Statutory PAYGO Presents an Opportunity to Cut Spending

Report Budget and Spending

Statutory PAYGO Presents an Opportunity to Cut Spending

August 31, 2022 22 min read Download Report
Matthew Dickerson
Senior Policy Advisor, Hermann Center for the Federal Budget
Matthew is a senior policy advisor for the Grover M. Hermann Center for the Federal Budget at The Heritage Foundation.

Summary

President Joe Biden’s American Rescue Plan Act has proven harmful, stoking inflation and inflicting damaging policies on the American people. Because it added $2 trillion to the deficit, the American Rescue Plan Act will trigger President Obama’s Statutory PAYGO law, requiring offsetting spending cuts at the end of the 117th Congress. This is an important opportunity for Congress to take a first step toward fiscal responsibility and addressing inflation by reducing the growth of government spending. Congress should ensure that the required amount of spending reductions take place either through targeted spending reductions or by requiring President Biden to faithfully execute the law and carry out a sequestration order.

Key Takeaways

President Joe Biden’s American Rescue Plan Act pumped nearly $2 trillion of deficit-financed spending into the economy, stoking inflation to 40-year highs.

The American Rescue Plan Act triggers the Statutory PAYGO law, requiring offsetting spending cuts.

Congress should ensure the spending cuts take place by enacting targeted spending cuts or requiring Biden to carry out the legally required sequestration.

President Joe Biden’s American Rescue Plan Act included many damaging policies that increased deficit-financed government spending by nearly $2 trillion, stoking inflation to rates not seen in four decades. The new spending also triggers the Statutory Pay-As-You-Go (PAYGO) Act of 2010,REF which requires deficit increases to be offset with future spending reductions through an enforcement mechanism known as sequestration. At the end of the 117th Congress, President Biden will be required to issue a sequestration order cutting budgetary resources of federal programs, giving policymakers an opportunity to begin reining in excessive and inappropriate government spending.

Reducing the growth of government spending is necessary to ensure a sustainable fiscal future and a prosperous economy unencumbered by the tax of inflation. Annual inflation reached 8.5 percent in July 2022, costing the average worker nearly $3,000 in real annual income.REF This inflation has been driven a by a surge of trillions in government spending and the Federal Reserve’s monetary policy that accommodated the fiscal irresponsibility. Inflation is putting a strain on the economy as well as the federal budget, which was already unsustainable and harming Americans even prior to the pandemic.

This Backgrounder will provide an overview of the Statutory PAYGO Act and its sequestration enforcement mechanism, describe the American Rescue Plan Act and why it triggers Statutory PAYGO, and argue that Congress should reject any effort to waive enforcement of Statutory PAYGO. Instead, Congress should enact targeted spending reductions—in an amount greater than or equal to the required cuts—or require President Biden to faithfully execute the law and carry out a sequestration order.

Background

What Is Statutory PAYGO? President Barack Obama and a unified Democrat-controlled Congress enacted Statutory PAYGO. The stated purpose of Statutory PAYGO is to “reestablish a statutory procedure to enforce a rule of budget neutrality on new revenue and direct spending legislation.”REF

The act adds the deficit impactsREF of newly enacted legislation that affects revenues or mandatory spending onto a PAYGO scorecard kept by the U.S. Office of Management and Budget (OMB).REF If, at the end of a session of Congress, a positive balance (called a “debit”) remains on a scorecard for the year, the President is required to issue a sequestration order that reduces budgetary resources of certain spending programs to fully offset the debit.

The Statutory PAYGO law suffers from several flaws:REF

  • The scorecard fails to incorporate many spending increases—including escalating costs from already enacted entitlement programs, as well as discretionary, emergency, disaster, and other new spending—that Congress designates as exempt from PAYGO rules.
  • The sequestration enforcement mechanism exempts programs that comprise most of the federal budget, including all discretionary spending and most mandatory entitlement programs.REF
  • The purpose of the act—attempting to control new deficits—is suboptimal. Excessive government spending is the underlying cause of the unsustainability of the federal budget.REF Over the long run, taxation of the private economy cannot keep up with government spending that grows faster than the economy. Higher taxes hurt economic growth, cause inefficiency by distorting decision-making and adding to administrative burdens, promote cronyism and corruption, and take money from those who earned it to be redistributed by politicians and bureaucrats. To be effective, a fiscal rule must control the growth of spending.REF

In addition to the flaws in the design of the Statutory PAYGO Act, Congress has lacked the political will to follow the law, repeatedly waiving the requirement for deficit neutrality to excuse fiscal profligacy.

