PAYGO is an Important Standard

Blog Post
Wednesday, October 18, 2017

Most people agree that current fiscal policies are unsustainable. It is thus a matter of common sense to require those who want to enact new tax cuts or entitlement expansions -- both of which would enlarge the structural deficit -- to put forward spending cuts or tax increases to pay for them. This is the simple concept behind PAYGO (shorthand for Pay-As-You-Go). Following this concept forces explicit trade-offs among spending, taxes and debt, which is exactly the priority-setting exercise that the budget process should facilitate.

PAYGO does not prevent Congress from passing tax cuts and entitlement spending increases. Rather, it simply requires that if Congress does such things, it must do so in a deficit-neutral way. Given the dire fiscal outlook over the next 10 years and beyond, this should not strike anyone as an unreasonable burden. Indeed, it seems a minimum, reasonable requirement. 

PAYGO first appeared in the Budget Enforcement Act of 1990 (BEA) as a way to prevent the unraveling of a major deficit-reduction package enacted by Congress and President George H.W. Bush. It established a statutory requirement that any legislation to lower revenues or expand mandatory (“entitlement”) spending be offset with revenue increases or entitlement spending cuts. Violations were to be enforced through automatic cuts in non-exempt programs.

The concept largely succeeded in its goals, with policymakers achieving the first budget surplus in decades by 1998. Unfortunately, all that extra cash burned a hole in the pockets of policymakers. Commitment to PAYGO and fiscal discipline began to deteriorate and the law implementing it expired in 2002. As deficits subsequently ballooned, policymakers and the public began to be concerned about deficits once again. A new PAYGO law was passed in 2010, although in a weaker form than the original and with additional exempt programs.

Some argue that PAYGO should only apply to spending increases and not tax cuts. This would be a mistake. Fiscal discipline is a commitment that must apply to the budget as a whole to be effective. Any legislation that would increase the deficit should be part of the enforcement mechanisms. Since spending and tax decisions both affect the bottom line, there is no compelling reason to exempt either from enforcement rules.

Moreover, exempting tax cuts from PAYGO would encourage an expansion of so-called “tax expenditures” in which benefits are funneled through the tax code rather than by direct spending. Tax expenditures distort economic decision-making and already substantially reduce federal revenue. Finally, exempting tax cuts from PAYGO would encourage the false notion that debt is a painless alternative to taxes.

In a time of expanding deficits, PAYGO is common sense. It does not, by itself, reduce the deficit but it promotes fiscal responsibility by requiring anyone who proposes a tax cut or entitlement expansion to answer the question: “Can we afford it?” Forcing an answer to this simple question is perhaps the most important thing politicians can do immediately to stop digging the fiscal hole deeper.