that would decimate all nonexempt direct spending programs. Presumably, Congress will act by the end of the 118^th Congress, or in January of 2025, to again shift the balances, or zero them out, to avoid going over this PAYGO cliff.

House and Senate PAYGO Rules

In addition to the statutory PAYGO mechanism, the House and Senate have their own PAYGO rules which allow parliamentary objections to block consideration of legislation that would cause deficit increases. The House rule applies to legislation that would increase deficits over a 6-year or 11-year period beginning with the current year; the Senate rule applies to deficits in (1) the current year; (2) the budget year; (3) the 6-year period beginning with the current fiscal year; or (4) the 11-year period beginning with the current year. Waiver of the Senate’s PAYGO rule requires 60 votes.  Unlike statutory PAYGO which has not been enforced, the Senate PAYGO rule have been used to block legislation; see  Senate PAYGO rule   House PAYGO rule

BCA of 2011, Spending Caps, and the Bipartisan Budget Acts of 2013, 2015, 2018, and 2019

The Budget Control Act of 2011 (BCA; August 2, 2011, P.L. 112-25)—negotiated during a lengthy political impasse over raising the debt ceiling—added a new layer of measures in the budget process aimed at reducing projected deficits. Tight statutory spending caps were imposed on defense and non-defense discretionary spending for each year through FY 2021 to reduce deficits by more than $900 billion over 10 years . The caps are enforced by automatic across-the-board budget cuts (“sequestration”) in appropriations bills if the caps are breached in any year.

The BCA also established a Joint Select Committee on Deficit Reduction (Joint Committee) to negotiate another $1.5 trillion in budget savings through FY2021. As a fallback, the BCA provided that automatic spending reductions would be triggered if Congress did not enact at least $1.2 trillion in Joint Committee budget savings by January 15, 2012.

The January 15, 2012 deadline was not met and $1.2 trillion in “Joint Committee automatic reductions” were triggered, beginning with an $85 billion sequester (across-the-board cuts) in FY2013. This was to be followed by automatic reductions of $109.3 billion to be implemented in each fiscal year through FY2021.

The BCA automatic reduction formula, if followed without amendment, would have applied more than 80% of the automatic annual budget reductions savings to discretionary spending through reductions in the discretionary caps. The remainder of the savings were to be applied to direct spending through annual sequestration (across-the-board cuts).

Subsequent legislation—the Bipartisan Budget Acts of 2013, 2015, 2018, and 2019—have partially or fully rolled back the automatic discretionary cap reductions that were to take effect in each year through FY2021. However, the annual sequester of direct spending (a.k.a. the “Joint Committee Sequester”) has been implemented each year—and extended another 10 years through FY2031 (most recently by COVID Relief, P.L. 116-136 and Infrastructure Acts, P.L. 117-58).

The Joint Committee Sequester automatically reduces more than 200 direct spending accounts. The reductions impact a broad array of direct spending programs, including Affordable Care Act cost-sharing reduction subsidies and risk adjustment, farm price and income supports, compensation and services for crime victims, citizenship and immigration services, agricultural marketing services and conservation programs, promoting safe and stable families, and animal and plant health inspection.

The Joint Committee Sequester also cuts Federal Deposit Insurance Corporation orderly liquidation operations, vocational rehabilitation services, mineral leasing payments, Centers for Medicare and Medicaid Services program management, social services block grants, Departments of Justice and Treasury law enforcement activities, and student loan origination fees. Also included are highway performance; school construction bonds; spectrum relocation activities; Trade Adjustment Assistance; Consumer Financial Protection Bureau; Drug Enforcement Administration operations; Tennessee Valley Authority; fish and wildlife restoration and conservation; affordable housing; the maternal, infant, and early childhood home visiting program; and Gulf Coast restoration.

