PAYGO
Encyclopedia
PAYGO is the practice in the United States of financing expenditures with funds that are currently available rather than borrowed.
The goal of this is to require those in control of the budget to engage in the diligence of prioritizing expenses and exercising fiscal restraint.
(which was incorporated as Title XIII of the Omnibus Budget Reconciliation Act of 1990
), PAYGO required all increases in direct spending or revenue decreases to be offset by other spending decreases or revenue increases. It was thought that this would control increases in deficit spending. Direct spending (or "mandatory spending") is largely composed of "entitlement spending," which means that a group of beneficiaries are entitled to a benefit and, without further legislative action, the government must provide that benefit—hence it is considered to be "mandatory." Only by legislative action can the benefit be either expanded or reduced. If a benefit is expanded or increased, that increase in direct spending must be offset by an increase in revenue or a decrease in direct spending.
In terms of revenue, PAYGO is designed to control revenue reductions. If revenue is estimated to be reduced through a reduction in tax rates of any kind or other effects on revenue collected by the Federal Government, that effect on the deficit must be offset either through increased tax rates or increase in revenue collection elsewhere, or spending reductions of the same amount.
In the initial PAYGO regimen, enacted in the Omnibus Budget Reconciliation Act of 1990
(OBRA '90), by statutory requirement, if legislation enacted during a session of Congress had the effect of increasing the projected deficit for the following year, a "sequestration" would be triggered. A sequestration is an across the board spending reduction of non-exempt mandatory programs to offset this increase in the deficit, as calculated by the Office of Management and Budget.
These rules were in effect from FY1991-FY2002. Enacted in 1990, it was extended in the Omnibus Budget Reconciliation Act of 1993
and the Balanced Budget Act of 1997
. In FY 1991, the Federal deficit was 4.5% of GDP
, and by FY 2000, the Federal surplus was 2.4%. Total Federal spending as a percentage of GDP
decreased each year from FY1991 through FY 2000, falling from 22.3% to 18.4%. Deficits, though, returned by the last year PAYGO was in effect: There was a "return to deficits ($158 billion, 1.5% of GDP) in 2002".
Beginning in 1998, in response to the first federal budget surplus since 1969, Congress started enacting, and the President signing, increases in discretionary spending above the statutory limit using creative means such as advance appropriations, delays in making obligations and payments, emergency designations, and specific directives. While staying within the technical definition of the law, this allowed spending that otherwise would not be allowed. The result was emergency spending of $34 billion in 1999 and $44 billion in 2000.
The PAYGO statute expired at the end of 2002. After this, Congress enacted President George W. Bush's proposed 2003 tax cuts (enacted as the Jobs and Growth Tax Relief Reconciliation Act of 2003
), and the Medicare Prescription Drug, Improvement, and Modernization Act
. The White House acknowledged that the new Medicare prescription drug benefit plan would not meet the PAYGO requirements:
After the expiration of PAYGO, budget deficits returned. The federal surplus shrank from $236.2 billion in 2000 to $128.2 billion in 2001, then a $157.8 billion deficit in 2002—the last year statutory PAYGO was in effect.
The deficit increased to $377.6 billion in 2003 and $412.7 billion in 2004. The federal deficit excluding trust funds was $537.3 billion in FY2006. In the first 6 years of President Bush's term, with a Republican controlled Congress, the federal debt increased by $3 trillion. The public debt continued to grow after Democrats gained control of Congress on January 3rd, 2007. At the end of the Bush Administration, public debt had nearly doubled from when President Bush took office in January 2001, to January 2009.
The PAYGO system was reestablished as a standing rule of the House of Representatives (Clause 10 of Rule XXI) on January 4, 2007 by the Democrat-controlled 110th Congress:
Less than one year later though, facing widespread demand to ease looming tax burdens caused by the Alternative Minimum Tax
, Congress abandoned its pay-go pledge. The point of order was also waived for the Economic Stimulus Act of 2008
which included revenue reducing provisions and increases in spending that increased the deficit, which paygo was designed to prevent. It was again waived in May 2008, upon the consideration of the 2007 U.S. Farm Bill by the House of Representatives. In this last bill, the advocates of the measure claimed that it was in compliance. However, the Rules Committee issued a report indicating at least a technical violation: "While there is a technical violation of clause 10 of rule XXI [paygo], the conference report complies with the rule by remaining budget neutral with no net increase in direct spending."