Despite these shortcomings, Statutory PAYGO remains law, and it can—and should—be used as a tool to control overspending.

The American Rescue Plan Triggers Statutory PAYGO. The American Rescue Plan Act injected about $1.9 trillion into the economy in March 2021.REF This spending package proved to be the spark that ignited an inflationary fire, coming on top of $4 trillion in legislation responding to the pandemic enacted within the previous year. The policies included in the American Rescue Plan Act have contributed to higher prices for American consumers.REF

The American Rescue Plan Act added trillions in deficits that will trigger Statutory PAYGO. According to the OMB, the law added more than $2 trillion in costs to the Statutory PAYGO scorecards over the fiscal year (FY) 2021–2031 period.REF The average annual cost added to the 10-year scorecard was $203.35 billion, while the average annual cost added to the five-year scorecard was $385.021 billion.

The costs of the American Rescue Plan Act, along with the costs of other legislation enacted in 2021, left a $370.633 billion debit on each year of the five-year PAYGO scorecard.REF Under the Statutory PAYGO law, President Biden should have been required to issue a sequestration order after the end of the first session of the 117th Congress in January 2022 reducing budgetary resources sufficient to offset this debit.

However, in December 2021, Congress intervened and paused enforcement of the Statutory PAYGO Act for one year while shifting the debit forward one year.REF As a consequence, the five-year PAYGO scorecard showed a $741.265 billion debit.REF The recently passed Inflation Reduction Act of 2022 will add several billion to the five-year scorecard.REF The total debit on the five-year scorecard will need to be offset by a sequestration order after the adjournment of the 117th Congress in January 2023 unless deficit-reducing legislation is enacted.

Sequestration Enforcement

A Brief History of Sequestration as a Budget Enforcement Tool. Statutory PAYGO enforces its goal of deficit neutrality via a mechanism called sequestration.

Sequestration refers to a cancelation or reduction of budgetary resources of spending programs by the President in response to a triggering event or other requirement in law. Sequestration has been used as a budgetary enforcement tool dating back to the Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA, also known as the Gramm–Rudman–Hollings Act). It was also included as a part of budget enforcement deals throughout the 1990s but fell out of use in 2002 for nearly a decade.REF The sequestration mechanism was then revived in the Statutory Pay-As-You-Go (PAYGO) Act of 2010.REF

More recently, sequestration was included at the suggestion of the Obama AdministrationREF to carry out two parts of the Budget Control Act of 2011:

  1. Discretionary spending caps. The Budget Control Act established caps on most discretionary spending covering FY 2012–2021. If Congress appropriated above a limit for the defense or non-defense categories, the President would have been required to issue a sequestration order reducing discretionary budget authority to correct the breach.
  2. Mandatory sequester. The Budget Control Act charged a newly created Joint Select Committee on Deficit Reduction to further reduce spending by $1.2 trillion. Because the Joint Committee failed and deficit-reducing legislation was not enacted, the deficit reduction target was instead enforced by reducing the discretionary caps as well as requiring automatic sequestration of nonexempt mandatory spending. While the Budget Control Act (after the failure of the Joint Committee) originally required a sequestration of mandatory spending annually through FY 2021, the requirement has subsequently been extended several times through FY 2031.REF

A consistent characteristic of sequestration throughout its history is its use as a budgetary enforcement tool. Sequestration has been included in budget reform legislation as a backstop to guarantee certain fiscal outcomes. Sequestration has not been intended as the first option to achieve the outcome of the budget reform but instead is a fallback to prevent an outcome that the budget reformers have deemed less desirable than the enforcement mechanism. In the case of Statutory PAYGO, sequestration was included to force Congress to either offset deficit increases with subsequent legislation or to allow sequestration spending cuts to do so.

Implementing the Statutory PAYGO Sequestration. While similar in concept to other sequestration mechanisms, the enforcement of Statutory PAYGO has its own distinctive procedures and coverage.

If a debit remains on a PAYGO scorecard after the adjournment of a session of Congress, the President is required to issue a sequestration order that reduces the budgetary resources from spending programs by enough to offset that debit.REF Each nonexempt program is supposed to be reduced by the same uniform percentage, which the OMB calculates when preparing the PAYGO sequestration order.

