Every year, the US federal budget shapes the direction of America’s economy and priorities. It determines how much money the federal government collects through taxes — and how that money is spent on defense, healthcare, education, infrastructure, and more.
But what exactly does the US federal budget contain? How is it built, what are its major parts, and how does it affect everyday Americans?
This guide breaks it all down in simple terms — from how the budget is created to what’s inside it, and why it matters for citizens, businesses, and global markets.
Understanding the Federal Budget
The federal budget is the government’s annual financial plan. It includes:
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Estimated revenues (money coming in from taxes and other sources).
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Planned spending (money going out on programs, services, and operations).
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The projected deficit or surplus (the difference between spending and income).
Essentially, it’s the blueprint for how the US government manages public money — much like a family budget, but on a national scale.
According to the Congressional Budget Office (CBO), the 2025 federal budget involves trillions of dollars in spending across hundreds of programs. This spending directly influences economic growth, inflation, and employment.
Who Creates the Budget
The process involves multiple players, but mainly:
The President and the Office of Management and Budget (OMB)
Each year, the President submits a budget proposal to Congress usually by early February.
This proposal is developed with the help of the Office of Management and Budget (OMB), which works with federal agencies to estimate future spending needs and revenue projections.
Congress
Congress has the final authority. It reviews, debates, and modifies the proposal through two key committees:
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House Budget Committee
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Senate Budget Committee
These committees draft the budget resolution, which sets overall limits on spending and revenue.
Federal Agencies
Each department (like Defense, Education, or Health) submits its funding requests through the OMB, outlining what programs it needs to run and why.
The Two Main Parts of the Budget
The federal budget is divided into two broad categories:
Mandatory Spending
Mandatory spending refers to programs required by law, which Congress does not need to approve every year.
These include:
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Social Security – payments to retirees and disabled citizens.
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Medicare – health insurance for people aged 65 and older.
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Medicaid – health coverage for low-income individuals and families.
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Federal pensions and certain income security programs.
These programs consume the largest share of federal spending. For instance, in 2024, mandatory spending made up nearly two-thirds of the entire budget.
Discretionary Spending
This is the part Congress controls annually through appropriations bills. It funds:
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The Department of Defense (military and national security).
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Education programs.
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Transportation infrastructure.
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Housing and urban development.
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Scientific research, environmental protection, and foreign aid.
Discretionary spending is about one-third of the budget and is where most of the political debate happens.
The Third Component: Net Interest
When the government spends more than it collects, it borrows money — increasing the national debt.
Interest payments on that debt form a third major part of the budget, known as net interest.
Net interest is rising rapidly due to higher borrowing and interest rates, now consuming hundreds of billions each year. This reduces flexibility for new programs unless revenue grows or spending elsewhere is reduced.
Major Spending Categories (What’s Inside the Budget)
Here’s a clearer picture of what the US budget actually contains:
| Category | Description | Example Programs |
|---|---|---|
| Social Security | Monthly benefits for retirees, disabled, and survivors. | Social Security Administration payments |
| Healthcare | Covers Medicare, Medicaid, and health programs. | Medicare, Medicaid, CHIP |
| Defense and Military | Operations, personnel, weapons, research, and defense infrastructure. | Pentagon, DOD projects |
| Education | Federal funding for schools, colleges, and student loans. | Pell Grants, Head Start |
| Veterans’ Benefits | Healthcare and pensions for veterans. | Veterans Affairs hospitals |
| Infrastructure & Transportation | Roads, airports, energy grids, and transit systems. | Department of Transportation |
| Science and Environment | Research, innovation, environmental protection. | NASA, EPA |
| Law Enforcement & Justice | FBI, border security, prisons, judiciary operations. | DOJ, Homeland Security |
| Interest on Debt | Payments to creditors who hold US Treasury bonds. | Treasury interest payments |
Where the Money Comes From
Federal revenue is mainly collected through:
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Individual Income Taxes – the largest source (about 50% of total revenue).
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Payroll Taxes – Social Security and Medicare contributions.
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Corporate Income Taxes – paid by businesses.
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Excise Taxes – on fuel, alcohol, tobacco, etc.
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Customs Duties and Miscellaneous Fees.
Together, these fund the programs mentioned above — but in most years, spending still exceeds revenue, creating a budget deficit.
The Budget Deficit and National Debt
When annual spending exceeds revenue, the government borrows the difference — creating a deficit.
Repeated deficits increase the national debt, which is the cumulative total owed.
For example, the federal debt surpassed $34 trillion in 2025, and interest payments are one of the fastest-growing expenses.
This raises debate between policymakers: should the government spend more to stimulate the economy, or reduce spending to control debt?
The Annual Budget Timeline
Here’s how the budget process usually unfolds:
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Fall (Previous Year): Agencies send funding requests to OMB.
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Winter: OMB reviews and adjusts proposals with the President.
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February: The President submits the Budget Request to Congress.
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Spring–Summer: Congress debates and passes budget resolutions.
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September: Appropriations bills are finalized.
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October 1: The new fiscal year begins.
If Congress fails to pass the appropriations in time, it can lead to a government shutdown, where non-essential services are temporarily halted.
Why the Federal Budget Matters
The federal budget affects nearly every aspect of American life:
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Economic Growth: Determines how much money flows into public investment and consumer sectors.
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Jobs & Wages: Infrastructure and defense spending create employment opportunities.
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Inflation Control: Too much spending can overheat the economy.
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Social Equity: Programs like Medicaid and Education affect income distribution.
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Global Stability: The US budget impacts world markets, trade, and defense partnerships.
When balanced correctly, the budget helps maintain stability and growth; when mismanaged, it can lead to debt crises or economic stagnation.
The Role of Politics and Compromise
Budgeting in Washington is rarely purely economic — it’s deeply political.
Different administrations emphasize different priorities:
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Democrats often advocate for higher social spending and progressive taxation.
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Republicans typically focus on defense and tax reductions.
Despite differences, bipartisan compromise is necessary every year to keep the government funded and functioning.
Recent Trends and Future Challenges
Rising Healthcare and Social Costs
An aging population means higher Social Security and Medicare expenses.
Climate and Infrastructure Investments
More funds are now being directed toward renewable energy, green infrastructure, and climate resilience.
Growing Debt Service Costs
With interest rates higher, the government spends more just to pay interest on existing debt — limiting flexibility for new initiatives.
Tech, Defense, and Global Competition
Cybersecurity, AI, and competition with global powers are now significant budget considerations.
Frequently Asked Questions (FAQs)
Q1. Who decides how the federal budget is spent?
Congress has the final say. The President proposes, but Congress approves and allocates.
Q2. What is the largest part of the US budget?
Social Security and healthcare (Medicare + Medicaid) make up over half of total spending.
Q3. What happens if Congress doesn’t pass a budget?
A continuing resolution temporarily extends previous funding levels; otherwise, a government shutdown occurs.
Q4. Can the US government run out of money?
Not in the usual sense — it can borrow by issuing Treasury bonds, but excessive borrowing increases long-term risks.
Why You Should Care
Understanding what’s inside the US federal budget isn’t just for economists or politicians — it affects everyone:
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Your taxes.
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Your retirement benefits.
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The healthcare system.
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Job creation and economic opportunity.
A well-managed federal budget helps maintain stability, reduce inequality, and promote long-term prosperity.
Conclusion
The US federal budget is far more than numbers on paper it’s a reflection of national priorities, political choices, and the country’s economic health.
Inside it are the essentials of American life: defense, healthcare, education, infrastructure, and the safety net that millions rely on.
By understanding what the federal budget contains, you gain a clearer view of how government decisions shape the economy and your future.