At the beginning of the 111th Congress, PAYGO was modified by including an "emergency" exemption. This designation was provided for the American Recovery and Reinvestment Act of 2009
(H.R. 1), which increased the deficit and increased the public debt limit to $12,104,000,000,000. Both direct spending in the bill and tax cuts, as passed by the Democratic-controlled Congress and signed by President Barack H. Obama, were exempted from the PAYGO rule under clause 5(b). The establishment of the House PAYGO Rule, and a similar Rule in the Senate, did not prevent the deficit from growing to $1.42 trillion for fiscal year 2009.
The paygo point of order does not apply to "direct spending" if it is incorporated into an annual or supplemental appropriations spending bill. The difference between direct spending and annual appropriations is that the former becomes permanent law with U.S. government spending on various entitlements that continues until the government acts to increase or reduce it. An annual appropriation bill provides spending authority to the government for a project or program that only lasts a year. Paygo was designed to apply to direct spending only. So one way of circumventing the point of order, is to include the direct spending increases in an annual appropriation bill, which was done for the Supplemental Appropriations Act of 2009.
On February 12, 2010, Obama signed statutory PAYGO rules into law.
, PAYGO refers to an unfunded system in which current contributors to the system pay the expenses for the current recipients. In a pure PAYGO system, no reserves are accumulated and all contributions are paid out in the same period. The opposite of a PAYGO system is a funded system, in which contributions are accumulated and paid out later (together with the interest on it) when eligibility requirements are met.
in the U.S. In that system, contributions are paid by the currently employed population in the form of the Federal Insurance Contributions Act tax
(FICA), while recipients are mostly individuals of at least 62 years of age. Social Security is not a pure PAYGO system, because it accumulates excess revenue in the Old-Age, Survivors, and Disability Insurance Trust Funds (OASDI
).
Budgeting
The PAYGO compels new spending or tax changes not to add to the federal deficit. Not to be confused with pay-as-you-go financing, which is when a government saves up money to fund a specific project. Under the PAYGO rules a new proposal must either be "budget neutral" or offset with savings derived from existing funds.The goal of this is to require those in control of the budget to engage in the diligence of prioritizing expenses and exercising fiscal restraint.
U.S. Congress
An important example of such a system is the use of PAYGO in both the statutes of the U.S. Government and the rules in the United States Congress. First enacted as part of the Budget Enforcement Act of 1990Budget Enforcement Act of 1990
The Budget Enforcement Act of 1990 was enacted by the United States Congress as title XIII of the Omnibus Budget Reconciliation Act of 1990 to enforce the deficit reduction accomplished by that law and revise the budget control process of the Federal Government...
(which was incorporated as Title XIII of the Omnibus Budget Reconciliation Act of 1990
Omnibus Budget Reconciliation Act of 1990
The Omnibus Budget Reconciliation Act of 1990 is a United States statute enacted pursuant to the budget reconciliation process to reduce the United States federal budget deficit....
), PAYGO required all increases in direct spending or revenue decreases to be offset by other spending decreases or revenue increases. It was thought that this would control increases in deficit spending. Direct spending (or "mandatory spending") is largely composed of "entitlement spending," which means that a group of beneficiaries are entitled to a benefit and, without further legislative action, the government must provide that benefit—hence it is considered to be "mandatory." Only by legislative action can the benefit be either expanded or reduced. If a benefit is expanded or increased, that increase in direct spending must be offset by an increase in revenue or a decrease in direct spending.
In terms of revenue, PAYGO is designed to control revenue reductions. If revenue is estimated to be reduced through a reduction in tax rates of any kind or other effects on revenue collected by the Federal Government, that effect on the deficit must be offset either through increased tax rates or increase in revenue collection elsewhere, or spending reductions of the same amount.
