PAYGO

From Wikipedia, the free encyclopedia

PAYGO (pay-as-you-go) is a term used to refer to financing where budgetary restrictions demand paying for expenditures with funds that are made available as the program is in progress.

Contents

[edit] Budgeting

The PAYGO or pay-as-you-go rule compels new spending or tax changes to not add to the federal deficit. New proposals must either be "budget neutral" or offset with savings derived from existing funds. [1] 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.

[edit] Theory Explained

PAYGO is best explained in an analogy of a supermarket that doesn't accept credit cards. When the customer sees something they want to buy, they take the item to the clerk, open their wallet, take out money, and pay for the item - which they then own and can take home with them. If when they open up their wallet they see no money inside, they either don't get to purchase the item, or it is not sold to them because they don't have the money. They would then need to find a way to put more money in their wallet to pay for the item before purchasing the item.

[edit] U.S. Congress

An important example of such a PAYGO system in this first sense is the use of PAYGO rules in the United States Congress. First enacted as part of the Budget Enforcement Act of 1990 (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 deficit spending. Direct spending largely comprises "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. In terms of revenue, PAYGO largely is designed to control tax reductions. If revenue is estimated to be reduced through a reduction in tax rates of any kind, that effect on the deficit must be offset either through increased revenue collection elsewhere, or spending reductions of the same amount.

In the initial PAYGO regimen, enacted in the Omnibus Budget Reconciliation Act of 1990 (OBRA '90), by statutory requirement, any increases in the deficit were to be offset by an across the board "sequestration" of programs. This means an automatic cut in non-exempt mandatory spending programs -- this was calculated by the Office of Management and Budget at the end of the year.

These rules were in effect from FY1991-FY2002 [2] and are widely seen as having assisted the US Congress in maintaining budget discipline. In FY 1991 the Federal deficit was 4.5% of GDP, by FY 2000 the Federal surplus was 2.4%. [3] Total Federal spending as a percentage of GDP decreased each and every year from FY1991 through FY 2000, falling from 22.3% to 18.4%. [4]

In 1998, in response to the first federal budget surplus since 1969, Congress started increasing discretionary spending above the statutory limit using creative means such as advance appropriations, delays in making obligations and payments, emergency designations, and specific directives. [5] While staying within the technical definition of the law, this allowed "emergency" spending that otherwise would not be allowed. The result was emergency spending of $34 billion in 1999 and $44 billion in 2000. In 2001 that amount jumped to $700 billion, most of which came from the 2001 tax cut (Economic Growth and Tax Relief Reconciliation Act of 2001). [6] In 2001 Congress began removing discretionary spending by statute from the PAYGO scorecard. Those amounts were $90 billion in 2001, $65 billion in 2002, $127 billion in 2003, $150 billion in 2004, $142 billion in 2005, and $144 billion in 2006. [7]

The PAYGO rules were allowed to lapse in the House and watered down in the Senate, which made it easier for lawmakers to approve President George W. Bush's tax cuts and a Medicare prescription drug plan. The White House admitted that the Medicare prescription drug plan would not meet the PAYGO requirements:

Any law that would reduce receipts or increase direct spending is subject to the PAYGO requirements of the Balanced Budget and Emergency Deficit Control Act and could cause a sequester of mandatory programs in any fiscal year through 2006. The requirement to score PAYGO costs expires on September 30, 2002, and there are no discretionary caps beyond 2002. Preliminary CBO estimates indicate that the bill would increase direct spending by $340 billion over the next ten years. The Administration will work with Congress to ensure fiscal discipline consistent with the President's Budget and a quick return to a balanced budget. The Administration also will work with Congress to ensure that any unintended sequester of spending does not occur. [8]

With the gutting, then abandonment, of PAYGO, budget deficits returned. The federal surplus shrunk from $236.2 billion in 2000 to $128.2 billion in 2001, then a $157.8 billion deficit in 2002. The deficit increased to $377.6 in 2003 and $412.7 billion in 2004. [9] The federal deficit excluding trust funds was $537.3 billion in FY2006. [10] In the first 6 years of President Bush's term, with a Republican controlled Congress, the federal debt increased by $3 trillion. [11] [12]

The PAYGO system was reestablished as a standing rule of the House of Representatives (Clause 10 of Rule XXI) on January 4th 2007 by the 110th Congress: [13] [14][15]