BCA Caps on Discretionary Spending through FY 2021 ($ in billions)

Budget Enforcement after Expiration of the BCA

The statutory limits on discretionary spending—as enacted by the BCA and modified by the Bipartisan Budget Acts—expired at the end of FY 2021. This section summarizes budget controls that remain in place after FY 2021.

Controls on Discretionary Spending

Although the 2011 BCA statutory spending caps expired at the end of FY 2021, the following discretionary spending controls continue to be in effect:

• Appropriations Committee Allocations:  The conference report on the annual budget resolution includes allocations of discretionary spending (budget authority and outlays) to the House and Senate Appropriations Committees, called 302(a) allocations. The full committees then subdivide those amounts among their respective 12 subcommittees, called 302(b) allocations; it is not in order in the House or Senate to consider an appropriations bill until the full committees make their 302(b) allocations (60 votes required for a waiver in the Senate).  In the House, budget authority must remain within the 302(b) allocations; in the Senate, both budget authority and outlays must remain within the 302(b) allocations and a waiver requires 60 votes. In the House there is also a point of order against violations of the 302(a) allocation to the full committee.
• Total Spending: A budget resolution includes levels for aggregate (total) budget authority and outlays for the budget year. In the House and Senate there is a point of order against legislation that would cause the budget resolution totals for new budget authority or outlays in the budget year to be exceeded (60-vote waiver in the Senate).
• Limits on Advance Appropriations: Recent budget resolutions (see Table 13) have included points of order, in the House and Senate, against advance appropriations unless specifically permitted in the budget resolution or Joint Statement of Managers (60-vote waiver in the Senate).

Controls on Direct (Mandatory) Spending

The following direct (mandatory) spending control measures continue to be in effect after expiration of the Budget Control Act at the end of FY 2021. Direct or mandatory spending refers to spending mandated by permanent laws under the jurisdiction of authorizing committees, outside the annual appropriations process, for example, Social Security, Medicare, and Medicaid.

• Annual Direct Spending Sequester extended through FY 2031: The annual Joint Committee Direct Spending Sequester—triggered on January 15, 2012, by the 2011 BCA—will continue to be implemented on October 1st of each fiscal year through FY 2031. For FY 2023, the automatic spending cuts total more than $25 billion, impacting Medicare, community and migrant health centers and the Indian Health Service, student loans, Affordable Care Act cost-sharing subsidies, farm price and income supports, compensation and services for crime victims, citizenship and immigration services, agricultural marketing services and conservation programs, animal and plant health inspection, Federal Deposit Insurance Corporation orderly liquidation operations, vocational rehabilitation services, Social Services Block Grants, law enforcement activities, highway performance grants, school construction bonds, spectrum relocation activities, Trade Adjustment Assistance, Drug Enforcement Administration operations, Tennessee Valley Authority, fish and wildlife restoration and conservation, affordable housing, the Maternal, Infant, and Early Childhood home visiting program, and Gulf Coast restoration.
• Statutory Pay-As-You-Go (PAYGO) Requirement: OMB maintains 5-year and 10-year “scorecards” of the average annual budgetary effects from all new direct spending (and tax) legislation enacted by Congress. At the end of a session of Congress, new direct spending or tax cut legislation that results in a net deficit increase for the first year of either scorecard would trigger a PAYGO sequester (across-the-board cuts in all nonexempt direct spending) to eliminate the deficit increase—absent congressional legislation to the contrary. (There have been no PAYGO sequesters due to numerous congressional actions exempting spending from the scorecards, zeroing out the scorecards, or moving net deficits from the budget year to later years.)
• House and Senate PAYGO Rules: Unlike Statutory PAYGO which looks at the net deficit effect—averaged over 5 years and 10 years—of all direct spending and revenue legislation enacted during a session of Congress, the House and Senate PAYGO rules allow a parliamentary point of order to be raised against individual bills, amendments, or conference reports projected to increase direct spending or reduce revenues unless the legislation includes offsets that prevent a deficit increase. Both rules prohibit deficit increases over a 6-year or 11-year period, beginning with the current fiscal year; and the Senate rule also prohibits deficit increases in the current year or the budget year, individually. A waiver of the PAYGO rule in the Senate requires a 60-vote supermajority. In the House, the point of order may be waived by a simple majority.
• No Direct Spending Legislation Before Adoption of the Budget Resolution:  Both the House and Senate prohibit consideration of direct spending legislation for the budget year before adoption of a budget resolution.
• Total Spending:  In the House and Senate there is a point of order against legislation that would cause the budget resolution aggregate levels for new budget authority or outlays in the budget year to be exceeded (60-vote waiver in the Senate).
• Authorizing Committee Allocations:  The conference report on the annual budget resolution includes “302(a) allocations” of budget authority and outlays to the authorizing committees covering the direct spending programs under their respective jurisdictions. The allocations may be set at baseline levels if no legislative changes are contemplated by the budget resolution, or the allocations can make room for changes. In the House, there is a point of order against direct spending legislation that exceeds BA allocations for the budget year or the total of years covered by the budget resolution. In the Senate, this point of order covers both BA and outlays. A waiver in the Senate requires 60 votes.
• Budget Reconciliation: A budget resolution enables Congress to fast-track legislation from multiple committees making changes in direct spending programs. In the Senate, reconciliation legislation cannot be filibustered (due to limits on debate); floor amendments must be germane; and all provisions must be budgetary in nature.
• Point of order against “backdoor spending”: Section 401(a) of the 1974 Budget Act provides a point of order against legislation creating new contract authority, borrowing authority or credit authority, unless it is subject to appropriations. In addition, as explained in the section on the Federal Credit Reform Act, any legislation providing new direct loans or loan guarantees must include budget authority up front to cover projected delinquencies, defaults, and interest rate subsidies over the life of the credit programs.
• Point of order against new entitlement authority effective in the current year: Section 401(b) of the 1974 Budget Act provides a point of order against legislation creating new entitlement authority that would become effective during the current fiscal year.