In the initial PAYGO regimen, enacted in the Omnibus Budget Reconciliation Act of 1990
Omnibus Budget Reconciliation Act of 1990
The Omnibus Budget Reconciliation Act of 1990 is a United States statute enacted pursuant to the budget reconciliation process to reduce the United States federal budget deficit....
(OBRA '90), by statutory requirement, if legislation enacted during a session of Congress had the effect of increasing the projected deficit for the following year, a "sequestration" would be triggered. A sequestration is an across the board spending reduction of non-exempt mandatory programs to offset this increase in the deficit, as calculated by the Office of Management and Budget.
These rules were in effect from FY1991-FY2002. Enacted in 1990, it was extended in the Omnibus Budget Reconciliation Act of 1993
Omnibus Budget Reconciliation Act of 1993
The Omnibus Budget Reconciliation Act of 1993 was federal law that was enacted by the 103rd United States Congress and signed into law by President Bill Clinton. It has also been referred to, unofficially, as the Deficit Reduction Act of 1993...
and the Balanced Budget Act of 1997
Balanced Budget Act of 1997
The Balanced Budget Act of 1997, , was signed into law on August 5, 1997. It was an omnibus legislative package enacted using the budget reconciliation process and designed to balance the federal budget by 2002....
. In FY 1991, the Federal deficit was 4.5% of GDP
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
, and by FY 2000, the Federal surplus was 2.4%. Total Federal spending as a percentage of GDP
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
decreased each year from FY1991 through FY 2000, falling from 22.3% to 18.4%. Deficits, though, returned by the last year PAYGO was in effect: There was a "return to deficits ($158 billion, 1.5% of GDP) in 2002".
Beginning in 1998, in response to the first federal budget surplus since 1969, Congress started enacting, and the President signing, increases in discretionary spending above the statutory limit using creative means such as advance appropriations, delays in making obligations and payments, emergency designations, and specific directives. While staying within the technical definition of the law, this allowed spending that otherwise would not be allowed. The result was emergency spending of $34 billion in 1999 and $44 billion in 2000.
The PAYGO statute expired at the end of 2002. After this, Congress enacted President George W. Bush's proposed 2003 tax cuts (enacted as the Jobs and Growth Tax Relief Reconciliation Act of 2003
Jobs and Growth Tax Relief Reconciliation Act of 2003
The Jobs and Growth Tax Relief Reconciliation Act of 2003 , was passed by the United States Congress on May 23, 2003 and signed into law by President George W. Bush on May 28, 2003...
), and the Medicare Prescription Drug, Improvement, and Modernization Act
Medicare Prescription Drug, Improvement, and Modernization Act
The Medicare Prescription Drug, Improvement, and Modernization Act is a federal law of the United States, enacted in 2003. It produced the largest overhaul of Medicare in the public health program's 38-year history.The MMA was signed by President George W...
. The White House acknowledged that the new Medicare prescription drug benefit plan would not meet the PAYGO requirements:
After the expiration of PAYGO, budget deficits returned. The federal surplus shrank from $236.2 billion in 2000 to $128.2 billion in 2001, then a $157.8 billion deficit in 2002—the last year statutory PAYGO was in effect.
The deficit increased to $377.6 billion in 2003 and $412.7 billion in 2004. The federal deficit excluding trust funds was $537.3 billion in FY2006. In the first 6 years of President Bush's term, with a Republican controlled Congress, the federal debt increased by $3 trillion. The public debt continued to grow after Democrats gained control of Congress on January 3rd, 2007. At the end of the Bush Administration, public debt had nearly doubled from when President Bush took office in January 2001, to January 2009.
The PAYGO system was reestablished as a standing rule of the House of Representatives (Clause 10 of Rule XXI) on January 4, 2007 by the Democrat-controlled 110th Congress:
Less than one year later though, facing widespread demand to ease looming tax burdens caused by the Alternative Minimum Tax
Alternative Minimum Tax
The Alternative Minimum Tax is an income tax imposed by the United States federal government on individuals, corporations, estates, and trusts. AMT is imposed at a nearly flat rate on an adjusted amount of taxable income above a certain threshold . This exemption is substantially higher than the...
