PAYGO

PAYGO (Pay As You GO) is the practice in the United States of financing expenditures with funds that are currently available rather than borrowed.

The PAYGO compels new spending or tax changes not to add to the federal debt. Not to be confused with pay-as-you-go financing, which is when a government saves up money to fund a specific project. Under the PAYGO rules a new proposal must either be "budget neutral" or offset with savings derived from existing funds. 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.

An important example of such a system is the use of PAYGO in both the statutes of the U.S. Government and the 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 increases in deficit spending. Direct spending (or "mandatory spending") is largely composed of "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. If a benefit is expanded or increased, that increase in direct spending must be offset by an increase in revenue or a decrease in direct spending.

In terms of revenue, PAYGO is designed to control revenue reductions. If revenue is estimated to be reduced through a reduction in tax rates of any kind or other effects on revenue collected by the Federal Government, that effect on the deficit must be offset either through increased tax rates or increase in 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, if legislation enacted during a session of Congress had the effect of increasing the projected debt for the following year, a "sequestration" would be triggered. A sequestration is an across the board spending reduction of non-exempt mandatory programs to offset this increase in the deficit, as calculated by the Office of Management and Budget.

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