Budget Enforcement: Points of Order, PAYGO, and Sequestration

Senators and Representatives can raise parliamentary objections on the Senate or House Floors to block consideration of legislation that would cause a breach of the total spending levels or revenue floor, or a breach of the committee or subcommittee spending allocations established by that year’s Budget Resolution. These parliamentary “points of order” are used most often to ensure that the 12 annual appropriations bills (containing the 30% of the budget that is “discretionary spending”) remain within their subcommittee allocations.

(In years when the House and Senate have not reached agreement on a Budget Resolution, the House and Senate have sometimes adopted “deeming resolutions” to serve in place of an annual budget resolution for the purposes of establishing enforceable budget levels for the upcoming fiscal year.)

A different type of enforcement tool was established for mandatory spending legislation and tax legislation, and is set forth in the Statutory Pay-As-You-Go Act of 2010 (usually known by the abbreviation “PAYGO”). The 2010 Act is the most recent incarnation of a PAYGO law, first adopted in 1990, aimed at enforcing a rule of budget neutrality for new mandatory spending and revenue legislation.

The objective of PAYGO is to prevent new mandatory spending and revenue legislation from increasing deficits. This is accomplished by effectively requiring that new legislation contain budget offsets to “pay for” new tax cuts or new mandatory spending increases. Budgetary offsets can be provisions that increase revenues or cut mandatory spending, or a combination of the two.

Under the PAYGO statute, the Office of Management and Budget maintains two cumulative “scorecards” of budgetary effects from newly-enacted mandatory spending and revenue legislation. OMB records on the scorecards the estimated effects of new legislation over the first 5 years following enactment of the new legislation, as well as 10 years from enactment.

After a congressional session ends, OMB finalizes the cumulative effect of revenue and mandatory spending legislation on the 5-year and 10-year scorecards; and determines whether a net deficit increase is estimated on either scorecard for the current budget year. If the cumulative effect of legislation is estimated to cause a net deficit in the current budget year, the President is required to issue a “sequestration order” that implements automatic across-the-board cuts in mandatory spending programs sufficient to fully offset the estimated deficit increase in the current budget year.

Note that even if a deficit increase is caused by tax cuts, the remedy is automatic mandatory spending cuts; there are no automatic tax increases.  For an example of how a sequestration order operates, see OMB: The Statutory Pay-As-You-Go Act of 2010 – A Description.

There are exceptions to the PAYGO statute.  First, legislation designated as emergencies are always exempt from PAYGO; they are not placed on either scorecard, and cannot trigger a sequester

Second, Congress can exempt any bill from PAYGO by simply including a provision stating that “the budgetary effects of this section (or bill) shall not be entered on the PAYGO scorecard maintained pursuant to section 4(d) of the Statutory Pay-As-You-Go Act of 2010.”

Finally, the automatic sequestration mechanism, itself, has exemptions. When an “across-the-board” sequester of mandatory spending programs is required, it is not really “across-the-board.” Automatic cuts in the Medicare program are limited to 4% and many other mandatory spending programs are entirely exempted from sequestration including: Social Security, federal retirement, interest payments, most unemployment benefits, veterans’ programs, and low-income programs including Medicaid, food stamps (now called SNAP), children’s health insurance (CHIP), refundable income tax credits, Temporary Assistance for Needy Families (TANF), and Supplemental Security Income (SSI).

Because Medicare cuts are limited and other programs are fully exempted from sequestration, a sequester order can hit the remaining non-exempt mandatory spending programs with severity to wipe out the cumulative PAYGO deficit in the budget year.  The affected mandatory spending programs subject to across-the-board sequestration cuts include farm price supports, vocational rehabilitation basic state grants, mineral leasing payments to States, the Social Services block grant, and many smaller programs.

In addition to the statutory PAYGO mechanism, the Senate has its own PAYGO rule which allows parliamentary objections to block consideration of bills or amendments that would cause deficit increases in the upcoming budget year, over a 6-year period, or over an 11-year period. The rule was first established by a Budget Resolution in 1993 and has been modified and extended by subsequent resolutions. Waiver of the Senate’s PAYGO rule requires 60 votes and, like the statute, sections of bills or entire bills can be excluded from the Senate’s PAYGO scorecard by including an exemption provision.