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PAYGO, or Pay-As-You-Go, is a budget enforcement mechanism aimed at encouraging fiscally responsible policymaking. In the simplest terms, PAYGO forces lawmakers to pay for their priorities. It requires that any new legislation that adds to the deficit, whether through an increase in mandatory spending or a decrease in revenues, must be fully offset by other spending or revenue changes so that the net effect of legislative changes is deficit neutral.
PAYGO has taken slightly different forms over the years. It was first established in 1990 as part of legislation to reduce large deficits. That original PAYGO law expired in 2002 but was restored in the Statutory Pay-As-You-Go Act of 2010. In addition to the statutory requirement, the House and Senate have also implemented separate PAYGO rules as a way to guide each chamber’s budget activities. The Senate PAYGO rule was implemented in 1993 and remains in effect today; the House PAYGO rule was implemented in 2007, repealed and replaced with a Cut-As-You-Go rule in 2011 (which focused exclusively on the mandatory spending effects of legislation), and reinstated as originally structured in 2019.
The statutory PAYGO law applies to any newly enacted legislation that affects mandatory spending and/or revenues. The projected costs and savings of each enacted bill is tracked by the Office of Management and Budget (OMB) on what are known as PAYGO scorecards.
The PAYGO scorecards show the 5-year and 10-year average costs or savings associated with each new piece of legislation. The example below shows the PAYGO treatment of a hypothetical bill enacted in 2020 with an estimated cost of $25 billion through 2025 and a total cost of $20 billion through 2030 as the costs in earlier years eventually turn to savings. For both the 5- and 10-year periods, the cost is divided by the number of years in the period to generate an average cost per year. Those averages are then assigned to each year in the scorecard. Because the scorecard uses averages, rather than the actual year-by-year estimate, the assigned cost in a given year could be higher or lower than the amount displayed in the cost estimate.
OMB compiles and keeps a running total of PAYGO scorecards for all new legislation involving mandatory spending and/or revenues. If the sum of all projected costs for a given year is greater than zero, the President orders a sequestration (cancellation of budgetary resources) in non-exempt mandatory spending programs to offset that cost.
The effect of a PAYGO sequestration would be limited because most mandatory spending programs — such as Social Security, federal retirement programs, veterans’ programs, most unemployment benefits, and low-income entitlements like Medicaid — are exempt from the automatic cuts. When sequestration is ordered, each non-exempt mandatory spending program is reduced by the same percentage with the exception of Medicare, which is limited to a maximum reduction of 4 percent. However, a PAYGO sequestration can be averted if Congress waives the rule or resets the scorecards to zero.
As with statutory PAYGO, the Senate and House PAYGO rules apply to proposed legislation affecting mandatory spending and revenues. The Budget Committees of the House or Senate, which commonly use calculations provided by the Congressional Budget Office, are responsible for tracking projected costs. As opposed to the PAYGO law, the PAYGO rules apply to each measure individually — enforced by a point of order to prevent the consideration of legislation that does not comply with the PAYGO rules.
PAYGO rules can be an effective tool to prevent the consideration of fiscally irresponsible legislation. In fact, the Senate PAYGO rule has been used to prevent the consideration of 44 amendments since its creation in 1993.
While the PAYGO law and rules function differently, they each work to promote fiscal responsibility. The PAYGO rules encourage legislators to consider policies individually and, if they are a priority, find a way to pay for them. The PAYGO law, on the other hand, takes a broader view by looking at a full year’s actions — discouraging fiscal irresponsibility by requiring sequestration if the set of actions during that year would have increased the deficit. While no budget process rule is, by itself, a substitute for lawmakers making fiscally responsible decisions, tools like PAYGO can help ensure that fiscal considerations are an important part of policymaking.