PAYGO

June 25 - OMB Director Peter Orszag testified this morning before the House Budget Committee regarding the Obama Administration's support of the Statutory PAYGO Act of 2009. According to Director Orszag, the new PAYGO law would require spending reductions or revenue increases for any new tax or entitlement legislation and would strengthen the overall budget process. Orszag also noted that PAYGO "tells Congress and the Administration that their minimum duty is not to make the existing multiyear structural deficit any worse than it already is."

At the same time, Orszag noted that four policy areas would be exempt under the new PAYGO legislation: the Medicare sustainable growth rate formula (SGR), the estate tax, the Alternative Minimum Tax (AMT), and the 2001 and 2003 income tax reductions. CRFB argued on June 9 however, that exempting these items from the PAYGO proposal largely undermined the purpose of the bill. Instead, CRFB proposed extending PAYGO to cover all non-discretionary non-emergency legislation and advocates for additional discretionary spending caps.

June 24 - Alan J. Auerbach and William G. Gale have recently released an updated version of their paper "The Economic Crisis and the Fiscal Crisis: 2009 and Beyond." The paper notes three different policy approaches to the current budget: the CBO estimate which upholds current laws and allows others to expire, an adjusted baseline which continues the Bush Administration's policies, and the current administration's budget proposal. Auerbach and Gale estimate the long-term fiscal gap for the CBO estimate to be between 4 and 6 percent of GDP and project the gap to be between 7 and 9 percent in the other two approaches. The authors noted,

"Although huge deficits are not desirable in the short term, they are nonetheless understandable. Once the economy recovers, though, the need to impose fiscal discipline - which used to be considered a "long term" problem - will be a short-term and urgent problem that will require difficult choices that policy makers have so far refused to make."

June 19 - The House and Senate passed the FY 2009 war supplemental this week and the bill is now headed to the President's desk for signature.   Since 2001, funding for military operations in Afghanistan and Iraq have been funded through supplemental bills and have been excluded from the regular Department of Defense budget requests.  In its FY 2010 Budget, the Obama Administration ended this practice and included the war costs in its request for DOD. Time will tell if this is the last war supplemental that President Obama signs.

In addition, the war supplemental faced one final hurdle: a budget hawk.  Senator Judd Gregg, the ranking member of the Senate Budget Committee, raised a point of order against the bill for the inclusion of the "cash for clunkers" legislation. This legislation, with its accompanying $1 billion appropriation, would give vouchers to car buyers who trade-in their current vehicles for more fuel efficient ones.  

Gregg did not object to the "cash for clunkers" bill per se, but to its late appearance in the supplemental appropriations bill.  The legislation was not in either the House or Senate original versions and was added by the House in conference. 

Gregg used a new provision of the Senate's standing rules that prohibits the inclusion of any congressionally directed spending or targeted tax cuts in a bill without identification of its author.  He argued that this type of maneuver (a frequent tactic in omnibus and supplemental appropriations bills) contradicted the recent discussions about transparency and for pay-as-you go legislation.  In particular, he criticized the House leadership for slipping this authorization legislation with no offsets into a bill the week it announced its commitment to statutory PAYGO.   

June 10 - CRFB's press release on PAYGO is here. In a nutshell: we support the concept; we don't like the loopholes for the 2001/2003 tax cuts, patching the AMT, updating physician's payments in Medicare, and modifying the estate tax; we think PAYGO should be accompanied by discretionary spending caps; and what is really needed is a budget deal. We express some concern over the ten-year time period here.

Some in the administration and elsewhere have suggested that being a "PAYGO purist" is counter-productive. Since we know Congress is going to make exceptions for at least a large chunk of these specified policies - the argument goes - it is better to carve them out of PAYGO legislation to avoid the situation where the policy is lifted and thus weakened, leading to it being ineffective in protecting against deficit-financing for other policies. We agree that if PAYGO were waived for tax extensions, AMT, or Medicare pay patches, it could easily make it more difficult to ensure it apply to new policies added to the agenda.

However, as we argued with the Center on Budget and Policy Priorities, the Concord Coalition, and the Committee for Economic Development:

"In this environment of already excessive red ink, no tax cuts or entitlement increases - whether new measures or extensions or expansions of existing measures, including the entire package of tax cuts enacted in 2001 and 2003, extension of relief from the Alternative Minimum Tax, or reauthorization of farm programs or the State Children's Health Insurance Program - should be enacted without offsets ensuring that they do not increase short- or long-term deficits and debt.  It is not responsible to continue to promote legislation that is supposed to improve the lot of the American people without considering the corrosive effects that the cumulative deficits and debt added by such legislation would have on current and future citizens." 4Cs Report, March 2007

  and

"Finding offsets for legislation that Congress believes it must pass before the end of the year will not be easy. But if providing AMT relief or enacting other entitlement spending increases or tax reductions is so important that the legislation containing such measures "must pass," then the policy in question must be worth paying for (and doing so without gimmicks). Any exceptions to the PAYGO rule now make sticking to it in the future all the more difficult." 4Cs Release, October 2007

If anything, the fiscal situation has become more dire since we wrote that during the Bush administration, and not adding to the debt other than to help bring on an economic recovery, has become more urgent.  

The better approach would be to use the political support for these exempted policies to bring people to the bargaining table to hash out a budget deal to reduce the medium- and long-term deficits. A compromise could include putting some of the PAYGO exempted policies into law along with some of the tougher tax increase and spending reduction that will be needed to help bring the budget closer to balance.

But by exempting these policies from PAYGO - giving them a free pass - we both make the budget deficit worse by trillions of dollars and make negotiating the kind of budget deal we will ultimately need all the more difficult.