Understanding the Federal Budget: A Beginner's Guide

The federal budget can seem overwhelming at first glance. With trillions of dollars being allocated across dozens of departments and programs, it’s easy to feel lost in the numbers. But understanding where your tax dollars go is an essential part of being an informed citizen.

What is the Federal Budget?

The federal budget is the government’s financial plan for the fiscal year, which runs from October 1 to September 30. It outlines how much money the government expects to collect in taxes and other revenue, and how it plans to spend that money on various programs and services.

Think of it like a household budget, but on a massive scale. Just as you might allocate your income to rent, food, transportation, and savings, the federal government allocates tax revenue to defense, healthcare, education, and other priorities.

The Three Main Categories

Federal spending falls into three main categories:

Mandatory Spending

This is spending on programs that are required by existing law. The biggest mandatory programs are Social Security, Medicare, and Medicaid. These programs are called “mandatory” because the government is legally obligated to pay benefits to anyone who qualifies.

Mandatory spending makes up about 65% of the total federal budget. This spending continues automatically unless Congress changes the underlying laws.

Discretionary Spending

This is spending that Congress must approve each year through the appropriations process. It includes funding for the military, education, transportation, scientific research, national parks, and much more.

Discretionary spending accounts for about 30% of the federal budget. Congress has more flexibility with these programs, deciding each year how much to allocate to different agencies and initiatives.

Interest on the Debt

The federal government pays interest on money it has borrowed over the years. This is similar to paying interest on a mortgage or credit card. As the national debt has grown, so has the amount spent on interest payments.

Interest payments currently make up about 5% of the budget, and this percentage is expected to grow in coming years.

Major Budget Categories

Let’s break down where the money actually goes:

Social Security (21%) - Provides retirement, disability, and survivor benefits to millions of Americans. If you’ve ever looked at a paycheck, you’ve seen the FICA tax deduction that funds this program.

Medicare (14%) - Provides health insurance for Americans 65 and older, as well as some younger people with disabilities.

Medicaid (10%) - Provides health coverage for low-income individuals and families. This is a joint federal-state program.

Defense (13%) - Funds the military, including personnel salaries, equipment, operations, and research.

Everything Else (42%) - This includes veterans benefits, education, transportation, agriculture, scientific research, foreign aid, national parks, the justice system, and much more.

How the Budget Process Works

Creating the federal budget is a complex process that takes more than a year:

1. February - The President submits a budget proposal to Congress
2. Spring - Congressional committees hold hearings and draft their own budget resolutions
3. Summer - Congress debates and votes on appropriations bills
4. Fall - Ideally, all appropriations are passed before the new fiscal year begins on October 1

In reality, the process often runs late, and Congress may pass “continuing resolutions” to keep the government funded while negotiations continue.

Understanding Your Tax Contribution

When you pay federal income tax, you’re contributing to all of these programs proportionally. Our calculator here at DemocraCents breaks down exactly how much of your tax payment goes to each category.

For example, if you paid $5,000 in federal taxes last year:

• About $1,050 went to Social Security
• About $700 went to Medicare
• About $650 went to defense
• And so on for each department

Seeing these numbers in dollars and cents, rather than abstract percentages, helps make government spending feel more concrete and personal.

Why This Matters

Understanding the federal budget helps you:

• Make informed voting decisions - Budget priorities reflect values and policy choices
• Engage in civic discussions - Have informed conversations about government spending
• Hold representatives accountable - Know whether elected officials are following through on budget promises
• Understand policy trade-offs - Recognize that spending more in one area often means spending less in another

Getting Started

The best way to understand the federal budget is to explore it yourself. Use our tax calculator to see your personal breakdown, then dive deeper into the areas that interest or concern you most.

Government spending affects every aspect of our lives, from the roads we drive on to the food we eat to the air we breathe. Taking time to understand where the money goes is an investment in your civic education.

Additional Resources

If you want to learn more about the federal budget:

• Visit USAspending.gov for detailed spending data
• Check out the Congressional Budget Office for budget analysis
• Read the President’s Budget to see proposed priorities

Understanding the federal budget is a journey, not a destination. Start with the basics, follow your curiosity, and gradually build your knowledge. Your fellow citizens—and your democracy—will be better for it.