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.
[1] 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.
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.
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.
[3] Beginning in 1998, in response to the first federal budget surplus since 1969, Congress started enacting, and the President signing, increases in discretionary spending above the statutory limit using creative means such as advance appropriations, delays in making obligations and payments, emergency designations, and specific directives.
[5] The White House acknowledged that the new Medicare prescription drug benefit plan would not meet the PAYGO requirements: Any law that would reduce receipts or increase direct spending is subject to the PAYGO requirements of the Balanced Budget and Emergency Deficit Control Act and could cause a sequester of mandatory programs in any fiscal year through 2006.
Preliminary CBO estimates indicate that the bill would increase direct spending by $440 billion over the next ten years.
[7] In the first 6 years of President Bush's term, with a Republican controlled Congress, the federal debt increased by $3 trillion.
[15] Both direct spending in the bill and tax cuts, as passed by the Democratic-controlled Congress and signed by President Barack H. Obama, were exempted from the PAYGO rule under section 5(b) of the Act.
An annual appropriation bill provides spending authority to the government for a project or program that only lasts a year.
Social Security is not a pure PAYGO system, because it theoretically accumulates excess revenue in the Old-Age, Survivors, and Disability Insurance Trust Funds (OASDI).
In practice, however, excess revenue has previously been used for other government spending while the Trust Funds are simply accounting vehicles for money owed by the Treasury.
The amount paid into the system depends on the income and gives the payers so called "pension points" (de: Entgeldpunkte).