Q+A: How does the budget proposal work?

WASHINGTON Mon Feb 14, 2011 10:31am EST

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WASHINGTON (Reuters) - President Barack Obama on Monday submits to Congress his third annual budget plan, one for the fiscal year 2012 that begins on October 1.

Given the shape of the nation's finances -- successive years of record budget deficits that have piled onto a federal debt that many economists deem unmanageable -- this budget proposal is particularly important to politicians and financial markets.

But what exactly is in budgets produced by presidents and how key are they in determining fiscal policy?

WHAT IS THE BUDGET?

It's a political document that gives the president another forum for unveiling new policy initiatives, but it is not a single bill that is put up for a vote. While it's full of numbers, the budget is an opportunity for presidents to show where they want to take the country over the next few years and how they will pay the bill.

In a budget message introducing last year's proposal, Obama spoke of the need to improve healthcare and the environment, which were hot topics all year.

WHAT TO WATCH FOR?

This year, people will watch whether Obama calls for major changes to Social Security, Medicare and Medicaid and whether he goes beyond his State of the Union call for $400 billion in savings by freezing many federal programs for five years.

Another question is whether Obama will formally embrace some recommendations that his deficit commission submitted last year to cut spending and raise taxes.

In hard times, presidents can use the budget to try to pep up a dispirited country.

Last year's budget message concluded: "These have been tough times and there will be difficult months ahead. But the storms of the past are receding; the skies are brightening; and the horizon is beckoning once more." Fostering optimism is one way presidents get re-elected.

WHAT IS IN THE BUDGET?

Beyond the rhetoric in the opening message, the thick volumes that make up the document are filled with economic projections that analysts and financial markets pore over.

The Obama administration's latest forecasts of annual budget deficits, economic growth, inflation, debt and interest rates are embedded, although sometimes these figures can be sugar-coated to put the administration in the best possible light. Or, projections might be made to look even worse than expected, making it easier for the administration to later boast about fantastic progress.

The budget also can contain programs that the president says he wants to terminate immediately.

WHAT HAPPENS AFTER CONGRESS RECEIVES OBAMA'S BUDGET?

This is a request to Congress for funds to pay for everything from federal retirement benefits to military programs, law enforcement and space exploration.

But members of Congress, especially those not from the president's own political party, often describe the president's budget this way: "Dead on arrival."

Even some members of the president's own party have different priorities for spending and taxes.

Nevertheless, submission of the president's budget kicks off a series of hearings on Capitol Hill where administration officials and outside experts offer their views on the programs Obama is requesting.

DOES THE BUDGET EVER GET ENACTED INTO LAW?

Not quite.

After budget committees in the House of Representatives and Senate wrap up their hearings on the president's budget, they try to produce their own budget blueprints.

If the committees succeed, the full House and full Senate will vote on those budgets, possibly as early as March or April. But these measures are called "resolutions," meaning they are not bills that eventually get sent to the president for signing into law.

THEN WHY BOTHER PASSING A BUDGET RESOLUTION?

These resolutions are important because if passed by Congress, they provide marching instructions to other committees, which then try to write legislation that can be enacted into law.

Once the appropriations committees get their budget instructions, they will try to write a dozen separate bills to fund programs. It's as if the budget committees set up checking accounts and the appropriations committees write the checks.

Republicans who control the House want the FY12 budget resolution to require steep spending cuts. But some are concerned that if Obama is presented with spending bills that are too austere, there could be a deadlock that could even lead to government shutdowns toward the end of this year.

Tax-writing committees in Congress also play an important role in trying to implement new tax cuts or tax increases called for in a budget resolution.

HOW DOES THE DEBT LIMIT FIT INTO ALL OF THIS?

The Treasury Department has told Congress that between early April and late May the government could bump up against a $14.3 trillion statutory limit on borrowing.

The administration wants Congress to quickly raise the limit. Failure to do so, it warns, could force the government to default on loans which could spark a global financial crisis.

Some Republicans want to include language in a debt limit bill tying it to the budget resolution, and want a budget resolution with spending cuts that they know Obama wouldn't swallow. Senate Democrats likely will work to change whatever budget the House passes, but there are worries that a congressional budget blueprint with too many spending cuts could prompt Obama to veto a debt limit bill. It's a highly unlikely scenario, but one that could rattle markets in coming weeks.

(Editing by Sandra Maler)

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