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PAYGO (Pay As You GO) is the practice in the United States of financing
expenditure An expense is an item requiring an outflow of money, or any form of fortune in general, to another person or group as payment for an item, service, or other category of costs. For a tenant, rent is an expense. For students or parents, tuition i ...
s with
funds Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm use ...
that are currently available rather than borrowed.


Budgeting

The PAYGO compels new spending or tax changes not to add to the federal debt. Not to be confused with pay-as-you-go financing, which is when a government saves up money to fund a specific project. Under the PAYGO rules, a new proposal must either be "budget neutral" or offset with savings derived from existing funds. The goal of this is to require those in control of the budget to engage in the diligence of prioritizing expenses and exercising fiscal restraint. An important example of such a system is the use of PAYGO in both the statutes of the U.S. Government and the rules in the U.S. Congress. First enacted as part of the
Budget Enforcement Act of 1990 The Budget Enforcement Act of 1990 (BEA) (, title XIII; ; codified as amended at scattered sections of 2 U.S.C. & ) was enacted by the United States Congress as title XIII of the Omnibus Budget Reconciliation Act of 1990, to enforce the deficit r ...
(which was incorporated as Title XIII of the Omnibus Budget Reconciliation Act of 1990), PAYGO required all increases in direct spending or revenue decreases to be offset by other spending decreases or revenue increases. It was thought that this would control increases in deficit spending. Direct spending (or "mandatory spending") is largely composed of " entitlement spending," which means that a group of beneficiaries are entitled to a benefit and, without further legislative action, the government must provide that benefit—hence it is considered to be "mandatory." Only by legislative action can the benefit be either expanded or reduced. If a benefit is expanded or increased, that increase in direct spending must be offset by an increase in revenue or a decrease in direct spending. In terms of revenue, PAYGO is designed to control revenue reductions. If revenue is estimated to be reduced through a reduction in tax rates of any kind or other effects on revenue collected by the Federal Government, that effect on the deficit must be offset either through increased tax rates or increase in revenue collection elsewhere, or spending reductions of the same amount.


History


Statutory PAYGO (1990–2002)

In the initial PAYGO regimen, enacted in the Omnibus Budget Reconciliation Act of 1990 (OBRA '90), by statutory requirement, if legislation enacted during a session of Congress had the effect of increasing the projected debt for the following year, a "sequestration" would be triggered. A sequestration is an across the board spending reduction of non-exempt mandatory programs to offset this increase in the deficit, as calculated by the Office of Management and Budget. These rules were in effect from FY1991–FY2002. Enacted in 1990, it was extended in the Omnibus Budget Reconciliation Act of 1993 and the
Balanced Budget Act of 1997 The Balanced Budget Act of 1997 () was an omnibus legislative package enacted by the United States Congress, using the budget reconciliation process, and designed to balance the federal budget by 2002. This act was enacted during Bill Clinton's ...
. In FY 1991, the Federal deficit was 4.5% of GDP, and by FY 2000, the Federal surplus was 2.4%. Historical Budget Tables, Budget of the United States Government, Fiscal Year 2008, page 26 Total Federal spending as a percentage of GDP decreased each year from FY1991 through FY 2000, falling from 22.3% to 18.4%. Deficits, though, returned by the last year PAYGO was in effect: There was a "return to deficits ($158 billion, 1.5% of GDP) in 2002". Beginning in 1998, in response to the first federal budget surplus since 1969, Congress started enacting, and the President signing, increases in discretionary spending above the statutory limit using creative means such as advance appropriations, delays in making obligations and payments, emergency designations, and specific directives.http://www.cbo.gov/ftpdoc.cfm?index=4032&type=0&sequence=7 The Budget and Economic Outlook: Fiscal Years 2004-2013, Appendix A, The Expiration of Budget Enforcement Procedures: Issues and Options While staying within the technical definition of the law, this allowed spending that otherwise would not be allowed. The result was emergency spending of $34 billion in 1999 and $44 billion in 2000.


