PAYGO legislation (short for pay-as you-go) was first enacted in 1991 and let to expire 2002. It received its name because it required Congress to make sure they had a way to pay for the bills they passed, either by increases in taxes or cuts in spending to other areas. Under PAYGO the deficit went from 4.5% of GDP in 1991 to a 2.4% surplus in 2000. In 2002 the last year of the first PAYGO bill deficits returned at $158 billion.
On February 12, 2010 President Obama signed the Statutory Pay-As-You-Go Act of 2010 into law. It was part of a package that also increased the debt limit on the nation’s credit card. In case you’re wondering that limit is now $14.294 trillion. The ultimate back card!
Just by its name PAYGO seems like a responsible piece of legislation passed by Congress to ensure they stop borrowing from our future. That is until you read the fine print and see the back door that Congress has left themselves.
PAYGO ONLY applies to NEW direct spending and revenue (tax) legislation. It does not apply to direct spending or revenue legislation that has already been passed. Direct spending also called mandatory spending, is what we spend on entitlement programs like Social Security and Medicare. Other example would be federal employee retirement and unemployment compensation.
So where’s Congress’s back door? Well, PAYGO does not apply to discretionary spending. In other words the federal budget. That encompasses pretty much every government agency. That’s right, Congress passed a law that doesn’t really require them to pay for anything! This would be equivalent to your deciding that you needed to cut expenses in your personals life. So you decided to freeze all mandatory or direct spending such as food and rent. But because you like to have a good time and not pay for it, all other spending such as beer, clothes, video games and other entertainment would not be subject to your spending freeze. Then you would pass along that debt to your children. You can see how this would not work for you, but somehow it works just fine for Congress.
So next time you hear a politician talking about how responsible they were for passing PAYGO, remember they’re really not.
Help us urge Congress to extend PAYGO to ALL spending so that we can really start bringing the deficit down.
Source: Congressional Research Service