Before the fights over next year’s budget even begin, congressional Democrats have taken a concrete step toward getting control of federal budget deficits by reinstating a pay-as-you-go rule. The idea is simple: If someone wants to expand entitlement spending or cut taxes, they have to find the money to pay for it — either by increasing other taxes or trimming existing entitlements.
The rule, known as PAYGO, has worked in the past. When it was first adopted in 1990, PAYGO played a significant role in turning a 30-year string of deficits into surpluses later that decade.
But adoption of PAYGO alone, which President Obama signed into law Feb. 12, won’t begin to fix the government’s long-term imbalance between revenues and spending as it did during the George H.W. Bush and Bill Clinton administrations. But it could help.
"By the end of the 1990s, the budget was in surplus for the first time in 30 years; and it was clear that budget process rules like PAYGO played a big part in our success," said House Budget Committee Chairman John M. Spratt Jr., D-S.C., hailing the return of PAYGO.
What PAYGO did was to prevent deficit reduction efforts from being undermined by tax cuts or new entitlements, such as the Medicare drug program proposed by President George W. Bush. That program passed in 2003 without any means to pay for it.
Back in the 1990s, however, government spending on medical care was much lower than now, and defense outlays were set to fall with the end of the first Gulf War.
Even so, ending deficits was not easy. It took two rounds of tax increases, primarily on upper-income earners, an extended period of spending restraint with specific dollar caps on discretionary spending, and a booming economy to do the trick.
PAYGO initially may be less useful in today’s tougher budget environment, as one of the largest demographic groups in the country — baby boomers — begins to draw from two entitlement wells: Social Security and Medicare.
Add to this a set of exemptions, and PAYGO loses some of its clout. These include extending the middle-class portions of the Bush-era tax cuts; temporary adjustments in the Alternative Minimum Tax; extending a block on cuts in Medicare payments to doctors; and restoring the estate tax to its 2009 rates for two years.
But lawmakers seeking new "stimulative" tax cuts will have to find a way to skirt PAYGO, or offset their costs elsewhere in the budget — a point that one of their biggest advocates has acknowledged.
"Entitlement increases and tax cuts need to be paid for," President Obama said last June in calling for a new PAYGO law. "They're not free, and borrowing to finance them is not a sustainable long-term policy."