Controls on Revenues

The following revenue control measures continue to be in effect :

• No Revenue Legislation Before Adoption of the Budget Resolution: Both the House and Senate prohibit consideration of revenue legislation for the budget year before adoption of a budget resolution.
• Budget Resolution Floor for Total Revenues: In the House and Senate there is a point of order against legislation that would cause revenues to fall below the budget resolution revenue floor for the budget year or the total of all years covered by the resolution (60-vote waiver in the Senate).
• Budget Reconciliation: A budget resolution enables Congress to fast-track legislation from multiple committees making changes in revenue (tax) laws. In the Senate, reconciliation legislation cannot be filibustered (due to limits on debate); floor amendments must be germane; and all provisions must be budgetary in nature.
• Statutory Pay-As-You-Go (PAYGO) Requirement: Statutory PAYGO: OMB maintains 5-year and 10-year “scorecards” of the average annual budgetary effects from all new direct spending and tax legislation enacted by Congress. At the end of a session of Congress, new direct spending or tax cut legislation that results in a net deficit increase for the first year of either scorecard would trigger a PAYGO sequester (across-the-board cuts in all nonexempt direct spending) to eliminate the deficit increase.  (There have been no PAYGO sequesters due to numerous congressional actions exempting spending from the scorecards, zeroing out the scorecards, or moving net deficits from the budget year to later years.)
• House and Senate PAYGO Rules: Unlike Statutory PAYGO which looks at the net deficit effect—averaged over 5 years and 10 years—of all direct spending and revenue legislation enacted during a session of Congress, the House and Senate PAYGO rules allow a parliamentary point of order to be raised against individual bills, amendments, or conference reports projected to increase direct spending or reduce revenues unless the legislation includes offsets that prevent a deficit increase. Both rules prohibit deficit increases over a 6-year or 11-year period, beginning with the current fiscal year; and the Senate rule also prohibits deficit increases in the current year or the budget year, individually. A waiver of the PAYGO rule in the Senate requires a 60-vote supermajority. In the House, the point of order may be waived by a simple majority.

