National Budget

National budget is the financial plan for a country's government. The budget states how much money the government intends to spend during a year, what it intends to spend it on, and where it expects to get the money to pay for that spending.

A budget usually covers a fiscal year. In Australia and New Zealand, the fiscal year begins on July 1 and ends on June 30. In Canada, It begins on April 1 and ends on March 31. In the United States, the government's fiscal year begins on October 1 and ends September 30. To explain how a national budget works, this article focuses on the budget of the U.S. government.

Creating a budget. To begin creating a national budget, the U.S. president establishes general budget guidelines. Federal agencies then create budget requests and submit them to the Office of Management and Budget (OMB), which creates a budget plan. The president presents this plan to Congress. Upon reviewing the president's proposal, Congress develops its own budgetary plans and proposes appropriations bills (bills setting money aside) to fund various federal programs. When those spending bills are passed by Congress and approved by the president, the budget process is completed. If Congress or the president does not approve those spending bills by the end of the fiscal year, a law may be passed to keep the government running temporarily. Otherwise a government shutdown may occur. In such instances, all government offices that are not critical close down until a budget is passed.

Government spending. Two of the largest categories of spending in the U.S. budget have long been Social Security and national defense. These two categories have made up about 40 percent to 45 percent of total annual U.S. government spending since the mid-1970's.

Economists commonly compare the national budget with the size of the economy as a whole. The economy's size is usually measured by the gross domestic product, or GDP, for a year. GDP is the value of all goods and services produced in a country for a given period. Since 1970, yearly federal spending in the United States has generally been from 19 percent to 23 percent of the nation's GDP.

Government revenue. Taxes make up the largest share of annual revenue (income) for the U.S. government. Personal income taxes in the United States have contributed about half of yearly revenue since the 1970's. The payroll taxes that finance Social Security, Medicare, and related programs have contributed more than 33 percent. Taxes paid by businesses have usually made up about 10 percent of annual U.S. revenues. Total yearly federal revenue in the United States has generally been from 16 percent to 20 percent of U.S. GDP.

Deficits and surpluses. In all but 12 years since the end of World War II (1939-1945), U.S. federal spending has exceeded revenues, causing annual budget deficits (shortfalls). The years when revenue for the United States exceeded spending resulted in a budget surplus. For most nations, times of war or a weak economy have been accompanied by budget deficits. Wars usually require large increases in military spending. Taxes may be increased but often cannot cover the expense. The extra cost becomes a budget deficit.

Recessions—periods of declining GDP and rising unemployment—tend to reduce government revenues. Reduced production levels mean smaller paychecks for some workers and no paycheck at all for those laid off from jobs or unable to find jobs. Lower incomes, in turn, reduce the amount of revenue the government collects from personal income tax. As business profits decline during recessions, corporate tax collections are also smaller.

Government spending, in contrast, rises during recessions. More people qualify for unemployment benefits and other forms of government assistance. Therefore, a recession in an economy tends to reduce government revenue while increasing spending. This imbalance creates larger budget deficits.

The policies of modern governments during recessions also cause budget deficits. In an effort to create jobs, governments often cut income taxes, hoping that people will spend more. Such spending can allow businesses to hire more workers and reduce unemployment. Also, governments may increase spending on projects, such as highways, that directly increase employment. These policies may aid economic recovery. But by increasing government spending and reducing taxes, they cause larger budget deficits. The money to cover such deficits usually has to be borrowed. The amount borrowed becomes part of the country’s national debt.