A week after muscling through possibly the most expensive
spending bill in America history, President Obama has called on
Congress to support fiscal discipline. Specifically, he has
proposed a Pay-as-You-Go (PAYGO) statute requiring that tax cuts
and entitlement expansions be collectively deficit neutral.
Since 2007, Congress has had a PAYGO rule mandating that each
new tax and entitlement bill be deficit neutral. Because it is
merely a congressional rule, lawmakers can (and do) waive it
easily. By contrast, a PAYGO statute--which existed from
1991 until 2002--would operate differently. Instead of requiring
that each tax and entitlement bill be deficit neutral, this law
would keep a running scorecard of all enacted bills (allowing one
bill to offset another). If, at the end of the year, the net effect
of all tax and entitlement legislation was to increase the budget
deficit over the next decade, an automatic series of entitlement
spending cuts ("sequestrations") would be triggered to offset those
PAYGO has proven to be more of a talking point than an actual
tool for budget discipline. During the 1991-2002 round of statutory
PAYGO, Congress and the President still added more than $700
billion to the budget deficit and simply cancelled every single
sequestration. Since the 2007 creation of the PAYGO rule,
Congress has waived it numerous times and added $600 billion to the
Creating a PAYGO law and then blocking its enforcement is
inconsistent and hypocritical. And given their recent waiving of
PAYGO to pass a $1.1 trillion stimulus bill, there is no reason to
believe the current Congress and the President are any more likely
to enforce PAYGO than their predecessors were. And even if it were
enforced, PAYGO applies to only a small fraction of federal
spending (new entitlements). Consequently, PAYGO is merely a
distraction from real budget reforms that could rein in runaway
spending and budget deficits.
Six Problems with PAYGO
1. PAYGO Would Not Decrease the Growth of Federal Spending.
PAYGO is not designed to reduce federal spending. It is not even
designed to slow the growth rate of spending. It only limits
the creation of new entitlement benefits above the spending
growth baseline. In fact, entitlement spending grew faster
after statutory PAYGO took effect in 1991.
2. PAYGO Exempts Discretionary Spending. Discretionary
spending programs--which comprise nearly 40 percent of the federal
budget--are totally exempt from PAYGO rules. In other words,
Congress could provide unlimited budget increases to most defense,
education, health research, justice, international, environmental,
veterans' health, homeland security, and housing programs without
triggering PAYGO. This loophole is a major flaw that substantially
3. PAYGO Exempts Current Entitlement Benefits. Under PAYGO,
current entitlement programs can continue to grow on autopilot.
Only newly created entitlement benefits must be offset. In short,
PAYGO would not prevent:
- Social Security from growing 6 percent annually;
Medicaid from growing 7 percent annually; and
- Nominal entitlement spending from nearly doubling over the next
PAYGO could theoretically slow down the creation of any new
entitlements. Yet the nation's main budgetary challenges stem from
the $44 trillion unfunded obligation from Social Security and
Medicare, as well as the growing costs of current entitlements like
Medicaid. PAYGO would do nothing to reduce the growth rate of these
4. PAYGO Employs a Double Standard That Raises Taxes.
few years, Congress must review and renew most entitlement programs
and many tax cuts. PAYGO sensibly says that renewing an existing
entitlement program is not "new" spending and therefore does not
need to be offset. However, PAYGO applies a different standard to
tax cuts. It classifies tax cut extensions as "new" tax cuts that
violate PAYGO and must be offset.
This makes no sense. PAYGO was intended to block the creation of
new policies that increase the deficit. Simply keeping
current tax policies in place should not be treated as "new" tax
cuts. Additionally, the blatant double standard of allowing
entitlement spending policies but not tax policies to be extended
constitutes a major bias towards higher taxes and spending. For
instance, PAYGO allows the extension of expiring SCHIP and farm
subsidy laws, but it does not allow the extension of the 2001 and
2003 tax cuts or the Alternative Minimum Tax (AMT) to be patched
without offsets. Even President Obama has criticized this double
standard, and Congress should eliminate this baseline disparity
from any PAYGO statute.
