Congress Says No-No to PAYGO

Blog Post
Thursday, December 09, 2021

What began as a tense week of dangerous brinkmanship over the debt limit in Congress is ending with a surprising burst of bicameral cooperation and bipartisanship. House and Senate leaders hammered out a deal that would allow Democrats to raise the statutory debt limit without threat of a Senate filibuster—and by an amount that would table the issue until after the 2022 midterm elections. Another crisis averted, whew!

By most accounts, fiscal watchdogs should applaud. The statutory debt limit is a remnant of a bygone era that lawmakers have irresponsibly weaponized for political leverage while cloaking themselves in faux indignation over the government’s mounting debt. That Congress willingly suspended the threat of default (for up to a year) without inflicting additional trauma should be reason to celebrate.

But lifting the hood on this legislation reveals a stinging defeat for fiscal responsibility. Once again, Republicans and Democrats postponed billions in required savings mandated by Congress’ own budget enforcement rules in exchange for what will probably be an historic increase in the debt limit. The challenge of putting projected deficits and debt on a sustainable long-term path is made even harder when lawmakers refuse to hold themselves accountable to the very fiscal rules they write. 

A Tale of Two Sequesters

The Statutory Pay-As-You-Go Act of 2010 (PAYGO) was enacted during a similarly tense debt limit battle. After billions of taxpayer dollars were necessarily spent on economic support programs during the 2008-2009 Great Recession, Congress adopted PAYGO alongside a $1.9 trillion increase in the federal debt limit. The objective of PAYGO is budget neutrality. It uses the threat of sequestration (an across-the board cancellation of certain enacted spending) to ensure that new mandatory spending and revenue legislation, on average, does not add to projected baseline budget deficits. 

Specifically, PAYGO directs the Office of Management and Budget (OMB) to average the 5- and 10-year budgetary effects of enacted bills, apportion those amounts over the budget window, and keep a running total on scorecards. If on net at the end of a session of Congress there is a positive balance on either scorecard in the current fiscal year, OMB orders a sequester to eliminate the balance (unless Congress intervenes). Certain safety net programs like Social Security, veterans’ benefits, and income-support programs are exempt from aPAYGO sequester. Medicare reimbursements to health care providers, however, are subject to a PAYGO sequester, but the law caps Medicare provider reductions at 4 percent. 

Like PAYGO, the Budget Control Act of 2011 (BCA) emerged from a high-profile debt limit showdown and introduced yet another sequester (see a pattern?). In exchange for a $2.1 trillion increase in the debt limit disbursed in three tranches ($400 billion, $500 billion, $1,200 billion), Republicans secured a decade of caps on discretionary spending and empaneled a bipartisan Joint Select Committee on Deficit Reduction (the Joint Committee) charged with finding an additional $1.5 trillion savings over the next 10 years. When the Joint Committee failed to agree on any savings, the BCA imposed even more stringent discretionary spending caps and a decade of sequesters on certain mandatory spending programs. Like PAYGO, safety net programs are exempt from the annual BCA mandatory sequester. However, reductions in Medicare reimbursements to health care providers are capped at 2 percent.

Unlike PAYGO which has no expiration date, the annual BCA sequesters were scheduled to end after FY 2021, but legislation enacted since 2011 has extended the yearly reductions multiple times as an offset to other health-related spending increases. Currently, the BCA mandatory sequester has been extended through 2030. 

While the BCA sequester of mandatory spending has been imposed every year since 2013, Congress has never permitted a PAYGO sequester to take effect. For example, when the Republican tax reform bill of 2017 would have triggered a PAYGO sequester, Republicans and Democrats joined hands to cancel it. In fact, since 2018 Congress has enacted bipartisan legislation that shifted or wiped out the PAYGO scorecard balances five separate times. 

PAYGO and BCA in 2021

Earlier this year, I wrote about twin sequesters that could affect federal spending in 2021: a $22 billion mandatory spending sequester imposed by the BCA, and a much larger mandatory spending sequester triggered by enactment of the Democrats COVID-related reconciliation bill (The American Rescue Plan Act) and imposed by PAYGO. 

Among other mandatory program savings, both sequesters would extract Medicare savings by reducing reimbursements paid to health care providers (physicians, hospitals, medical device providers, labs, pharmaceutical companies, etc.). The sequesters would not affect Medicare benefits or cost-sharing amounts paid by beneficiaries.

Earlier this year, Congress delayed imposition of the estimated $20 billion BCA sequester until December 31, 2021, but no action was taken on the approximately $380 billion PAYGO sequester because the matter wasn’t imminent. Now that the House and Senate are approaching the end of the first session of the 117th Congress, however, both sequesters are just weeks away.

The Debt Limit Deal 

The debt limit deal (S.610) would create a one-time fast-track process in the Senate whereby Democrats could pass (in a separate stand-alone bill) a numerical increase in the statutory debt limit, as opposed to a mere suspension, with a simple majority, exempting this one-time legislation from the Senate’s filibuster. 

In addition, S.610 would suspend the $22 billion BCA sequester for the first three months of 2022 and then impose only half of the required reduction in the second three months. The measure would also transfer the balances on the 5- and 10-year PAYGO scorecards from FY 2022 into FY 2023, essentially delaying the FY 2022 PAYGO sequester.

Too Big to Handle

In an earlier letter to House Republican Leader Kevin McCarthy (CA-23) following passage of the Democrats’ $1.9 trillion American Rescue Plan Act, Congressional Budget Office director Phil Swagel wrote that the final PAYGO sequester would probably be too large to implement:

"Without enactment of subsequent legislation that would offset the deficit increase, waive the recordation of the bill's effects on the scorecard, or otherwise mitigate or eliminate the statutory PAYGO requirements, OMB would be required to issue a sequestration order within 15 days of the end of the Congressional session to reduce spending in fiscal year 2022 by $381 billion, CBO estimates. However, the PAYGO law limits reductions in Medicare spending to four percentage points (or an estimated $36 billion for that year), leaving $345 billion to be sequestered from the remaining mandatory accounts. Because the law entirely exempts many large accounts, including low-income programs and Social Security, in CBO's estimation, the annual resources available from which OMB must draw would total between $80 billion and $90 billion -- significantly less than the amount that would require to be sequestered.

Because the required reduction in spending would exceed the estimated amount of available resources in each year over the next 10 years, in the absence of further legislation, OMB would be unable to fully implement the outlay reductions required by the PAYGO law."

But given the alarming trajectory of future deficits and debt, rather than “postponing” the FY 2022 PAYGO sequester (which history suggests Congress probably has no intention of implementing…ever) lawmakers could and should have apportioned the mandated savings over the next several years. Instead, the current solution creates a sequester so large in 2023 (more than $770 billion at this point) that the only recourse will be to zero out the scorecard altogether or roll the 2023 balance into 2024…again. 

A Bitter Irony

Both PAYGO and the BCA—and the sequesters they impose—were enacted to smooth passage of large and politically problematic increases in the statutory debt limit. In a twist only Hollywood could imagine, it is more than ironic that Congress would moderate or “suspend” (read: cancel) these mandated savings to smooth passage for an even larger, more politically problematic increase in the federal debt limit today. 

It’s time for Congress to stop saying no-no to PAYGO.