Today, President Obama held a press conference with Congressional leaders to announce his support for enactment of a statutory pay-as-you-go (PAYGO) budgeting rule.
The Obama administration’s proposal looks to build off the PAYGO rules put in place during the 1990s. Similar to them in design, the Office of Management and Budget (OMB) would keep a running scorecard for the costs associated with enacted legislation for each year through 2014 and compare those costs to the established baseline. If the scorecard found the cumulative effect of enacted legislation to increase the deficit, OMB would be required to reduce spending in certain non-exempt mandatory programs to balance the difference -- a process called sequestration. Although sequestration under PAYGO was never actually ordered in the 1990's, the existence of this automatic trigger provides some incentive for members of Congress to be fiscally disciplined.
While PAYGO has recently been in place for a few years, it has only existed as a congressional rule which has often been waived or ignored for legislation requiring politically difficult trade-offs. The proposal that President Obama put forward, and that the Blue Dog Coalition in the House of Representatives have been championing for years, restores the teeth to PAYGO in a way that makes it one of the few federal budget process levers that has a history of helping to keep members of Congress accountable. The strengthened PAYGO also happens to be one policy objective that we have consistently urged policymakers to take up.
The President's plan is concerning, however, as it alters the baseline for official PAYGO scorekeeping to exempt $3.5 trillion in deficit increasing policies over the next ten-years. As proposed, the President’s statutory PAYGO rules would make use of a “current policy” baseline instead of the “current law” baseline. Compared to current law, the use of a “current policy” baseline would assume costly policy options -- annual AMT relief, extension of the 2001 and 2003 tax cuts, and Medicare physician payment cut avoidance. Although all of these decisions will require action by Congress and a signature from the President, their extension is simply assumed in this new baseline -- disguising the costs associated with these policies and avoiding the "teeth" of the proposed PAYGO law.
Certainly, we are encouraged by today's announcement, but recognize that even if statutory PAYGO is enacted, it does nothing to address the underlying fiscal outlook which remains unsustainable. For this, budget process changes cannot do the heavily lifting alone. As current OMB Director Peter Orszag (then CBO Director) testified before the House Budget Committee in 2007:
Even if PAYGO rules were fully effective in achieving their objective—offsetting the budgetary impact of policy changes—they would succeed only in preventing further deterioration of the long-term fiscal imbalance that exists under current policies. The nation faces a substantial long-term budget challenge even if no further policies were adopted that would expand future budget deficits, and PAYGO rules do not address that underlying fiscal problem.