F ederal budget decisions express the priorities of Congress and reinforce its influence on federal policies. Making budgetary decisions for the federal government is a complex process and requires the balance of competing goals. The recent economic recession adversely affected federal budget outcomes through declines in revenue and increases in spending. Subsequent improvement of the economy and implementation of policies designed to lower spending have improved the short-term budget outlook. In FY2015, the federal budget recorded a deficit of 2.5% of gross domestic product (GDP), which represents the lowest deficit level since FY2007. Over the next several years, projections of a continued decline in discretionary spending are more than offset by increases in mandatory spending and net interest payments, leading to a rise in federal deficits. Increases in the long-term cost of federal health care programs, federal debt levels, and the retirement of the baby boom generation all contribute to upward pressure on federal spending levels. Operating these programs in their current form may pass on substantial economic burdens to future generations. Congress and the President may consider proposals for deficit reduction if fiscal issues remain a key item on the legislative agenda. This report summarizes issues surrounding the federal budget and discusses policy changes relevant to the budget framework for FY2017. It also discusses the major policy proposals included in the President's FY2017 budget and, when available, the House and Senate budget resolutions. Finally, this report addresses major short- and long-term fiscal challenges facing the federal government. Each fiscal year, Congress and the President engage in a number of practices that influence short- and long-run revenue and expenditure trends. This section describes the budget cycle and explains how budget baselines are constructed. Budget baselines are used to measure how legislative changes affect the budget outlook and are integral to evaluating these policy choices. Action on a given year's federal budget, from initial formation by the Office of Management and Budget (OMB) until final audit, typically spans four calendar years. The executive agencies begin the budget process by compiling detailed budget requests, overseen by OMB. Agencies work on their budget requests in the calendar year before the budget submission, often during the spring and summer (about a year and a half before the fiscal year begins). The President usually submits the budget to Congress around the first Monday in February, or about eight months before the beginning of the fiscal year. Congress typically begins formal consideration of a budget resolution once the President submits the budget request. The budget resolution is a plan, agreed to by the House and Senate, which establishes the framework for subsequent budgetary legislation. Because the budget resolution is a concurrent resolution, it is not sent to the President for approval. If the House of Representatives and Senate cannot agree on a budget resolution, a substitute measure known as a "deeming resolution" may be implemented by each chamber. House and Senate Appropriations Committees and their subcommittees typically begin reporting discretionary spending bills after the budget resolution is agreed upon. Appropriations Committees review agency funding requests and propose levels of budget authority (BA). Appropriations acts passed by Congress set the amount of BA available for specific programs and activities. Authorizing committees, which control mandatory spending, and committees with jurisdiction over revenues also play important roles in budget decision making. During the fiscal year, Congress and OMB oversee the execution of the budget. Once the fiscal year ends on the following September 30, the Department of the Treasury and the Government Accountability Office (GAO) begin year-end audits. Budget baseline projections are used to project the future impact of current laws and measure the effect of future legislation on spending and revenues. They are not meant to predict future budget outcomes. Baseline projections are included in both the President's budget and the congressional budget resolution. It is important to understand the assumptions and components included in budget baselines. In some cases, slight changes in the underlying models or assumptions can lead to large effects on projected deficits, receipts, or expenditures. The Congressional Budget Office (CBO) computes current-law baseline projections using assumptions set out in budget enforcement legislation. Since Congress and the President have resolved certain questions related to expiring tax policy and have enacted specific policies set to control discretionary spending over the next decade, there are fewer policy uncertainties affecting the baseline levels under current law. On the revenue side of the budget, the American Taxpayer Relief Act of 2012 (ATRA; P.L. 112-240 ; see additional discussion below) permanently set into law many individual tax rates and tax policy provisions. On the spending side, baseline discretionary spending levels are largely constrained by the caps and automatic spending reductions enacted as part of the Budget Control Act of 2011 (BCA; P.L. 112-25 ) and further modified by the Bipartisan Budget Act of 2015 (BBA 