It shall not be in order to consider any bill, joint resolution, amendment, or conference report if the provisions of such measure affecting direct spending and revenues have the net effect of increasing the deficit or reducing the surplus for either the period comprising the current fiscal year and the five fiscal years beginning with the fiscal year that ends in the following calendar year or the period comprising the current fiscal year and the ten fiscal years beginning with the fiscal year that ends in the following calendar year. [16]

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. [17] 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 of 2008, upon the consideration of the 2007 U.S. Farm Bill by the House of Representatives. In this last bill, the advocates of the measure claimed that it was in compliance, even though it was clearly not. In fact the Rules Committee issued a report with the following: "While there is a technical violation of clause 10 of rule XXI [paygo], the conference report complies with the rule by remaining budget neutral with no net increase in direct spending."[18]

The paygo point of order does not apply to "direct spending" if it is incorporated into an annual 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 one 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 Spending Act of 2008.[19]

[edit] 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.

[edit] U.S. Social Security

An important example of such a PAYGO system in this second sense is Social Security in the U.S. In that system, contributions are paid by the currently employed population in the form of a payroll tax, also called the FICA tax, which stands for the "Federal Insurance Contributions Act", 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 so-called Trust Funds, officially known as the Old-Age, Survivors, and Disability Insurance Trust Funds (OASDI).

[edit] Explanation

These kind of PAYGO systems can be implemented quickly, because no reserves are necessary to finance the expenses of the first generation of recipients. However, these windfall gains of the first generation have to be financed by following generations. By paying the expenses of generation t, the following generation t+1 relies on future contributions of generation t+2 to cover its expenses. In this fashion, the windfall gains of the first generations are passed along over generations and, hypothetically, the last generation would have to finance its own expenses and that of the preceding generation.

[edit] References

  1. ^ C-SPAN Congressional Glossary
  2. ^ http://budget.house.gov/analyses/08paygo_validation.pdf Background on Pay-As-You-Go]
  3. ^ http://www.whitehouse.gov/omb/budget/fy2008/pdf/hist.pdf Historical Budget Tables, Budget of the United States Government, Fiscal Year 2008, page 26
  4. ^ http://www.whitehouse.gov/omb/budget/fy2008/pdf/hist.pdf Historical Budget Tables, Budget of the United States Government, Fiscal Year 2008, page 26
  5. ^ 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
  6. ^ 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
  7. ^ 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
  8. ^ H.R. 4954 - Medicare Modernization and Prescription Drug Act of 2002 sent on 06/27/2002
  9. ^ http://www.whitehouse.gov/omb/budget/fy2008/pdf/hist.pdf Historical Budget Tables, Budget of the United States Government, Fiscal Year 2008, page 26
  10. ^ http://www.whitehouse.gov/omb/budget/fy2008/pdf/hist.pdf Historical Budget Tables, Budget of the United States Government, Fiscal Year 2008, page 28
  11. ^ ftp://ftp.publicdebt.treas.gov/opd/opds012001.prn MONTHLY STATEMENT OF TREASURY SECURITIES OF THE UNITED STATES JANUARY 31, 2001
  12. ^ ftp://ftp.publicdebt.treas.gov/opd/opds012007.prn MONTHLY STATEMENT OF THE PUBLIC DEBT OF THE UNITED STATES JANUARY 31, 2007
  13. ^ http://www.bloomberg.com/apps/news?pid=20601087&sid=a3oUW7DXSJQg&refer=home House Approves Democratic `Pay-Go' Spending-Control Measure
  14. ^ http://www.cbpp.org/1-12-07bud.htm THE NEW PAY-AS-YOU-GO RULE IN THE HOUSE OF REPRESENTATIVES by Richard Kogan
  15. ^ Committee on Rules
  16. ^ http://www.rules.house.gov/110/text/110_Hres6.pdf 110th Congress 1st Session H. RES. 6 Adopting the Rules of the House of Representatives for the One Hundred Tenth Congress.
  17. ^ Pay Go, Pay Gone: AMT Drives Senate Dems to Blink
  18. ^ http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_reports&docid=f:hr629.110.pdf
  19. ^ THOMAS (Library of Congress)

[edit] External Links

Languages