Controls on Federal Credit

• Require Advance Appropriations for Credit Legislation (with Exceptions):  Section 504 of the 1974 Budget Act requires that new direct loan obligations and new loan guarantees may be incurred only to the extent that new budget authority to cover their costs is provided in advance in an appropriations act. In addition, section 401 of the Act prohibits new credit authority unless the BA is provided in advance in appropriations act.

Controls on Deficits and Debt

• Budget Reconciliation: The annual budget resolution may include optional “reconciliation instructions” requiring authorizing committees to report legislation making changes in direct spending programs or tax laws. When committees report reconciliation legislation in response to budget resolution instructions, the legislation is packaged into an omnibus reconciliation bill by the Budget Committees, and then considered under expedited procedures. In the Senate, reconciliation bills are filibuster-proof, and all amendments must be strictly germane. From FY 1980 through FY 1997, the first 13 budget reconciliation acts were utilized to reduce budget deficits, including deficit reduction packages in 1990, 1993, and 1997 that were followed by four years of federal budget surpluses. Reconciliation bills remain a potent tool to reduce deficits, but since 2001 have typically been used to expedite policy agendas resulting in deficit increases.
• Byrd Rule Point of Order against Outyear Deficits in a Reconciliation Bill: The Byrd Rule places boundaries on the types of legislation eligible to be considered under the filibuster-proof reconciliation procedures, including a prohibition on provisions that would increase outyear deficits (i.e., deficits in years beyond the budget resolution window). For example, in instances when reconciliation procedures have been used to expedite tax cuts, the Byrd Rule has required that tax cuts expire after 10 years so as not to cause deficits beyond the 10-year budget resolution window.
• Long-Term Deficit Points of Order:  In the Senate, a rule adopted in the FY 2016 budget resolution—and still in effect—prohibits the consideration of legislation that would cause a net increase in deficits of more than $5 billion in any of the four consecutive 10-year periods beginning 10 years after the budget year in the most recently agreed to budget resolution. Waiver of the rule requires 60 votes.
• Statutory Pay-As-You-Go (PAYGO) Requirement: Statutory PAYGO is a control on new deficit spending. OMB maintains 5-year and 10-year “scorecards” of the average annual budgetary effects from all new direct spending and tax legislation enacted by Congress. At the end of a session of Congress, new direct spending or tax cut legislation that results in a net deficit increase for the first year of either scorecard would trigger a PAYGO sequester (across-the-board cuts in all nonexempt direct spending) to eliminate the deficit increase.  (There have been no PAYGO sequesters due to numerous congressional actions exempting spending from the scorecards, zeroing out the scorecards, or moving net deficits from the budget year to later years.)
• House and Senate PAYGO Rules:  The House and Senate PAYGO rules are controls on new deficit spending. Unlike Statutory PAYGO which looks at the net deficit effect—averaged over 5 years and 10 years—of all direct spending and revenue legislation enacted during a session of Congress, the House and Senate PAYGO rules allow a parliamentary point of order to be raised against individual bills, amendments, or conference reports projected to increase direct spending or reduce revenues unless the legislation includes offsets that prevent a deficit increase. Both rules prohibit deficit increases over a 6-year or 11-year period, beginning with the current fiscal year; and the Senate rule also prohibits deficit increases in the current year or the budget year, individually. A waiver of the PAYGO rule in the Senate requires a 60-vote supermajority. In the House, the point of order may be waived by a simple majority.

Controls on Legislation Impacting Social Security

• Current budget law contains several provisions aimed at protecting Social Security. There is a point of order in the House and Senate against budget reconciliation provisions that would impact Social Security (60-vote waiver); and several points of order in the House and Senate against any legislation that would worsen Social Security’s financial position (60-vote waiver).