, Congress abandoned its pay-go pledge. The point of order was also waived for the Economic Stimulus Act of 2008
Economic Stimulus Act of 2008
The Economic Stimulus Act of 2008 was an Act of Congress providing for several kinds of economic stimuli intended to boost the United States economy in 2008 and to avert a recession, or ameliorate economic conditions. The stimulus package was passed by the U.S. House of Representatives on January...
which included revenue reducing provisions and increases in spending that increased the deficit, which paygo was designed to prevent. It was again waived in May 2008, upon the consideration of the 2007 U.S. Farm Bill by the House of Representatives. In this last bill, the advocates of the measure claimed that it was in compliance. However, the Rules Committee issued a report indicating at least a technical violation: "While there is a technical violation of clause 10 of rule XXI [paygo], the conference report complies with the rule by remaining budget neutral with no net increase in direct spending."
At the beginning of the 111th Congress, PAYGO was modified by including an "emergency" exemption. This designation was provided for the American Recovery and Reinvestment Act of 2009
American Recovery and Reinvestment Act of 2009
The American Recovery and Reinvestment Act of 2009, abbreviated ARRA and commonly referred to as the Stimulus or The Recovery Act, is an economic stimulus package enacted by the 111th United States Congress in February 2009 and signed into law on February 17, 2009, by President Barack Obama.To...
(H.R. 1), which increased the deficit and increased the public debt limit to $12,104,000,000,000. Both direct spending in the bill and tax cuts, as passed by the Democratic-controlled Congress and signed by President Barack H. Obama, were exempted from the PAYGO rule under clause 5(b). The establishment of the House PAYGO Rule, and a similar Rule in the Senate, did not prevent the deficit from growing to $1.42 trillion for fiscal year 2009.
The paygo point of order does not apply to "direct spending" if it is incorporated into an annual or supplemental appropriations spending bill. The difference between direct spending and annual appropriations is that the former becomes permanent law with U.S. government spending on various entitlements that continues until the government acts to increase or reduce it. An annual appropriation bill provides spending authority to the government for a project or program that only lasts a year. Paygo was designed to apply to direct spending only. So one way of circumventing the point of order, is to include the direct spending increases in an annual appropriation bill, which was done for the Supplemental Appropriations Act of 2009.
On February 12, 2010, Obama signed statutory PAYGO rules into law.
Social insurance
In social insuranceSocial insurance
Social insurance is any government-sponsored program with the following four characteristics:* the benefits, eligibility requirements and other aspects of the program are defined by statute;...
, PAYGO refers to an unfunded system in which current contributors to the system pay the expenses for the current recipients. In a pure PAYGO system, no reserves are accumulated and all contributions are paid out in the same period. The opposite of a PAYGO system is a funded system, in which contributions are accumulated and paid out later (together with the interest on it) when eligibility requirements are met.
U.S. Social Security
An important example of such a PAYGO system in this second sense is Social SecuritySocial Security (United States)
In the United States, Social Security refers to the federal Old-Age, Survivors, and Disability Insurance program.The original Social Security Act and the current version of the Act, as amended encompass several social welfare and social insurance programs...
in the U.S. In that system, contributions are paid by the currently employed population in the form of the Federal Insurance Contributions Act tax
Federal Insurance Contributions Act tax
Federal Insurance Contributions Act tax is a United States payroll tax imposed by the federal government on both employees and employers to fund Social Security and Medicare —federal programs that provide benefits for retirees, the disabled, and children of deceased workers...
(FICA), while recipients are mostly individuals of at least 62 years of age. Social Security is not a pure PAYGO system, because it accumulates excess revenue in the Old-Age, Survivors, and Disability Insurance Trust Funds (OASDI
Social Security (United States)
In the United States, Social Security refers to the federal Old-Age, Survivors, and Disability Insurance program.The original Social Security Act and the current version of the Act, as amended encompass several social welfare and social insurance programs...
).