Sequestration is sometimes criticized as making “across-the board” spending cuts, but this is far from the case. Programs comprising the vast majority of the federal budget are exempt from sequestration. Social Security, veterans’ programs, most means-tested welfare programs, refundable tax credit payments, and dozens of other programs are excluded.REF Discretionary spending, including defense discretionary funding, is excluded from the Statutory PAYGO sequestration.REF Interest payments on the national debt are also exempt.REF

That leaves Medicare and nearly 250 smaller programs as nonexempt and subject to a sequestration order. Out of the entire $5.9 trillion federal budget, there are about $95 billion in non-Medicare, nonexempt budgetary resources for FY 2023 according to the President’s budget.REF The estimated amount of nonexempt budgetary resources is based on the President’s budget; the actual amount that could be subject to sequestration at the end of the 117th Congress could vary as a result of proposals from the President’s budget not being enacted, other enacted legislation, or economic changes.

While Medicare is included in a sequestration order, the amount that Medicare payments can be reduced under Statutory PAYGO is capped at 4 percent.REF If the calculated uniform percentage reduction to carry out the PAYGO sequestration order exceeds 4 percent, then Medicare payments would be reduced by 4 percent and all other nonexempt programs would be reduced by a larger percentage to make up the difference.REF According to the OMB, Medicare budgetary resources are projected to be about $923 billion in FY 2023, meaning a 4 percent reduction would be approximately $37 billion.REF

The five-year PAYGO scorecard will show a debit of approximately $746 billion at the end of the 117th Congress, assuming no additional PAYGO legislation affecting the deficit is enacted. However, the required sequestration order of that amount could not be completed because the total budgetary resources of nonexempt programs would be only approximately $132 billion based on the President’s budget.REF According to the Congressional Budget Office (CBO), “OMB would be unable to fully implement the outlay reductions required by the PAYGO law.”REF The purpose of the Statutory PAYGO Act is clear and unambiguous: to offset deficit increases in new legislation by reducing budgetary resources of direct spending programs through sequestration enough to offset the debit on the PAYGO scorecard.REF Therefore, the President and the OMB must carry out the law to the fullest extent possible.

To carry out the Statutory PAYGO sequestration requirement, the OMB would reduce Medicare payments over the next year by 4 percent, reducing outlays by about $37 billion out of the $923 billion in anticipated spending in the baseline. According to the Congressional Research Service, “Generally, Medicare’s benefit structure remains unchanged under a mandatory sequestration order and beneficiaries see few direct impacts.”REF While providers and plans would receive slightly smaller payments from the taxpayers, beneficiaries would generally not pay any higher out-of-pocket costs.REF

Relative to the overall level of spending, the reduction would be small while marginally helping to improve the financial standing of the program. Medicare is in need of changes in order to remain solvent and provide better results. According to the Medicare trustees, the Medicare Hospital Insurance Trust Fund will be depleted by 2028 under current law.REF As Heritage Foundation Senior Fellow Robert Moffit has written, “One-off budget cuts as part of sequestration won’t solve Medicare’s endemic spending problem. Only major reforms would slow Medicare’s spending growth while improving the program for beneficiaries and providers alike.”REF Modernizing Medicare would control costs but, more importantly, stimulate innovation and allow for better health outcomes.REF

The OMB would eliminate the budgetary resources of the nearly 250 remaining nonexempt programs, reducing outlays by about $95 billion.REF The nonexempt programs are generally limited in terms of their budgetary impact and consist primarily of subsidies and other activities that are outside the proper scope of the federal government. A few examples of such nonessential taxpayer-funded spending include the “Emergency Citrus Disease Research and Development Trust Fund,” the “Agriculture Wool Apparel Manufacturers Trust Fund,” the “Concrete Masonry Products Board,” subsidies for airline tickets to underused airports, billions to bail out irresponsible banks, and bureaucratic administrative expenses.REF

To alleviate any concerns about carrying out sequestration, the handful of potentially worthwhile activities that are subject to sequestration are small and should be funded through the regular discretionary appropriations process, taking funding from lower-priority programs. Furthermore, the President has the authority to exempt or reduce the sequestration percentage for any military personnel account that may be affected.REF

Excessive Government Spending Is Harming Americans. Americans throughout the country are feeling the negative impacts of excessive government spending. Inflation hit 8.5 percent in July,REF driven by trillions in deficit spending,REF loose monetary policy that accommodated higher government spending, and destructive regulatory and anti-work polices such as restrictions on energy production and expanded welfare benefits.REF The current labor shortage is about 2.9 million workers. This is weighing down the economy despite high levels of job openings.REF The U.S. economy is in a recession after real gross domestic product fell 1.6 percent in the first quarter of 2022 and again by 0.9 percent in the second quarter.REF After President Biden’s spending and regulatory binge, the CBO projects that economic growth will stagnate over the next decade.REF