Deficits, Public Debt, and the Debt Ceiling

The nation’s public debt – which is the accumulated debt of the nation – increases when Congress enacts total spending for a fiscal year that exceeds total revenues, i.e., when the government runs an annual deficit. When Congress passes spending and tax laws that result in an annual deficit, the U.S. Treasury must borrow sufficient funds to cover the deficit, and the accumulated public debt increases.

Total public debt also increases when Social Security, retirement, and other government trust funds, invest cash surpluses in Treasury securities for safekeeping, as required by law.

The statutory limit on the public debt, often called the “debt limit,” is an artificial legal limit on the Treasury’s ability to borrow the funds necessary to finance already incurred obligations of the United States. If Congress passes spending measures that exceed incoming revenues, but prevents the Treasury from borrowing funds to cover the deficit, the nation would default on its legal obligations to lenders, Social Security beneficiaries, veterans, Medicare providers and any others to whom payments are legally owed.

A U.S. default has never occurred and would have catastrophic effects on: (1) the ability of the U.S. Treasury to issue bonds in the future; as well as (2) the stability of global financial markets.

The debt limit approximates total public debt – which includes:

• Debt-Held-by-the-Public (money borrowed by selling Treasury securities to various buyers including foreign investors, mutual funds, state and local governments, commercial banks, insurance companies and individuals); plus
• Debt Held by Federal Government Accounts, such as the Social Security Trust Funds and various federal retirement trust funds.

While a lot of political attention is paid to the debt limit due to its symbolism, most experts view debt-held-by-the-public as more significant than total public debt, because debt-held-by-the-public reflects the total amount the Federal Government is borrowing from private credit markets – with the implications that has for available credit. As of January 2023, debt held by the public was approximately $24.5 trillion, while total public debt was $31.4 trillion.  See https://fiscaldata.treasury.gov/datasets/debt-to-the-penny/debt-to-the-penny for up-to-the-minute data on federal debt.

Controls on Presidential Impoundment

One impetus for development of the congressional budget process was an executive-legislative power struggle that erupted during the Nixon Administration over presidential authority to impound funds appropriated by Congress.  In response to President Nixon’s attempt to withhold congressionally appropriated funds, Title X of the Congressional Budget and Impoundment Control Act of 1974 established legal procedures to prevent a recurrence of this dispute and is separately referred to as the Impoundment Control Act (ICA).

Under the procedures put in place by the Impoundment Control Act, the President may (1) “defer” (delay) using an amount of appropriated budget authority until later in a fiscal year or (2) propose to “rescind” (cancel) an amount of budget authority.

Deferrals. The purpose of the deferral mechanism is to permit the Executive Branch to set money aside until later in the year to provide for a contingency, or to save money due to changes in operations. The President may not propose a deferral simply because he disagrees with Congress’ appropriations decision. A further restriction is that funds may not be deferred for a period that is too long to allow the agency to obligate the funds prudently by the end of the fiscal year. A deferral proposed by the President takes effect unless Congress passes, and the President signs, a law disapproving the deferral in which case the funds must be released.

Rescissions.  A rescission (cancellation) of appropriations, proposed by the President, does not occur unless Congress affirmatively passes a law approving the cancellation within 45 days (of continuous session). Consequently, if either the House or Senate fails to enact the President’s proposed rescission of budget authority in a timely manner, the President has no choice but to release the budget authority to the agency after expiration of the 45-day period.  Rescission legislation in the Senate is subject to statutory debate limitations and therefore cannot be filibustered, requiring only a simple majority (51) for passage. (Congress has unfettered authority to initiate its own rescission legislation to revise earlier appropriations decisions.)

In drafting the 1974 Impoundment Control Act, Congress put teeth in its limitations on presidential impoundment by empowering the Comptroller General (who heads the Congress’ investigative arm, the GAO) to file suit in Federal Court to require the release of appropriated funds that have been illegally deferred or rescinded.