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What Voters Need to Know About the Federal Budget

Writer's picture: Xa HopkinsXa Hopkins

Politicians tend to discuss their financial priorities in the broadest terms, often speaking more to voters’ concerns than the reality of what a politician can fix in a particular position based on their access and ability to impact a budget.  I previously worked in a position where I analyzed the biggest part of the federal discretionary budget—more on this term later—and the experience left me concerned about how many Americans do not vote in line with their interests due to a gap in understanding about how the federal budget works and what priorities fall into federal versus state or local funding.


This is not an article telling you how to vote based on your financial priorities.  It also does not tackle a wider analysis of state and local budgets.  However, in an election year where we have a presidential election and many high-profile federal elections across the country, it is worth understanding how the federal budget works so you can choose someone to represent your federal financial priorities in office.


If you live in a state, voting for senators and representatives that value your budget priorities is a privilege and a responsibility you should embrace.  You owe the decision thorough thought and analysis rather than voting emotionally because you are lucky to be able to choose a federal representative.  We would know:  We do not have any voting representation in Congress as residents of Washington, DC.  If you have the opportunity to vote for federal representation, please vote.



Mandatory and Discretionary Spending


The federal budget consists of two large categories:


  1. Mandatory spending: Money that the federal government must spend on pre-determined programs, typically spending on whomever qualifies for these programs.

  2. Discretionary spending: Money that the government appropriates each year according to its priorities.


This means Congress must honor mandatory spending categories.  It is the federal equivalent to personal spending categories like basic rent, food, and health spending.  The money is already allocated to mandatory programs based on which Americans qualify for those programs.  It cannot be shifted towards other priorities or saved.


Discretionary spending has more flexibility.  Each year, Congress must decide how to spend the discretionary portion of the federal budget to meet its priorities.  Congress and the president must sign off on appropriations bills to make these spending bills become laws.



Mandatory Spending


Mandatory spending consists of a few large categories including:


  • Health care programs like Medicare and Medicaid

  • Social Security in all its forms, including retirement and disability

  • Income security programs like child tax credit, child nutrition, foster care, and unemployment

  • Retired military and civilian benefits

  • Certain veterans’ services


Most of us can agree that we appreciate having health insurance, want all children to have access to food regardless of socioeconomic conditions, and support paying the retirement benefits earned by veterans.  These are the types of spending included in the mandatory spending portion of the federal budget.


Mandatory spending is the largest part of the federal budget.  About two-thirds of the federal budget is mandatory spending.


This fact is the counterpoint to one of the biggest misunderstandings I routinely hear:  Folks often think that defense spending is the biggest part of the federal budget.  In reality, defense spending is the biggest part of discretionary spending, but discretionary spending is only 25–30% of the federal budget.


Healthcare and medical programs are actually the largest thematic segment of the federal budget, costing more than $1.5 trillion.  Social security and disability are the next largest category at more than $1.3 trillion.


In other words, the largest part of the federal budget is also the part of the budget that cannot be changed.  But this is not necessarily a bad thing.  Mandatory spending may be large, but it helps people in ways in which most of us agree.  It keeps Americans healthy and financially secure.



Discretionary Spending


Discretionary spending changes year-to-year, but it generally includes categories like:


  • Defense

  • Education

  • Health

  • Veterans’ benefits (other than those included in mandatory spending)

  • Government

  • Housing

  • Transportation

  • International affairs

  • Energy and environment

  • Labor

  • Science

  • Food and agriculture


These topics include areas in which we are more likely to have different priorities and solutions.  We may not all agree on the ratio of money spent on housing relative to transportation, the importance of investing in new energy sources, how much money we allocate to different types of farmers and ranchers, or whether some defense budget funds should be shifted to international affairs to facilitate diplomacy.  The big sticking points of politics fall under the discretionary budget.


This budget, which contains the overwhelming majority of spending related to our political disagreements, is only 25–30% of the larger federal budget.


I find that to be an encouraging distribution because it means most Americans already agree on two-thirds of what creates an enriching society.  While politicians can argue relentlessly, sometimes even in a harsh manner, they are typically arguing about only the final third of spending.  We agree on a lot before we get to the areas of contention.


It is worth highlighting the defense budget within discretionary spending because it is the largest part of the discretionary budget by far.  The fiscal year 2023 defense budget was just over $815 billion, nearly half of discretionary spending.  This is a lot of money!  But it is also much less than spending on healthcare and medical programs or Social Security, so be wary of graphs that claim the defense budget is the largest part of federal spending.  These graphs typically reference discretionary spending only.  Within that context, it is reasonable to consider whether some of those defense dollars should instead go to other discretionary spending categories, but know that our biggest health and social safety nets are already covered.  



Federal Debt


The final large category of government spending is spending to service the federal debt.  Due to the large federal debt accumulated by the U.S. government, servicing the federal debt has become its own spending category in the federal budget.


As of this writing, the public debt of the United States—the total amount of money the federal government has borrowed over time—is just over $35 trillion.  Interest payments on this debt are currently just under $900 billion annually, representing 17% of all federal spending in the 2024 fiscal year.  



