Contents

1. Key Definitions

Deficit

A deficit occurs when federal government outlays (spending) exceed revenues (income) within a single fiscal year.

Deficits are measured annually and reflect the difference between spending and revenue during that period.

Debt

Federal debt is the accumulation of past deficits, minus any surpluses, financed through borrowing.

Debt reflects the total amount the federal government owes to creditors at a given point in time, not the size of the current year’s deficit.

Mandatory spending

Mandatory spending refers to spending that occurs automatically under existing law, without requiring annual congressional approval.

Levels of mandatory spending are determined by: • eligibility rules • benefit formulas • participation rates • economic and demographic factors

Mandatory spending continues unless the underlying law is changed.

Discretionary spending

Discretionary spending refers to spending that is set through annual appropriations acts passed by Congress.

Unlike mandatory spending, discretionary spending generally requires explicit approval each fiscal year and is subject to annual budget caps and negotiations.

Debt ceiling

The debt ceiling is a statutory limit on the total amount of money the U.S. Treasury is authorized to borrow to meet existing federal obligations.

The debt ceiling does not: • authorize new spending • change revenue laws • alter benefit formulas

It affects the government’s ability to finance obligations that have already been established by law.

Baseline

A baseline is a benchmark projection of federal spending, revenues, deficits, and debt used to evaluate the budgetary effects of proposed policy changes.

In U.S. budget analysis, baselines typically reflect current law, meaning they assume existing laws operate as written unless changed.

Baselines are analytical tools, not forecasts or policy commitments.

Structural deficit

A structural deficit is the portion of a deficit that persists even when the economy is operating near its potential level.

Structural deficits reflect underlying features of spending and revenue laws rather than temporary economic conditions.

Cyclical deficit

A cyclical deficit arises from short-term economic fluctuations.

During economic downturns: • revenues tend to decline • certain spending programs increase automatically

These effects can increase deficits even in the absence of new legislation.

Fiscal year

The fiscal year for the U.S. federal government runs from October 1 through September 30 and is designated by the calendar year in which it ends.

Budget outcomes are measured and reported on a fiscal-year basis.

2. The Basic Budget Flow

This section describes, at a high level, how U.S. federal budget decisions translate into annual deficits or surpluses.

The intent is to clarify the sequence of actions and identify where constraints apply within that sequence.

2.1 Enactment of spending and revenue laws

Federal fiscal outcomes begin with laws enacted by Congress and signed by the President.

These laws establish:

At this stage, Congress determines what the government is authorized to do, not how those commitments will ultimately be financed.

2.2 Congressional decision points versus automatic processes

For clarity, this document distinguishes between Congressional decision points and automatic processes operating under existing law.

Congressional decision points are discrete actions that require affirmative legislative approval. These include:

These actions occur at specific points in time and involve recorded votes.

Automatic processes are outcomes that occur without new legislative action, once laws are in effect. These include:

These processes reflect the operation of previously enacted laws rather than new policy decisions.

Understanding the distinction between decision points and automatic processes is essential for interpreting fiscal outcomes and assessing when accountability attaches to legislative action versus statutory execution.

2.3 Annual budget outcomes

Once spending and revenue laws are in effect, actual budget outcomes depend on economic and demographic conditions.

During a fiscal year:

If total spending exceeds total revenue, a deficit occurs. If revenue exceeds spending, a surplus occurs.

These outcomes can occur without additional legislation during the year.

2.4 Financing deficits through borrowing

When a deficit occurs, the U.S. Treasury finances the gap by borrowing.

This borrowing:

Borrowing is a financing mechanism, not a policy decision about program size or tax levels.

2.5 How the U.S. Treasury borrows money

When federal spending exceeds revenue, the U.S. Treasury finances the resulting deficit by issuing Treasury securities.

These securities are debt instruments that promise repayment of principal with interest and are issued in several forms:

Issuance through auctions

Treasury securities are sold primarily through regular public auctions conducted by the Treasury Department.

At these auctions:

The Treasury does not sell securities directly to foreign governments or to the Federal Reserve at issuance. All participants compete under the same auction rules.

Who holds Treasury debt

After issuance, Treasury securities may be held by:

Ownership may change over time as securities are traded in secondary markets.

Borrowing versus money creation

Issuing Treasury securities is a borrowing activity, not money creation.

Treasury borrowing:

Money creation occurs through separate processes conducted by the Federal Reserve under its own legal authority.

Constraints on the Treasury’s ability to issue debt, including the statutory debt ceiling, are discussed in Section 3

Separation from monetary policy

The U.S. Treasury is responsible for financing government operations. The Federal Reserve is responsible for monetary policy.