PAYGO not in effect (2003–2006)

The PAYGO statute expired at the end of 2002. After this, Congress enacted President George W. Bush's proposed 2003 tax cuts (enacted as the Jobs and Growth Tax Relief Reconciliation Act of 2003), and the
Medicare Prescription Drug, Improvement, and Modernization Act The Medicare Prescription Drug, Improvement, and Modernization Act, also called the Medicare Modernization Act or MMA, is a federal law of the United States, enacted in 2003. It produced the largest overhaul of Medicare in the public health progr ...
. The White House acknowledged that the new Medicare prescription drug benefit plan would not meet the PAYGO requirements: After the expiration of PAYGO, budget deficits returned. The federal surplus shrank from $236.2 billion in 2000 to $128.2 billion in 2001, then a $157.8 billion deficit in 2002—the last year statutory PAYGO was in effect. The budget deficit increased to $377.6 billion in 2003 and $412.7 billion in 2004. The federal budget deficit excluding trust funds was $537.3 billion in FY2006. In the first 6 years of President Bush's term, with a Republican controlled Congress, the federal debt increased by $3 trillion. The public debt continued to grow after Democrats gained control of Congress on January 3, 2007. At the end of the Bush Administration, public debt had nearly doubled from when President Bush took office in January 2001, to January 2009.


PAYGO as House rule (2007–2010)

The PAYGO system was reestablished as a standing rule of the House of Representatives (Clause 10 of Rule XXI) on January 4, 2007 by the Democratic-controlled 110th Congress: Less than one year later though, facing widespread demand to ease looming tax burdens caused by the Alternative Minimum Tax, Congress abandoned its pay-go pledge. The point of order was also waived for the Economic Stimulus Act of 2008 which included revenue reducing provisions and increases in spending that increased the deficit, which paygo was designed to prevent. It was again waived in May 2008, upon the consideration of the
2007 U.S. Farm Bill The Food, Conservation, and Energy Act of 2008 (, also known as the 2008 U.S. Farm Bill) was a $288 billion, five-year agricultural policy bill that was passed into law by the United States Congress on June 18, 2008. The bill was a continuation ...
by the House of Representatives. In this last bill, the advocates of the measure claimed that it was in compliance. However, the Rules Committee issued a report indicating at least a technical violation: "While there is a technical violation of clause 10 of rule XXI
aygo The Toyota Aygo is a city car (A-segment) marketed by Toyota mainly in the European market between 2005 and 2021 across two generations. The Aygo was first displayed at the 2005 Geneva International Motor Show. It was built alongside the relate ...
the conference report complies with the rule by remaining budget neutral with no net increase in direct spending." At the beginning of the 111th Congress, PAYGO was modified by including an "emergency" exemption. This designation was provided for the American Recovery and Reinvestment Act of 2009, which increased the deficit and increased the public debt limit to $12.104 trillion. Both direct spending in the bill and tax cuts, as passed by the Democratic-controlled Congress and signed by President Barack H. Obama, were exempted from the PAYGO rule under section 5(b) of the Act. The establishment of the House PAYGO Rule, and a similar Rule in the Senate, did not prevent the deficit from growing to $1.42 trillion for fiscal year 2009. The PAYGO point of order does not apply to "direct spending" if it is incorporated into an annual or supplemental appropriations spending bill. The difference between direct spending and annual appropriations is that the former becomes permanent law with U.S. government spending on various entitlements that continues until the government acts to increase or reduce it. An annual appropriation bill provides spending authority to the government for a project or program that only lasts a year. PAYGO was designed to apply to direct spending only. So, a way of circumventing the point of order is to include the direct spending increases in an annual appropriation bill, which was done for the Supplemental Appropriations Act of 2009.


Return of statutory PAYGO (2010–present)

On February 12, 2010, Obama signed statutory PAYGO rules into law.


Social insurance

In social insurance, PAYGO refers to an unfunded system in which current contributors to the system pay the expenses for the current recipients. In a pure PAYGO system, no reserves are accumulated and all contributions are paid out in the same period. The opposite of a PAYGO system is a funded system, in which contributions are accumulated and paid out later (together with the interest on it) when eligibility requirements are met.


U.S. Social Security

An important example of such a PAYGO system in this second sense is
Social Security Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specifical ...
in the U.S. In that system, contributions are paid by the currently employed population in the form of the Federal Insurance Contributions Act tax (FICA), while recipients are mostly individuals of at least 62 years of age. Social Security is not a pure PAYGO system, because it accumulates excess revenue in the Old-Age, Survivors, and Disability Insurance Trust Funds (
OASDI In the United States, Social Security is the commonly used term for the federal Old-Age, Survivors, and Disability Insurance (OASDI) program and is administered by the Social Security Administration (SSA). The original Social Security Ac ...
).


See also

* Generational accounting * Statutory Pay-As-You-Go Act of 2010


References


External links


Transition to Accrual Accounting -- IMF Technical Guidance Note, 2007
{{DEFAULTSORT:Paygo Government finances in the United States United States federal budgets United States federal legislation