Pay-As-You-Go Rules in the Federal Budget Process

Pay-As-You-Go Rules in the Federal Budget Process

Order Code RS20006
Updated March 5, 2001
CRS Report for Congress
Received through the CRS Web
Pay-As-You-Go Rules in
the Federal Budget Process
Bill Heniff Jr.
Consultant in American National Government
Government and Finance Division
The pay-as-you-go (PAYGO) rules in the federal budget process require that new
direct spending and revenue legislation be deficit neutral. The net effect of all such
legislation enacted during a session must not cause a net increase in the budget deficit (or
a net decrease in the budget surplus). If direct spending or revenue legislation causes an
increase in the deficit, it must be offset by an equivalent amount of direct spending
reductions, revenue increases, or a combination of both.
The Budget Enforcement Act (BEA) of 1990 (title XIII of P.L. 101-508) established
the PAYGO procedures for the purpose of preserving the deficit reduction achieved in
legislation of that year. The PAYGO rules are intended to hold Congress and the
President accountable for any projected increase in the deficit due to legislative action, but
not for the actual amount of the deficit which could be affected by factors outside their
immediate control, such as economic or demographic changes. The 1990 BEA also
created separate statutory limits on discretionary spending funded through the annual
appropriations process. For more information on the discretionary spending limits, see
CRS Report RS20008, Discretionary Spending Limits.
The PAYGO process is not tied to any specific level for the deficit (or surplus). Even
with a budget surplus, the PAYGO process is applicable to any legislation affecting direct
spending or revenues. For more on the applicability of this process under a budget
surplus, see CRS Report 98-97, The Budget Enforcement Act: Fact Sheet on Its
Operation under a Budget Surplus.
Initially, the 1990 BEA applied PAYGO rules to new direct spending and revenue
legislation enacted through FY1995. In 1993, Congress and the President extended these
rules to new legislation enacted through FY1998. Most recently, the PAYGO rules were
extended by the 1997 Budget Enforcement Act (title X of P.L. 105-33) to apply to
legislation enacted through FY2002.
Enforcing PAYGO Rules
PAYGO rules are enforced primarily by sequestration—an automatic mechanism
whereby budgetary resources are canceled by the amount of any violation. In addition, the
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Senate has established a point of order, effective through FY2002, that augments the
statutory PAYGO rules (discussed below).
The sequestration process was established by the Balanced Budget and Emergency
Deficit Control Act of 1985 (title II of P.L. 99-177), commonly referred to as Gramm-
Rudman-Hollings, and it was applied to the enforcement of PAYGO rules by the 1990
BEA. A sequestration is triggered automatically when the net effect of new direct
spending or revenue legislation enacted in the current and immediately prior session of
Congress causes an increase in the deficit (or a reduction in the surplus). If the Office of
Management and Budget (OMB) director determines in the final sequestration report that
a sequestration is necessary, the President is required to issue a sequestration order
reducing most, but not all, nonexempt direct spending programs by a uniform percentage
offsetting the amount of the net deficit increase. Certain exceptions exist limiting the
percentage amount of any reduction for some programs, such as Medicare.
The BEA requires OMB and the Congressional Budget Office to issue sequestration
reports advising Congress and the President of the effect of new direct spending and
revenue legislation on the deficit. OMB must provide Congress with an estimate of the
net deficit effect of new direct spending and revenue legislation within seven days after its
enactment. In addition, OMB is required to maintain a PAYGO scorecard keeping track
of the cumulative impact of all enacted legislation. However, the only report that can
automatically trigger a PAYGO sequestration order is the final sequestration report issued
by the OMB director 15 days after the end of the session.
Social Security benefits, federal deposit insurance guarantee commitments, and any
direct spending or revenue legislation the President and Congress designate as an
emergency requirement are excluded from PAYGO estimates.
While the PAYGO rules apply to direct spending and revenue legislation enacted
through FY2002, the sequestration process enforcing the PAYGO rules continues until
FY2006. If direct spending or revenue legislation enacted before the end of FY2002
causes a net increase in the deficit for any fiscal year through FY2006, a sequestration
would occur for that year to eliminate the deficit increase.
Similar PAYGO rules are enforced procedurally in the Senate. A freestanding point
of order under H.Con.Res. 68 (106th Congress), the FY2000 budget resolution, may be
raised against any direct spending or revenue legislation that would violate the pay-as-you-
go requirements by increasing or causing an on-budget deficit for the first fiscal year, the
period of the first five fiscal years, or the following five fiscal years, covered by the most
recently adopted budget resolution. However, this point of order is not self-enforcing like
the sequestration process; a Senator must raise the point of order against any violating
legislation. In addition, the Senate may waive this point of order by a three-fifths vote
under procedures established by section 904 of the Congressional Budget Act, or by
unanimous consent.