Although their actions interact, they operate under separate legal mandates, and borrowing by the Treasury does not equate to direct money creation by the central bank.

2.6 Role of the debt ceiling

The debt ceiling limits the total amount of outstanding federal debt that can be issued.

Because it applies after spending and revenue laws are enacted, the debt ceiling does not determine:

Instead, it affects the government’s ability to finance obligations that already exist.

2.7 Summary of the sequence

In simplified form, the budget flow operates as follows:

  1. Spending and revenue laws are enacted
  2. Economic conditions and program rules determine actual revenues and outlays
  3. A deficit or surplus results
  4. Deficits are financed through borrowing, subject to the debt ceiling

Understanding this sequence is essential for interpreting debates about deficits, debt, and fiscal responsibility.

3. The Debt Ceiling: What It Is and What It Is Not

This section explains the role of the debt ceiling within the federal budget process and clarifies common misunderstandings about its function.

3.1 Statutory definition

The debt ceiling is a statutory limit on the total amount of money the U.S. Treasury is authorized to borrow to finance federal obligations.[1]

It applies to the stock of outstanding debt, not to individual spending programs or annual budget totals.

3.2 What the debt ceiling does not do

The debt ceiling does not:

All spending and revenue decisions are made through separate legislation enacted by Congress.[2]

3.3 Timing within the budget sequence

The debt ceiling operates after fiscal decisions have already been made.

In the budget sequence:

  1. Congress enacts spending and revenue laws
  2. Those laws generate obligations during the fiscal year
  3. If spending exceeds revenue, borrowing is required
  4. The debt ceiling limits the Treasury’s ability to issue debt to finance those obligations

Because it appears late in the sequence, the debt ceiling functions as an ex post financing constraint, not a forward-looking budget control.[3]

3.4 Why raising the debt ceiling does not create new spending

Raising the debt ceiling allows the Treasury to continue borrowing to meet obligations that already exist under law.[2]

It does not:

As a result, debt-ceiling legislation typically reflects past fiscal decisions rather than new ones.

3.5 Relationship to persistent deficits

Persistent deficits arise from the interaction of:

Because the debt ceiling does not alter these underlying factors, it does not reliably prevent deficits from recurring over time.

Key takeaway

The debt ceiling is a borrowing limit, not a budgeting mechanism.

It affects how obligations are financed, not whether those obligations are created.

4. Mandatory Spending and Automatic Growth

This section explains how certain categories of federal spending can increase over time without new legislative action, contributing to persistent deficits.

4.1 What “mandatory” means in practice

Mandatory spending is governed by permanent laws that establish eligibility rules and benefit formulas.

Once these laws are enacted:

As a result, changes in mandatory spending can occur without new votes by Congress.

4.2 Drivers of automatic growth

Mandatory spending can grow over time due to factors such as:

These drivers operate independently of the annual appropriations process.

4.3 Interaction with economic cycles

During economic downturns:

This combination can widen deficits even in the absence of new legislation.

Conversely, during economic expansions:

4.4 Why “doing nothing” can still change fiscal outcomes

Because mandatory programs operate under existing law, maintaining the status quo does not imply constant spending levels.

Instead, fiscal outcomes reflect:

Key takeaway

Mandatory spending introduces automatic growth mechanisms into the federal budget.

These mechanisms can contribute to persistent deficits without requiring frequent legislative action.

5. Discretionary Spending and Annual Appropriations

This section explains how discretionary spending is determined through the annual appropriations process and how it differs structurally from mandatory spending.

5.1 What “discretionary” means in practice

Discretionary spending refers to federal spending that must be approved through annual appropriations acts passed by Congress.

Unlike mandatory spending, discretionary spending:

If appropriations are not enacted, discretionary programs generally lack authority to continue operating at prior funding levels.

5.2 The annual appropriations process

Each fiscal year, Congress considers and passes appropriations legislation that specifies funding levels for discretionary programs.

This process typically involves:

Appropriations laws determine how much discretionary spending will occur during the fiscal year, subject to enacted budget rules.

5.3 Relationship to budget enforcement

Because discretionary spending is revisited annually, it is often the primary focus of:

As a result, discretionary spending is generally more immediately adjustable than mandatory spending, even though it represents a smaller share of total federal outlays.

5.4 Why discretionary spending is often misunderstood

Public discussions frequently associate deficits with discretionary spending because:

However, discretionary spending does not automatically grow under existing law and requires affirmative legislative action to increase.

