A Guide to the Federal Budget
By Sophie Evans
“It’s too many damn pages for any man to understand.” – Thomas Jefferson in Hamilton
There has been a lot of talk recently about the cost of President Biden’s proposed American Jobs Plan – $1.7 trillion as of May 21 – and whether that amount of spending is responsible given the $5 trillion the government has already spent on Covid-19 relief. These conversations about the federal budget tend to be contentious because they go right to the heart of the government’s major role: taxing and spending money. In fact, the main way most of us interact with the federal government is through paying taxes each year.
What happens after Tax Day is less well known. The actual budget process tends to be long and complicated. In that sense, it hasn’t changed that much since Thomas Jefferson called it “too many damn pages for any man to understand,” in the notorious lyrics of Lin Manuel Miranda’s Hamilton. That said (or to be precise, rapped,) we created a fact sheet so that you can understand the most important parts of the budget debate.
Now, back to Biden’s proposals. In 2020, the government received $3.4 trillion in revenue, the vast majority of which came from individual tax payers. That same year, the government spent about $4.4 trillion on typical spending like Social Security, defense, interest payments on its outstanding debt, etc. Just like when we borrow money, the government has to pay interest on all of the money it has borrowed and not yet paid back. At this point, the 2020 budget is pretty similar to that of 2019 – you can see exactly how it breaks down in our fact sheet.
But, as we all know too well, 2020 was not a typical year: we’ve experienced a global catastrophe at a scale not seen since World War II. The government spent an additional $2.1 trillion on Covid-19 relief, bringing total spending in 2020 to $6.5 trillion.
Taken together, these actions resulted in a deficit of $3.1 trillion. A deficit is just the difference between spending and revenue ($6.5 trillion – $3.4 trillion = $3.1 trillion.) In other words, it is the amount the government must borrow to pay for all of its programs in a given year.
It’s easy to balk at these numbers, especially when it comes to $3.1 trillion in government borrowing. But, just like a bank takes into account your entire financial situation before letting you borrow money, we need to think about the deficit in terms of the US’s financial situation as a country. Lenders care about a borrower’s ability to pay them back. That is true if the borrower is an individual or a government. Individuals can only pay back a loan with their future income, which is, obviously, limited by their lifespan.
Governments, however, can pay back their loans by taxing future generations. The amount of tax revenue the government will have to pay back its loans depends on both the tax rates and the amount of taxable income produced by individuals and corporations. That is why we need to think about government borrowing in terms of the country’s income, formally known as its GDP. The government borrowed $3.1 trillion in 2020; US “income” for that year was $20.8 trillion.
Since there is no equivalent “lifespan” for the government, it can borrow and pay back money on a much longer timeline. The government does not need to balance its budget like an individual, where money in equals money out. In fact, there are many instances where the government should run a deficit: helping businesses and individuals survive a pandemic is certainly one of them. That said, a government cannot borrow unlimited money forever. (This is what people mean by the “US debt problem,” which the fact sheet explains through a bathtub analogy.)
The government has to make choices about what it wants to spend money on, and, in terms of the budget, not all choices are equal. The “Investing in Our Littlest Learners” piece makes a case for prioritizing childcare and education. Sarah argues that this type of spending is beneficial for our country and “pays for” itself in the long-term budget.
When politicians use the term “pay for,” they are referring to the process by which Congress can take money already allocated to other programs and use it to “pay for” a new one. Members of Congress are currently debating whether some of the $6.5 trillion allocated last year could be used to fund some of President Biden’s new proposals.
These “pay for” ideas are how we should think about government spending, whether in terms of how to best use already allocated funding or in terms of long-term investments. After all, as taxpayers, we pay for a majority of government spending – we should want the money to be spent wisely.
Sophie Evans is the Policy Director for Engage. You can reach her at email@example.com.