5. Previous PAYGO Statutes Were Never Enforced--Even Once.
Congress already had a PAYGO statute from 1991 to 2002. But this
law was never enforced. Over the statute's 12 years, Congress
enacted more than $700 billion in new entitlement spending and tax
cuts--and then enacted legislation cancelling every single
sequestration. Even if Congress had allowed sequestration, they had
already enacted legislation exempting 97 percent of all entitlement
spending--all but $31 billion--from being part of any
The law was practically designed to fail.
Entitlement spending actually grew faster
during the 12
years of PAYGO (1991-2002) than in the 12 previous years
The budget did temporarily achieve balance during that period.
Yet PAYGO had very little to do with it. The budget was balanced by
the combination of the dot com bubble revenue boom, defense savings
after the Cold War ended, and declining net interest costs.
6. Current PAYGO Rules Are Not Enforced.
operated under a PAYGO rule since 2007. In that short period of
time, Congress has already bypassed PAYGO to:
- Enact a
stimulus bill that cost $479 billion in new
entitlements and tax cuts;
- Enact a veterans'
education entitlement bill costing $63
- Enact a student loan expansion costing $15 billion;
- Twice patch the
SCHIP and farm bills that used blatant gimmicks to hide
tens of billions of dollars in new entitlement benefits.
Congress has bypassed PAYGO every time it has proved even
slightly inconvenient to its spending agenda. There is no reason to
believe another PAYGO statute would be any more successful.
Even if PAYGO were miraculously enforced, baseline entitlement
cost increases would still push the size of the federal government
to nearly 50 percent of GDP by 2050. PAYGO would also promote the
expiration of all 2001 and 2003 tax cuts and force millions of
Americans to pay the AMT. As a result, tax revenues would rise from
the historical average of 18.3 percent of GDP to a record 23.5
percent by 2050. The
slow-growth economies of Western Europe show that such levels of
spending and taxation cause serious long-term economic damage.
If a statutory PAYGO law is to be enacted, President Obama and
Congress should address some of the problems by:
- Making sure PAYGO treats tax and entitlement programs equally.
If the renewal of expiring entitlement programs does not trigger
PAYGO, neither should the renewal of expiring tax cuts.
- Pledging to block any legislation cancelling a PAYGO
sequestration. Otherwise, Congress will continue to expand
entitlements without paying for them.
- Avoiding the past practice of exempting 97 percent of
entitlement spending from sequestration, which would otherwise
render the law ineffective.
- Enacting statutory discretionary spending caps to close the
loophole exempting non-entitlement spending.
- Enacting tougher entitlement controls by setting multi-year
spending targets for entitlement programs covered by PAYGO. If OMB
projects that spending will exceed these targets, the President
would be required to submit reform proposals to reduce spending as
part of the annual budget request, and Congress would have to act
on those proposals.
Worse Than Doing Nothing
It is easy to suggest that even an ineffective PAYGO would be no
worse than the status quo. This ignores PAYGO's bias for painful
tax increases. Also, by providing a false sense of security, PAYGO
would slow the momentum for vital budget process reforms that could
actually rein in spending and the deficits. At the very least, the
President should reduce Congress's ability to game the system by
adding the improvements noted above to his PAYGO proposal.
is Grover M. Hermann Fellow in Federal
Budgetary Affairs in the Thomas A. Roe Institute for Economic
Policy Studies at The Heritage Foundation.
Douglas Holtz-Eakin, Director of the
Congressional Budget Office "Reforming the Federal Budget Process,"
testimony before Rules Committee, U.S. House of Representatives,
March 23, 2004, at http://www.cbo.gov/doc.cfm?index=5220&type=0
(February 26, 2009).
Calculated from Office of Management and
Budget, Historical Tables: Budget of the United States
Government, Fiscal Year 2009, Table 8.2, page 135. Annual
mandatory spending (excluding net interest) grew by 40 percent
between 1980 and 1991 (before PAYGO) and by 49 percent between 1991
and 2002 (during PAYGO).
Newman, "House Passes Bill to Avoid PAY-GO Sequestration But
Daschle Says Senate May Not Take It Up," BNA Daily Report for
Executives, November 18, 2002.