What is Statutory PAYGO?
The
Statutory Pay-As-You-Go (PAYGO) Act of 2010 (
Public Law 111–139, codified at 2 U.S. Code § 931 et seq) was
enacted by President Barack Obama and a unified Democrat-controlled Congress with the stated purpose to “reestablish a statutory procedure to enforce a rule of budget neutrality on new revenue and direct spending legislation.”
Statutory PAYGO only covers direct (also called “mandatory” or “
autopilot”) spending and revenues. Discretionary spending (including regular annual appropriations) is not subject to PAYGO.
How is Statutory PAYGO Supposed to Work?
Enforcing Statutory PAYGO is a two-step process:
- The covered cost of enacted legislation throughout the year is kept on scorecards.
- If the net costs on the scorecard shows a deficit, then sequestration cuts are ordered.
The Statutory PAYGO Scorecards
Throughout the calendar year, the
Office of Management and Budget (OMB) keeps two Statutory PAYGO scorecards: one tracks the five-year costs of legislation and the other tracks of the 10-year costs of legislation.
In an attempt to smooth out the costs of legislation and limit gimmicks, the dollar amounts entered into the scorecard are equal to the average of the deficit impact over five or 10 years, as per the applicable scorecard.
The scorecards roll over from year to year, keeping a continuous running tally of the deficit impacts of covered legislation.
Sequestration
At the end of a Session of Congress (generally the end of December) OMB reviews the scorecard. If either the five or 10 year scorecard shows a “debit” (a deficit increase) for that year, sequestration cuts are ordered.
Sequestration is the cancellation 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 budget enforcement mechanism for several laws, including the Balanced Budget and Emergency Deficit Control Act of 1985, the Budget Control Act of 2011, and the Fiscal Responsibility Act of 2023.
What Does and Does Not Get Cut by Statutory PAYGO Sequestration?
Sequestration is sometimes criticized as making “across-the-board” spending cuts, but this is far from the case.
Exempt programs and activities are identified at
2 U.S. Code § 905. Programs comprising most of the federal budget are exempt from Statutory PAYGO sequestration, including:
- Social Security,
- veterans’ programs,
- most means-tested welfare programs,
- refundable tax credit payments,
- discretionary spending, including defense discretionary funding,
- Interest payments on the national debt, and
- dozens of other programs.
Medicare is
partially subject to sequestration. The amount that Medicare payments can be reduced under Statutory PAYGO is capped at
no more than 4 percent.
Only about 235 out of 2,000 budgetary accounts, totaling approximately $150 billion, are fully subject to Statutory PAYGO sequestration. That is just 2 percent of the $6.8 trillion federal budget. The programs subject to a Statutory PAYGO sequestration are the same as those subject to the
Budget Control Act mandatory sequester that has been implemented annually since fiscal year 2013 and extended on a bipartisan basis into FY 2032.
Calculating the Sequester Cuts
The sequestration is supposed to be an amount equal to the debit on the Statutory PAYGO scorecard that triggered enforcement.
What is the Current Statutory PAYGO Situation?
The current $1.7 trillion
PAYGO scorecard balance reflects the significant deficit increase as a result of President Biden's spending, including the American Rescue Plan Act of 2021.
Because the PAYGO scorecard exceeds the amount of spending on programs subject to sequestration, a $190 billion reduction in spending would be required in January 2025.
| Implementing the FY 2025 PAYGO Sequester |
| Because the required sequestration of $1.698 trillion exceeds the amount available to cut, OMB would be forced to follow this calculation. |
| |
Sequesterable Base |
Percentage Reduction |
PAYGO Sequestration |
| Medicare |
$1,068.708 |
4% |
$42.748 |
| Other Non-Exempt Programs |
$147.440 |
100% |
$147.440 |
| Total |
$1,216.147 |
|
$190.188 |
| In Billions of Dollars.
Source: Author Calculations Based on OMB |
The entire balance on the current Statutory PAYGO scorecards is due to the reckless spending that has occurred under President Joe Biden. The
FY 2023 omnibus appropriations bill transferred the PAYGO scorecard balances for FY 2023 and FY 2024 to the FY 2025 scorecard. The balance from FY 2022 had
previously been transferred to the 2023 scorecard. This pushed the consequences of Biden’s spending to the end of his fourth year in office.
The American Rescue Plan Act (ARPA) added a $385 billion cost on each year of the five-year PAYGO scorecard. This annual cost for ARPA is larger than the available sequesterable base in each year. Thus, the need for a Statutory PAYGO sequester is attributable to ARPA.
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