Sequestration versus PAYGO: Which Do You Prefer?

We all know a lot about sequestration, especially since we hear about it almost daily on the news or in conversations. However, very few individuals know that much about the PAYGO process, which replaced the sequestration procedures in 1990. Below, I outline (1) the history of PAYGO, (2) when it occurs, and (3) its current statutory status.

History of PAYGO:
The Budget Enforcement Act (BEA), which was established in OBRA 1990, created pay-as-you-go (PAYGO), a process affecting laws governing revenues and entitlement programs. The system required that, in a given Congress, the overall effect of policies that would expand entitlement spending or decrease revenues relative to the baseline should be deficit-neutral. In short, it ensures that net effect of revenue and mandatory expenditure policies were budget neutral. It focuses on the cost of the policy change and on tradeoffs with existing tax or spending programs, giving an advantage to programs already budgeted and making it difficult to create new programs or expand incentives. Neither tax cuts nor spending increases could be advocated without taking into account their effects on the overall deficit.

It was intended to replace Gramm-Rudman-Hollings sequestration procedure that set fix targets in reducing the deficit, but had no control on mandatory spending. PAYGO enabled Congress to have some control over restraining program costs. While they still had to spend more money on programs if prices increased, they also had the ability to limit changes to these programs that would lead to more spending, such as altering eligibility. PAYGO was successful and led to a surplus up until it expired in 2002. Since then, PAYGO has been used in multiple instances, but never in the originally capacity due to several crises facing the country, ranging from economic to environmental.

When Does PAYGO Occur? PAYGO occurs when proposed entitlement legislation, such as Social Security or Medicare, is introduced that is meant to increase spending. The CBO issues an estimate report that outlines the budgetary effects of the legislation; it estimates the change in the program benefits or eligible population to the baseline resulting from the legislation. The cost of the new legislation is the additional budget authority and outlays required above what is assumed in the program baseline required under current law. The CBO report initiates the PAYGO procedure, which requires cuts in other areas to pay for an increase in entitlement spending. PAYGO does not apply if spending increases are due to economic change; it only applies if new legislation is introduced.

PAYGO’s Current Status: In 2010, Congress passed the Statutory Pay-As-You-Go Act of 2010, which reinstates the PAYGO budgeting rules used by Congress from 1990 to 2002. However, there are several major programs and activities that are exempt from PAYGO rules. These include Social Security payments, programs administered by the Department of Veterans Affairs, net interest on debt, and income tax credits. Over 150 additional programs, funds, and activities are also exempt, such as outlays to Fannie Mae, Freddie Mac, the Postal Service Fund, Health Care Trust Funds, and low-rent public housing loans and expenses. Further, emergency spending is also not subject to PAYGO rules, for example the emergency disaster relief for Hurricane Sandy. These exemptions were made to allow money to move quickly through the legislative process without having to find an offset. In the end, it remains to be seen whether or not this form of PAYGO procedure will help in reducing the national deficit.

What do you think?

Is PAYGO a useful tool in reducing the budget deficits?

Should Congress reenact PAYGO in its original form, removing all exemptions for programs and activities?

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Andrew Krzmarzick

From that chart, it seems pretty obvious that PAYGO was working before the Iraq War. Without getting political, I’d be open to removing some of those exemptions. One idea would be to use a crowdsourcing tool to list the exemptions and encourage citizens to vote and comment on them to get a sense of national priority. Of course, the list should include both the program name, the number of people it serves and the size of that program / activity in the budget.

David B. Grinberg

Excellent post, Samantha.

I actually worked for the Office of the Majority Leader, former Rep. Richard Gephardt, during the bi-partisan 1990 Budget Summit. PAYGO is obviously a useful tool for deficit reduction and should be reenacted in the original form. Another useful tool to assess the severity of the budget deficit and national debt is the debt to GDP ratio (the percentage of the deficit/debt as measured in terms of the overall Gross Domestic Product — U.S. economic output).

Unfortunately, despite the merits of PAYGO, don’t hold your breath on any reenactment — especially in today’s toxic political climate where personal partisan self-interests too often trump the interests of the American people. Sad story.