President’s PAYGO Proposal is Unworkable

Brian Riedl / June 09, 2009

President Obama today is promoting a Pay-as-You-Go (PAYGO) statute requiring that tax cuts and entitlement expansions be collectively deficit-neutral. Congress is likely to take up the proposal later this month.

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 costs.

Yet PAYGO has proven to be more of a talking point than an actual tool for budget discipline. Consider that:

1) PAYGO has never been enforced

• 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 that would have enforced PAYGO. Even if Congress had wanted to enforce PAYGO during that period, they had already exempted 97% of all entitlement spending from sequestration cuts. It was basically designed to fail. (more…)