The pay-as-you-go rule, usually shortened to PAYGO, is a budget-neutrality requirement on new direct spending and revenue legislation. Its statutory form states its own purpose plainly: to reestablish a statutory procedure to enforce a rule of budget neutrality on new revenue and direct spending legislation (2 U.S.C. 931).
It is not a limit on how much the government spends. It is a scorekeeping rule about what a new law does to the projected path, and the enforcement is automatic rather than discretionary.
The Statute and What It Applies To
The current statutory version was enacted as the Statutory Pay-As-You-Go Act of 2010 (2 U.S.C. 931). It borrows its vocabulary rather than inventing it: the definitions in section 622 of that title, and in section 250 of the Balanced Budget and Emergency Deficit Control Act of 1985, apply to the chapter, except to the extent that they are specifically modified by the chapter’s own list (2 U.S.C. 932). Section 622 is the same definitional section that carries tax expenditure.
The thing being measured is a PAYGO Act, meaning a bill or joint resolution that affects direct spending or revenue relative to the baseline (2 U.S.C. 932).
What gets measured is the budgetary effects, meaning the amount by which PAYGO legislation changes outlays flowing from direct spending or revenues relative to the baseline. Effects that increase outlays flowing from direct spending or decrease revenues are termed costs, and effects that increase revenues or decrease outlays flowing from direct spending are termed savings (2 U.S.C. 932).
Two exclusions sit inside that definition and both matter. Budgetary effects do not include any costs associated with debt service, and, for purposes of those definitions, off-budget effects are not counted as budgetary effects (2 U.S.C. 932).
Appropriations Are Mostly Outside It, With One Carve-In
Provisions in appropriation Acts are also considered budgetary effects for the chapter’s purposes solely for purposes of recording entries on a PAYGO scorecard, and then only if they make outyear modifications to substantive law, with an exception for provisions whose outlay effects net to zero over the current year, the budget year and the 4 subsequent years (2 U.S.C. 932).
The definition names what it means by that. For purposes of that paragraph, modifications to substantive law refers to changes to or restrictions on entitlement law or other mandatory spending contained in appropriations Acts, and provisions in appropriations Acts that are neither outyear modifications to substantive law nor changes in revenues have no budgetary effects for the chapter’s purposes (2 U.S.C. 932).
Two Scorecards, Not One
OMB maintains and makes publicly available a continuously updated document containing two PAYGO scorecards, plus a separate addendum displaying the estimated costs of provisions designated in statute as emergency requirements (2 U.S.C. 933).
The first scorecard displays the budgetary effects of PAYGO legislation in each year over the 5-year period beginning in the budget year. The second displays them in each year over the 10-year period beginning in the budget year (2 U.S.C. 933).
Two adjustments are applied before anything is entered. For purposes of that section, OMB treats the budgetary effects of PAYGO legislation enacted during a session of Congress that occur during the current year as though they occurred in the budget year (2 U.S.C. 933). Then an averaging rule spreads the total: OMB cumulates an Act’s effects over the budget year, which includes any look-back effects, and the four subsequent outyears, divides by five, and enters that quotient in the budget-year column and every subsequent column of the 5-year scorecard, and does the same over the nine subsequent outyears divided by ten for the 10-year scorecard (2 U.S.C. 933).
Averaging is the part that surprises people. A one-off cost is not recorded as a spike in the year it lands. The same averaged quotient is entered in the budget-year column and in each subsequent column of the scorecard (2 U.S.C. 933).
A Debit Triggers a Sequestration Order
A debit is defined as the net total amount, when positive, by which costs recorded on the PAYGO scorecards for a fiscal year exceed savings recorded on those scorecards for that year (2 U.S.C. 932).
The reporting deadline is tight. Not later than 14 days, excluding weekends and holidays, after Congress adjourns to end a session, OMB must make publicly available and cause to be printed in the Federal Register an annual PAYGO report (2 U.S.C. 934).
If that report shows a debit on either scorecard for the budget year, OMB prepares and the President issues a sequestration order reducing budgetary resources of direct spending programs by enough to offset that debit, and where there is a debit on both scorecards the order fully offsets the larger of the two (2 U.S.C. 934).
How the Cut Is Calculated, and the Medicare Ceiling Inside It
OMB calculates a uniform percentage by which the budgetary resources of nonexempt direct spending programs are sequestered, set so the resulting outlay savings offset the budget-year debit on the applicable scorecard (2 U.S.C. 935).
One program has its own ceiling. Where the uniform percentage would exceed 4 percent, the Medicare programs described in section 906(d) of that title are reduced by 4 percent instead, and the uniform percentage applied to all other nonexempt direct spending programs is increased as necessary so that Medicare and everything else together produce the required outlay savings (2 U.S.C. 935). The cap protects Medicare from the full rate and moves the burden, it does not reduce the total.
The Current-Policy Adjustments Have Expired
The Act allowed certain estimates to be adjusted for current policy, covering Medicare payments to physicians, the estate and gift tax, and extensions of middle-class tax cuts, among others (2 U.S.C. 936).
That section carries its own end date, and dropping it is how the provision gets misdescribed. It states that the section shall remain in effect through December 31, 2011 (2 U.S.C. 936).
Questions Firms Ask
Not directly. It applies to legislation that affects direct spending or revenue relative to the baseline (2 U.S.C. 932), so it constrains what a new law is scored as doing, not what the government spends under laws already on the books.
Because the rule is written symmetrically. A decrease in revenues is a cost and an increase in revenues is a saving, on the same scorecard as changes in direct spending outlays (2 U.S.C. 932). A revenue-reducing tax act and a spending-increasing entitlement act are scored in the same currency.
Where a provision of direct spending or revenue legislation in a PAYGO Act is enacted as an emergency requirement that Congress so designates in statute, the amounts of new budget authority, outlays and revenue in all fiscal years resulting from that provision are treated as an emergency requirement for the Act’s purposes (2 U.S.C. 933). The estimated costs of provisions designated in statute as emergency requirements are displayed in a separate addendum to the scorecard document (2 U.S.C. 933).
The phrase is reused, in two directions. Inside the statute itself each chamber runs its own procedure, with a designation route in the House of Representatives and a point of order in the Senate against an emergency designation (2 U.S.C. 933). Separately, in public finance the same words name a funding pattern in which a project is paid for out of receipts as they arrive rather than out of bond proceeds, and that sense appears in tax increment financing.
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