2015; P.L. 114-74 ). The CBO baseline also incorporates policy provisions in current law that have historically been revised before the subsequent policy changes actually took effect. Specifically, the CBO baseline assumes that discretionary budget authority from FY2018 through FY2021 will be restricted by the caps as created by the BCA, and that certain expiring tax provisions will not be extended. This leads to baseline projections of lower spending and higher revenue levels relative to what some consider likely based on previous policy actions. In addition to these elements of current law, macroeconomic assumptions, specifically of GDP growth, inflation, and interest rates, will also affect the baseline estimates and projections. Minor changes in the economic or technical assumptions that are used to project the baseline also could result in significant changes in the outyear deficit levels. Current baseline projections show rising budget deficits over the next several years. Such a trend represents a reversal from the significant declines in inflation-adjusted deficits experienced in the past few fiscal years. Those declines were primarily due to continued increases in employment (which increased revenues collected from income and payroll taxes) and reductions in discretionary spending. While the baseline projections include continued declines in discretionary outlays, those reductions are more than offset by increases in mandatory spending, which are largely due to the rising cost of Social Security and Medicare programs. Baseline projections also include increases in debt held by the public throughout the 10-year budget window. Debt held by the public finances budget deficits and federal loan activity, and is a function of three things: (1) the size of existing debt, (2) economic growth, and (3) interest rates. Debt held by the public declined in FY2015 for the first time since FY2007, which was largely attributable to interest rates that were well below their historical averages. However, the baseline projections include a rise in interest rates, which causes debt held by the public to increase. Debt held by the public was 73.6% of GDP at the end of FY2015, and is projected to be 86.1% of GDP at the end of FY2026. CBO also provides projections based on alternative policy assumptions, which illustrate the levels of spending and revenue if current policies continue, rather than expire as scheduled under current law. If discretionary spending caps established by the BCA are lifted and expiring tax provisions are extended, CBO projects an increase in the budget deficit of more than $1.0 trillion relative to the current-law baseline, inclusive of debt servicing costs, over the FY2017 to FY2026 period. Beyond the 10-year forecast window, federal deficits are expected to grow unless major policy changes are made. This is a result of increased outlays largely attributable to health care and retirement costs. Over the last four decades, on average, federal spending has accounted for approximately 20.5% of the economy (as measured by GDP), while federal revenues averaged roughly 17.4% of GDP. Since FY2002, spending exceeded revenues in each fiscal year, resulting in budget deficits. Between FY2009 and FY2012, spending and revenue deviated significantly from historical averages, primarily as a result of the economic downturn and policies enacted in response to financial turmoil. In FY2015, the U.S. government spent $3.69 trillion and collected $3.25 trillion in revenue. At 2.5% of GDP, the resulting budget deficit was the smallest imbalance since FY2007. The trends in revenues and outlays between FY1970 and FY2015 are shown in Figure 1 . Federal outlays are often divided into three categories: discretionary spending, mandatory spending, and net interest. Discretionary spending is controlled by annual congressional appropriations acts. Mandatory spending encompasses spending on entitlement programs and spending controlled by laws other than annual appropriations acts. Entitlement programs such as Social Security, Medicare, and Medicaid make up the bulk of mandatory spending. Congress sets eligibility requirements and benefits for entitlement programs, rather than appropriating a fixed sum each year. Therefore, if the eligibility requirements are met for a specific mandatory program, outlays are made without further congressional action. Net interest comprises the government's interest payments on the debt held by the public, offset by small amounts of interest income the government receives from certain loans and investments. In FY2000, total outlays equaled 17.6% of GDP, the lowest recorded level since FY1966. In FY2009, outlays peaked at 24.4% of GDP. Outlays then fell steadily for the next few years, equaling 20.3% of GDP in FY2014, before rising to 20.7% of GDP in FY2015. Under the CBO baseline, total outlays are projected to continue rising and will reach 23.1% of GDP in FY2026. Figure 2 shows the level of federal spending as a percentage of GDP, broken into the discretionary, mandatory, and net interest categories, between FY2000 and FY2026, as projected in the CBO baseline. In FY2000, discretionary spending totaled 6.1% of GDP. Discretionary spending increased in most years between FY2000 and FY2010, largely as a result of increases in security spending and federal interventions designed to stimulate the economy.