Where Your Taxes Go


It makes sense to care about the breakdown of the federal budget because the income tax you pay is allocated in proportions that resemble the breakdown of categories in the federal budget as a whole.  This means healthcare and medical programs receive the largest number of tax dollars, while smaller discretionary initiatives receive smaller portions of your taxes.


This excellent graphic from the Bipartisan Policy Center shows how the taxes you pay largely reflect the proportions of categories included in the federal budget:


You will notice a key exception to this proportional match is that mandatory spending, particularly “Health Care” and “Social Security” in the graphic above, receives less than half of our income tax dollars despite composing two-thirds of the federal budget.  This is because businesses pay employer taxes as well, contributing to these health care and Social Security categories on your behalf.


If you include the employer side of taxes paid on behalf of employees, more than half of taxes related to you go towards programs ensuring our health and safety, whether now or in the long run.  Since more of us benefit from these programs at some point or have loved ones who do or will, they tend to be a relatively uncontroversial area of spending.


The money that goes to discretionary spending is lower since discretionary spending is lower.  The precise allocation will reflect the budget priorities in any given fiscal year.



How to Reduce Taxes Significantly, and Why You May Not Want That


Everyone would love lower federal taxes, but lowering taxes also means sacrificing something in the federal budget.  Additionally, most concessions would not make a significant impact on the federal budget.


The majority of discretionary spending categories, the parts that are easily changed, are relatively small percentages of the federal budget.  If you have a $1,000 federal income tax bill, cutting the budget for education in half would save you about $20.  (For the record, cutting the education budget is the last thing I would suggest, but it is simply an example.)  Cutting the education budget in half would have widespread detrimental societal effects—probably not worth $20 of savings.  Plus, you will likely feel the same impact from a $980 federal income tax bill as a $1,000 bill.


Cuts in most discretionary spending categories would have similarly ineffectual outcomes on your wallet.  To put this in perspective, I like to think of these compared to trying to cut down expenses in a personal budget.  Reducing most discretionary spending categories is akin to cutting out a weekly coffee.  Sure, there are savings.  But it probably does not make sense because you lose more joy than you gain dollars.


The one discretionary budget exception is the defense budget.  From the personal budgeting perspective, think of the defense budget as the “food” category of a personal budget.  It includes all the required basic groceries for survival, but it also includes some money to dine out at nice restaurants.  Completely eliminating the dining out budget could have a big impact, and reducing it could still have substantial effects.  However, it is still not the biggest potential impact.


The only way to prompt significant change in a personal budget is to minimize the biggest expenses: particularly housing and transportation, and maybe healthcare.  These are the big expenses folks rarely question with their personal budget.  In the federal budget, this means mandatory spending.  The only way to make cuts that you would really feel as a reduction of taxes would require cuts to mandatory spending.


But mandatory spending is the one category where we all agree.  It funds the portions of the budgets that keep us safe and healthy and pays out the funds we earn after working diligently over long careers.


That is why managing the federal budget is difficult.  The areas where we can agree to make some cuts have limited impact on our federal income tax liability.  The areas that would provide the biggest impact are considered untouchable because they fall within federal mandatory spending.  Hypothetical tax cuts require major sacrifices.  It is okay if we do not want to make those major sacrifices, but it is good to know where our federal taxes go.



How to Get More Spending in Categories You Value


When considering where we want to increase spending, it is important to acknowledge that there are only two ways to increase spending in an area we value:


  1. Reallocate resources from one category to another.

  2. Increase taxes.


If you like what a particular candidate suggests about improving a certain category, dig a little deeper.  Consider whether they will pull money from another location to lead to these improvements or raise taxes.  If money is being pulled from elsewhere, make sure your values align.  If you and the senator for which you plan to vote both want to increase spending on energy, great.  But if they want to pull the funding from agriculture, and you are a farmer, that may be less great.  Consider not just what individuals representing at the federal level want to do but also how they will pay for it.  A change may be worth a tax increase to you but not a reduction in education spending.


This information is not always easy to find.  Regardless of specific political position, I tend to favor politicians that fully consider the how behind their policies and either speak to it or publish background information addressing how they will bring their policies into reality.  However, many candidates will not outline how they plan to get something done in writing or in speeches.  


The solution:  Ask!  These candidates are there to represent you at the federal level.  If you want to find out how their policies match up with actual spending, challenge the candidate to tell you their actual plan.  Go to a campaign event where they are taking questions, correspond with one of their campaign or legislative aides (aides often know more about the “how” than the candidate), or research how they navigated bureaucracy in the past.  Some will provide thoughtful answers that delineate a process.  Others will only be able to give you the points about what will change.  This alone is telling.  Remain skeptical of someone who cannot tell you how they will bring their too-good-to-be-true ideas to life.  


Everything is a tradeoff.  Believing your taxes will go down while spending in categories you value will go up is unrealistic.  The federal budget is just that:  a budget.  It is just like your personal budget.  Money needs to come from somewhere, and that somewhere is either another category of spending or your pocket.  Determine what you value, and figure out who is working to move money to that category in ways that make sense to you.  Then vote for the person who shares your values and knows how to fund them.

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