Budgets reflect priorities, but in our case, those aren't always clear.

Former British Prime Minister Margaret Thatcher once said that anyone "who understands the problems of running a home will be nearer to understanding the problems of running a country." Indeed, when most people think about government, they often think about it in personal terms. When looking at the federal budget (and deficit)—it's tempting to think, "I have to balance my budget, why can't the government? Of course, that's not really true. Household debt currently stands at record levels. When it comes to living beyond one's means, America's elected representatives have long embraced the population's credit card mentality.

But there are differences. For starters, most Americans probably have a fairly good idea of how all their hard-earned money is being spent. They should: they earn it, and at some point, their home equity loans, credit cards, and indulgent relatives max out.

The United States government, however, marches to the beat of a different drummer. Our soldiers, civil servants, and other federal employees provide goods and services, but there's no market mechanism to determine when supply and demand are in balance. As a result, the president and Congress have built up a $9 trillion overdraft over the past five years.

"The public really has no idea where their tax money is going," says Ellen Miller, co-founder of the Sunlight Foundation, an advocate for greater government transparency.

Priorities—or not

Just how does the federal government decide how to spend taxpayer money? In the $2.5 trillion federal budget for 2005, the government spent $521 billion on defense and homeland security—$494 billion for the Pentagon and $27 billion for the Department of Homeland Security. Put that together with big-ticket federal entitlement programs—Social Security ($519 billion in 2005), Medicare ($333 billion) and Medicaid ($182 billion)—and the government spends more on our social safety net than defense. But these represent a sort of dividend to taxpayers who qualify—pensions for those who have served their country, the elderly, sick, and others who our society have decided to support in one way or another and to varying degrees.

Total defense spending amounts to about 4% of our $12 trillion gross domestic product. Compare that to defense spending in the 1960s. Back then, it bounced between 7% and 9% of GDP. The percentage-of-GDP argument has its proponents, but why is the country spending billions more in absolute dollars than in the 1960s—when we were fighting a real war in Vietnam and a cold war with the Russians? Our enemies are now armed with box-cutters and exploding Nikes, not multibillion dollar nuclear missiles and submarines.

Back in the 1960s, Social Security accounted for around 13% of the budget. Today, it accounts for 21%. The 1960s also saw the birth of Medicare and Medicaid, the other legs that support America's social insurance system. Everything other than entitlements and defense—education, highways, federal prosecutors—came out to $425 billion in 2005. Yet, America is one of the only (if not only) developed countries without universal health care while our medical expenses are the highest in the world.

What part of the budget is growing the fastest? During the past five years, education spending has increased at an 18.9 % average annual rate, health research 12.3%, housing and commerce 9.6% and transportation 9%. Then there's the budget deficit.

In its most recent estimate, the Congressional Budget Office forecasts a $260 billion shortfall in 2006, down from $318 billion in 2005 and $413 billion in 2004. When the Reagan Administration began running huge budget deficits in the 1980s as it dramatically increased defense spending—the biggest shortfalls since World War Two—many economists predicted that without dramatic spending cuts or tax increases, the country was on the way to fiscal ruin. Of course, a combination of massive defense cuts and higher tax revenues from the stock market bubble during the Clinton years allowed the government to generate four years of surpluses totaling $556 billion.

But defense spending is back up and without a once-a-generation stock market boom to generate huge revenues, the budget has fallen back in the red. Indeed, the CBO is predicting shortfalls for the rest of the decade. But why are we generating deficits at all—why isn't the world's biggest economy generating surpluses? And, how long can the United States depend upon the kindness of strangers, in this case Asian central banks, wealthy oil kingdoms and private European wealth to fund a Congress that can't seem to say "no"?

The rules of engagement

No surprise, but the budget doesn't just necessarily reflect the priorities of balanced-budget advocates or other so-called good government types. "First of all the budget reflects the priorities of the White House," says Dana Chasin, former legislative assistant to U.S. Senator Mark Dayton and now a fiscal policy advisor at OMB Watch. That makes sense since it's the president who starts the budget process rolling with his budget request to Congress every year by February 1. Budget legislation, as expressed in the Constitution, starts in the House, as a joint resolution. The House Budget Committee then examines the President's request, decides how it wants to allocate money. The budget is then divided into various accounts, such as Defense or Education. While that's happening, the Senate works on its own budget. After the House passes its resolution, the two sides meet in conference committee, negotiate their differences, and then pass the final budget resolution which specifies the max that can be spent in each account. Is that it? Hardly. Then its time for the money actually to be appropriated.

Again, this legislation starts in the House with both houses eventually ending back in conference committee to work out their differences. Then it's back to the president to sign the appropriations bill into law.

Sounds simple (sort of), but there are more cooks involved in the process than our duly elected legislators and chief executive. "The budget also certainly reflects the priorities of key constituencies," Chasin said. "Look at the budget that was adopted for the Defense Department." He notes that the White House asked for $439 billion but Congress appropriated $470 billion. "Some will see that as congressional profligacy or pork," he adds.

Indeed, examining the Pentagon's budget is like taking a short course in everything that's wrong with the budget process. William Wheeler, a defense budget expert and former staffer for both Democrats and Republicans in the Senate, notes that in the 2006 defense bill, Congress added some $9.3 billion in additional spending from the original White House request to cover things like a Memorial Day celebration, health care in Hawaii, Alaskan fisheries, and breast cancer research. In total, the Congressional Research Service found more than 2,800 of these earmarks.

"Worse is how both Democrats and Republicans in Congress pay for it," Wheeler explains. "Eagerly advertised to the voters back home as good news, they neglected to explain that they raided parts of the defense budget to offset the cost. The favorite target is the Operation and Maintenance Budget that includes spending for weapons maintenance, training, fuel and all the other essentials key to fighting a war.

Now getting rid of wasteful, unnecessary spending won't, in and of itself, solve either the immediate budget deficit or the nation's long-term entitlement problem, but they might create a more fiscally responsible process that could result in those bigger problems being dealt with. Even some in Congress recognize the problem. Thanks to the efforts of Senators Tom Coburn (R-OK) and Barack Obama (D-IL), authors of The Federal Funding Accountability and Transparency Act, citizens will be able to better track wasteful spending starting in 2008. The bill creates a type of "Google for government spending," it would create a single, publicly accessible Web site to track the approximately $1 trillion in federal contracts, grants, and loans awarded each year, providing detailed information on the recipient, amount and intended purpose. While none of these efforts will directly lead to a balanced budget, they might create a more budget conscious public. At the end of the day, that's a good first step.

About James Pethokoukis

James Pethokoukis is a senior writer for U.S. News and World Report.