Even prior to the COVID-19 outbreak and the federal government’s $6 trillion spending spree, the federal budget was on an unsustainable trajectory, growing faster than the overall economy.REF Federal spending as a percentage of gross domestic product has grown well above the historical average. After the recent spike in pandemic and stimulus spending falls off, spending will continue growing, and by 2032 federal outlays will consume or redistribute nearly a quarter of the national economy.REF

Growing the federal government beyond its proper constitutional constraints has put Washington politicians and bureaucrats in charge of more and more of the most personal aspects of Americans’ lives, weakening families and communities. Expansive welfare programs deprive many of both work and marriage, undermining higher-order needs of humans that can be satisfied only by families and civil society.REF The centralization of power in the federal government has undermined citizen involvement and self-government.REF The expansion of the budget has further empowered the bureaucratic administrative state and its ability to issue onerous regulations. It is vital that Congress reverse the growth of spending so that the American people can flourish.

Recommendations for Congress

Under President Obama’s Statutory PAYGO law, reductions in federal outlays are required as a result of President Biden’s irresponsible spending. Under no circumstances should the required amount of spending cuts not occur. It is important that Congress ensure government spending is reduced as a first step toward fiscal responsibility and turning the tide on inflation. Congress can ensure these cuts are carried out by either of or a combination of two complementary options:

  1. Enact targeted spending reductions of equal or greater amounts. Congress should enact legislation to cut federal spending in amounts greater than or equal to the remaining debit on the Statutory PAYGO scorecard. Such spending cuts should represent real reductions in outlays, not budget gimmicks.REF Targeted spending cuts, such as those outlined in The Heritage Foundation’s Budget Blueprint,REF could alleviate the need for some or all of the sequestration enforcement under Statutory PAYGO. A spending reduction package could include slowing the growth of entitlement programs, rolling back executive actions that have caused significant fiscal costs,REF and reducing non-defense discretionary spending.
  2. Enforce the law and let sequestration happen. To achieve a modicum of fiscal responsibility, all Congress has to do is nothing at all. After the adjournment of the 117th Congress, the President will be required to faithfully execute the law and issue a sequestration order reducing budgetary resources for nonexempt programs.REF While the debit on the five-year PAYGO scorecard should require a sequestration order of about $746 billion at the end of this Congress, because the total nonexempt sequesterable budgetary resources total only about $132 billion, an actual sequestration order would max out at a level equal to the nonexempt amount.REF The handful of potentially worthwhile mandatory spending programs that are subject to sequestration is small and should be funded through the regular discretionary appropriations process, taking funding from lower-priority programs without increasing overall spending.

Furthermore, Congress should reject any efforts to simply waive PAYGO that are not paired with fully offsetting spending reductions. Legislation attempting to waive sequestration enforcement or to clear the PAYGO scorecards would massively increase government spending above what it would otherwise be under current law. While the House of Representatives passed legislation attempting to remove the effects of the American Rescue Plan Act from the Statutory PAYGO scorecard, the Senate rejected this irresponsible proposal.REF

Although the American Rescue Plan Act was enacted through the reconciliation process, which bypasses a Senate filibuster, a provision to waive or otherwise turn off enforcement of Statutory PAYGO cannot be done via reconciliation. This is because such a provision would violate the Byrd Rule.REF In all practicality, this means that any legislation to modify enforcement of Statutory PAYGO must have bipartisan support.

Conclusion

President Biden’s American Rescue Plan Act has proven harmful, stoking inflation and inflicting damaging policies on the American people. Because it added $2 trillion to the deficit, the act will also trigger a sequestration order at the end of the 117th Congress, requiring President Biden to enforce President Obama’s Statutory PAYGO law.

Congress should ensure the required amount of spending reductions are effectuated. Lawmakers could enact targeted spending reductions in an amount equal to or greater than the remaining required sequestration enforcement. If they do not, Congress should ensure that President Biden enforces the law and carries out the Statutory PAYGO sequestration to the fullest extent possible, cutting excessive government spending.

Finally, Congress should reject any effort to simply waive enforcement of Statutory PAYGO without fully offsetting spending reductions, which would have the effect of increasing government spending above what should occur under current law.

The American Rescue Plan Act triggering Statutory PAYGO is an important opportunity for Congress to begin reducing the growth of government spending and inflation.

Matthew D. Dickerson is Director of the Grover M. Hermann Center for the Federal Budget at The Heritage Foundation.

Authors

Matthew Dickerson
Matthew Dickerson

Senior Policy Advisor, Hermann Center for the Federal Budget