2.2: PAYGO

[Impose] tougher pay-as-you-go budget rules.

Other Information:

A pay-as-you-go (often referred to as PAYGO) rule would apply to entitlements and other mandatory programs. PAYGO would require that the spending resulting from new or expanded mandatory spending be paid for either with new revenue increases or new mandatory spending cuts. Similarly, changes to existing laws to cut taxes would need to be offset with revenue increases or mandatory spending cuts. PAYGO rules generally apply for as many years as the new spending increase or revenue reduction would last—up to the full 10-year period used by Congress for projections. A temporary, or one-year tax cut, for example, would have to be offset for that one year only, while a permanent expansion of eligibility for an entitlement program or tax cut would have to be offset over the next 10 years. If all of the changes enacted during the year to mandatory spending or revenues were not sufficiently offset, an across-the board reduction would be applied to mandatory spending programs to correct the shortfall. PAYGO would not apply to changes in spending or revenues that result from unanticipated economic or other factors. For example, PAYGO would not apply if rising unemployment led to more benefit claims, but it would apply if the Congress and President enacted a law to raise the benefit levels or make them available for a longer period of time. The Congress and the President recently enacted a form of PAYGO. This new law, however, exempted many costly policy changes, including extension of the 2001 and 2003 tax cuts for all but higher-income taxpayers and upward adjustments to Medicare payments to physicians. Many budget experts propose a strict PAYGO rule that would apply to all changes to current law affecting entitlement and mandatory programs and revenues. Others argue in favor of PAYGO that would apply only to proposed spending changes. However, exempting tax changes from PAGYO might encourage lawmakers to rely more on tax expenditures to extend benefits, and a broader PAYGO would be more likely to promote fiscal restraint than one that exempts only certain types of changes, either to revenue or spending laws.

Stakeholder(s):

• Congress


• The President

Indicator(s):

Indicator:1

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