Unlike a household budget, the federal budget is not a balance sheet where income and spending are adjusted against each other. Congress allocates funds and levies taxes by means of bills that are relatively independent.

If the government takes in more than it spends in a year, there is a budget surplus. This excess revenue is generally applied to reducing the national debt. Since 1969, surpluses have occurred only for a few years in the Clinton administration and the beginning of the Bush term. Surpluses are due to higher taxes, low unemployment, and a booming economy that produces a larger than expected overall national income, which correspondingly results in a larger sum of tax money to the government. The recession, along with tax cuts and increased military and national security spending, ended these surpluses by 2001.

If the government should happen to take in less than it spends in a year, there is a budget deficit. The government must then borrow the difference, and this borrowing contributes to the national debt. The federal government may borrow by taking short-term loans from regular financial institutions such as banks. It may also raise capital through the sale of savings bonds.

The national debt is the sum of all deficits and other unpaid debts. The deficit for the year 2004 is projected at a record half trillion dollars. The national debt now totals in the $6 trillion range and is growing. As the national debt increases, the interest that the government must pay on this debt takes up a greater and greater share of the entire budget. Currently, 15 percent of the budget goes to paying interest on money borrowed in past years. With continued deficit spending, this percentage will grow in the future. Factors that could cause the debt to balloon include continued recession, high unemployment, excess military and national security expenses, and the projected increase in social security and Medicare benefits for baby-boomers who will be retiring in the coming several decades.

In spite of all the politics involved in planning the allocation of federal money, the budget is relatively constant with very little deviation from one year to the next. Generally, budget expenses are as follows: 15 percent for defense, 15 percent for interest on the debt, 53 percent for entitlements (Social Security, Medicare, veterans benefits, etc.), and 17 percent for non-defense discretionary spending. Non-defense discretionary spending includes appropriations for items such as highways, education, national parks, foreign aid, environmental issues, and internal infrastructure improvements of a non-military nature. Debt interest and entitlements are fixed expenses in that they must be paid. Their percentage of the whole is rising, however, leaving military and non-defense discretionary spending to be adjusted accordingly.

Copyright 2006 The Regents of the University of California and Monterey Institute for Technology and Education