The federal budget is the single biggest annual spending plan in the world — roughly $6 trillion of revenue and $7 trillion of spending in recent years. The mechanics of how that money gets raised, allocated, and spent are less mysterious than they sound. But the budget process is built on decades of overlapping rules that explain why government shutdowns, continuing resolutions, and last-minute deals are so common.
Where the Revenue Comes From
In a typical year, federal revenue breaks down roughly like this:
- Individual income taxes — about 50% of revenue. The single largest source, by a wide margin
- Payroll taxes (FICA) — about 33%. The Social Security tax (6.2% from employee + 6.2% from employer, up to a wage cap) and the Medicare tax (1.45% + 1.45%, no cap). Earmarked for those programs but flows into the same Treasury
- Corporate income taxes — about 10%
- Excise taxes, customs duties, estate and gift taxes, miscellaneous — about 7% combined
The mix has shifted over decades. In 1960, individual income taxes and corporate income taxes were close to equal. Today individual income taxes are five times the corporate share — partly because corporate rates fell, partly because more business income now flows through pass-through entities (LLCs, S-corps) taxed at individual rates.
Where the Money Goes — Mandatory vs Discretionary
Federal spending splits into three big buckets:
- Mandatory spending — about 65% of total spending. Programs whose payments are set by formula in law, not by annual appropriations. Social Security, Medicare, Medicaid, SNAP (food stamps), veterans benefits, federal employee retirement, unemployment insurance. Congress doesn’t vote on these each year; payments happen automatically as long as people qualify
- Discretionary spending — about 25%. Programs Congress funds each year through the appropriations process. Defense (about half of this bucket), plus everything else: education, transportation, the FBI, NASA, the National Parks, foreign aid, scientific research. The part of the budget that’s actually debated annually
- Net interest on the debt — about 10% and rising. The cost of paying interest on Treasury bonds. Not optional — default risk — and growing as interest rates rise
This breakdown matters because government-shutdown fights are almost entirely about the discretionary 25%. Mandatory programs and interest payments keep flowing even during a shutdown. Social Security checks, Medicare reimbursements, and Treasury interest payments all go out on time. What stops are agencies that depend on annual appropriations — national parks, IRS audits, federal contractor work, non-essential federal staffing.
Deficit vs Debt — Two Different Numbers
- Deficit — the gap between revenue and spending in a single year. If the government collects $5 trillion and spends $6 trillion, the deficit for that year is $1 trillion
- Debt — the accumulated total of past deficits, less any surpluses. The national debt is what the federal government owes today as a result of every annual deficit it’s ever run, financed by issuing Treasury bonds
A “trillion-dollar deficit” headline refers to one year. The national debt is a running total. The debt typically grows by roughly the deficit each year, because the government borrows from financial markets to cover the gap.
The Budget Process Congress Is Supposed to Follow
On paper, the federal budget process runs on this schedule each fiscal year (FY runs October 1 through September 30):
- February — The president submits a budget proposal to Congress. Mostly a political document; Congress isn’t bound by it
- April — Congress passes a budget resolution setting overall spending and revenue targets. (Often missed.)
- Summer — House and Senate appropriations committees write 12 separate appropriations bills, each covering one functional area (Defense, Labor-HHS-Education, Transportation-HUD, etc.)
- September 30 — Deadline. All 12 appropriations bills must be signed into law before the new fiscal year begins, or affected agencies shut down
In practice, Congress has rarely passed all 12 bills on time in the last few decades. When they don’t, Congress passes a continuing resolution (CR) — a temporary funding bill that keeps agencies running at prior-year levels for weeks or months, buying time to negotiate. Sometimes the year ends with a single giant “omnibus” appropriations bill rolling many of the 12 together, often passed in the final days before a shutdown.
What Happens in a Government Shutdown
If the September 30 deadline passes without funding (or a CR), discretionary agencies experience a “lapse in appropriations.” The Anti-Deficiency Act bars the government from spending money it doesn’t have. In practical terms:
- Federal employees split into “excepted” (must work, paid retroactively) and “non-excepted” (furloughed, also paid retroactively under a 2019 law)
- National parks, museums, the IRS’s phone help line, most federal grant processing, and most regulatory agency work stop
- Social Security checks, Medicare claims processing, military operations, FBI agents, air traffic controllers, TSA officers, mail delivery (USPS isn’t taxpayer-funded), and interest on the debt all continue
- Contractors generally do not get paid retroactively — only direct federal employees
Shutdowns end when Congress passes new funding. The longest in U.S. history was 35 days in December 2018 – January 2019.
The Trust Funds
Some federal programs collect their own earmarked revenue into separate “trust funds” that exist on paper inside the broader Treasury. Social Security has the OASI and DI trust funds, funded by payroll taxes; Medicare Part A has the Hospital Insurance trust fund. When Social Security collects more in payroll tax than it pays in benefits, the surplus is invested in special-issue Treasury bonds — effectively lent to the rest of the government, which uses it for general spending and owes it back.
This is the source of the perennial “Social Security trust fund will be depleted in 20XX” headlines. The trust fund itself is a legal accounting construct; it’s the source of the program’s authority to pay full benefits without further legislation. Once it’s depleted, payroll tax revenue still covers about 75% of scheduled benefits indefinitely — which is why “depleted” doesn’t mean “goes to zero.”
The Bottom Line
About two-thirds of federal spending is mandatory and on autopilot. About a quarter goes through annual appropriations, which is what shutdown fights are about. Net interest is small but growing. Revenue comes mainly from individual income and payroll taxes. The technical budget calendar is rarely met, which is why continuing resolutions and last-minute omnibus deals have become the norm. None of this is mysterious — it’s just the long-running result of a process designed in 1974 trying to manage a budget many times larger today.