Key takeaway

Discretionary spending is actively controlled through annual legislation and is structurally distinct from mandatory spending.

Its visibility in the appropriations process does not necessarily reflect its relative contribution to long-term deficit trends.

6. Baseline Budgeting and Default Assumptions

This section explains how baseline projections are constructed and why they matter for understanding fiscal outcomes.

6.1 Purpose of a budget baseline

In U.S. federal budgeting, a baseline is a benchmark set of projections used to estimate future spending, revenues, deficits, and debt under specified assumptions.

The Congressional Budget Office (CBO) constructs baselines primarily to provide a neutral reference point against which proposed policy changes can be evaluated.

Baselines are analytical tools. They are not forecasts and they do not represent policy recommendations.[4]

6.2 The “current law” baseline

Under a current law baseline, projections assume that existing statutes remain in effect as written, unless changed by legislation.[5]

As a result, spending and revenue levels may change over time even in the absence of new laws.

6.3 Automatic growth embedded in law

Many federal programs include features that cause spending to change automatically, such as:

When these features are embedded in permanent law, baseline projections treat their effects as the default outcome.

Maintaining current-law spending is therefore not equivalent to holding spending constant in nominal terms.

6.4 How baselines shape budget interpretation

Baseline rules influence how fiscal decisions are described and evaluated.[6]

Because the baseline incorporates automatic growth:

These effects arise from the structure of the baseline, not from discretionary political choices in a given year.

6.5 Relationship to persistent deficits

Baseline assumptions interact with other budget mechanisms, including:

Through this interaction, fiscal outcomes can evolve over time without a single legislative action that explicitly increases total spending or decreases total revenue.

Key takeaway

Baseline budgeting embeds default assumptions about growth and continuation of existing law.

These assumptions play a central role in how fiscal outcomes are projected, interpreted, and debated, even when no new policy decisions are made.

7. Economic Cycles and Revenue Volatility

This section explains how economic conditions affect federal revenues and certain spending programs, contributing to changes in deficits over time.

7.1 Revenue sensitivity to economic conditions

Federal revenues are closely linked to overall economic activity.

During economic expansions:

During economic downturns:

These revenue changes occur under existing tax law, without new legislative action.

7.2 Automatic spending responses to downturns

Certain federal programs are designed to respond automatically to economic conditions.

During downturns:

These responses are built into program design and operate independently of annual budget decisions.

7.3 Cyclical deficits

A cyclical deficit is the portion of a budget deficit attributable to temporary economic conditions.

Cyclical deficits:

Cyclical effects can temporarily obscure the underlying fiscal position.

Key takeaway

Economic cycles introduce automatic volatility into federal budgets.

Deficits can increase or decrease as a result of economic conditions alone, even when no changes are made to spending or revenue laws.

8. Why Persistent Deficits Can Occur Without a Single Decision

This section synthesizes the mechanisms described above to explain how persistent deficits can arise without a single, explicit decision to increase total spending or reduce total revenue.

8.1 Distributed decision-making

Federal fiscal outcomes result from multiple laws enacted at different times, often by different Congresses.

Spending authority, revenue rules, and budget procedures are not typically decided in a single legislative package that balances total revenues against total expenditures.

As a result, no single vote may clearly correspond to the emergence of a persistent deficit.

8.2 Interaction of automatic mechanisms

Persistent deficits can arise from the interaction of:

Each mechanism operates within existing law, and none individually requires an explicit decision to create a deficit.

8.3 Absence of a binding ex ante constraint

In the current framework, there is no binding requirement that:

Constraints such as the debt ceiling apply after obligations exist and therefore do not serve as forward-looking fiscal controls.

Key takeaway

Persistent deficits can emerge from structure rather than intent.

They reflect how fiscal rules, automatic processes, and economic conditions interact over time, rather than a single identifiable decision point.

9. What This Document Does Not Conclude

This document is intentionally limited in scope.

It does not:

The purpose of this document is explanatory, not normative.

10. Sources and Further Reading

This section lists authoritative sources for readers who wish to explore these topics in greater detail.

[1] U.S. Department of the Treasury. Debt Limit: Frequently Asked Questions.

[2] Congressional Research Service. The Debt Ceiling: History and Recent Increases.

[3] Congressional Budget Office. Federal Debt and the Statutory Limit.

[4] Congressional Budget Office. How CBO Develops Its Baseline Budget Projections.

[5] Congressional Budget Office. The Budget and Economic Outlook.

[6] Congressional Research Service. Baseline Budgeting: Concepts and Issues.

Suggested sources include:

Specific citations may be added or updated as underlying data or official guidance changes.