There is currently a massive $1.7 trillion balance on the statutory PAYGO scorecard for 2025. Under current law, this balance is slated to trigger a sequester in January. However, the size of the $1.7 trillion sequester is many multiples larger than the spending base it is supposed to be levied upon and therefore cannot take place in full. If enforced to the extent it can be, the still unrealistic outcome would be roughly $200 billion in across-the-board cuts, zeroing out most spending accounts subject to the sequester.

Despite the importance of PAYGO, it has not successfully been enforced in past years and will not be enforced in full this year due in part to the size of the PAYGO balance. Given the nation’s poor fiscal situation, lawmakers should use the upcoming PAYGO sequester deadline as an opportunity to adopt realistic and meaningful fiscal improvements while recommitting to abiding by PAYGO going forward.

In this piece we explain:

• The current PAYGO balance is too large for a sequester to be implemented as designed.
• Lawmakers should not ignore the PAYGO sequester as they have in past years (often using hidden methods to bypass it, where many of them don’t even realize the changes are being made).
• Instead, lawmakers should implement meaningful fiscal reforms and recommit to abiding by PAYGO in the future. Such reforms might include: specific policy reforms, reforming the sequester to be more achievable, creating a fiscal commission, or adopting strong budget processes.

How Does Statutory PAYGO Work?

PAYGO – short for Pay-As-You-Go – was designed to prevent policymakers from adopting policies that would worsen the deficit. In general, PAYGO requires that any policies projected to increase mandatory spending or reduce revenue be offset with mandatory spending cuts and/or revenue increases. PAYGO restrictions do not apply to discretionary spending, emergency spending, or the Social Security program and Postal Service, which are “off-budget.”

The Statutory Pay-As-You-Go (PAYGO) Act, which has been in place since 2010, seeks to prohibit revenue and mandatory spending legislation enacted in a given year from increasing the deficit over a 5- or 10-year period. (There are also three other forms of PAYGO: the Senate PAYGO rule, which requires that each individual mandatory spending or revenue bill be fully offset at the time of passage; the House CUTGO rule, which resembles the Senate rule but applies only to mandatory spending; and Administrative PAYGO, which requires the executive branch to identify potential offsets anytime it publishes a rule that would increase deficits.)

While lawmakers can still pass debt-financed tax cuts and mandatory spending increases under statutory PAYGO, the law requires them to review these decisions and ensure that they are not deficit-increasing or else face an across-the-board sequestration of certain budgetary resources.

Every time legislation is enacted that affects mandatory spending or revenue, the Office of Management and Budget (OMB) records the legislation’s budgetary effect on the “PAYGO scorecard.” At the end of a calendar year, if the scorecard has a positive balance – meaning cumulative effects of the policies lead to an overall increase in the deficit in either the 5- or 10-year windows – the President must issue a “sequestration order” to cut non-exempt mandatory spending programs.

OMB calculates the amount of a sequester by taking the average annual effect of the cumulative cost of the legislation over each of the periods, and whichever is larger is the amount of the budget reduction in the next year.

Illustrative PAYGO Effects of Hypothetical Legislation

The sequester is then applied to a small subset of mandatory budget accounts. Social Security, federal retirement programs, and most means-tested programs (including Medicaid) are exempt, and reductions in Medicare are limited to 4 percent. As a result of this narrow base, sequestration cuts can be quite steep if there is a large balance on the scorecard.

However, in practice, statutory PAYGO has been routinely bypassed by policymakers.

Policymakers Often Circumvent Statutory PAYGO

Congress has never allowed the PAYGO sequester to go into effect following an accumulation of deficit-increasing legislation. Instead, Congress has bypassed the sequester in numerous ways, such as by wiping the scorecard clean as they did after enactment of the 2017 Tax Cuts and Jobs Act or delaying when the sequester would hit as they did after enactment of the American Rescue Plan.

Examples of Select Legislation that Added to Debt and How It Circumvented PAYGO

Note: the PAYGO impact often won’t match the total deficit impact due to the use of discretionary spending, off-budget effects, and other differences.

How Big Would the Current Sequester Be?

The current PAYGO scorecard has a balance of $2.2 trillion over five years, $2.4 trillion over ten years, and $1.7 trillion for 2025 – almost all of which is the result of balances that have been carried forward from previous Congresses.

While this should theoretically necessitate a $1.7 trillion sequester next year, the entire amount of spending subject to the sequester is only about $200 billion – meaning the sequester called for by the scorecard is about eight-and-a-half times as large as the largest possible cut.

Given this, the law calls for a $200 billion cut to be ordered next year – roughly $45 billion from reducing Medicare payments by 4 percent and another $155 billion by eliminating spending on accounts such as agriculture subsidies, the Social Services Block Grant, the Crime Victims Fund, and the mandatory budgets of immigration services agencies.

If the sequester were ordered, the law could deem that the full $1.7 trillion balance for this year was addressed (despite only $200 billion being cut), and it would disappear from the scorecard. The $442 billion balance already on the scorecard would remain for next year, which would result in a similar-sized sequester – somewhat above $200 billion – for the following year.

Spending Cuts Under a Statutory PAYGO Sequester, 2025

Source: CRFB estimates based on OMB data. All figures rounded to nearest $5 billion.

Responsibly Addressing the PAYGO Sequester

While the 2025 sequester is so large that it cannot be met, policymakers should not just waive it altogether. Instead, it should be viewed as an opportunity to replace the current unworkable sequester with smarter fiscal reforms. Options include: 

1. Enacting specific policies to offset the $1.7 trillion sequester over a longer period of time. Fiscal targets are most effective if they are large enough to make a difference, but small enough to be politically achievable. The existing target is too large to reasonably be met in a single year. Instead, Congress should replace the unworkable and blunt instrument with a package of $1.7 trillion in specific savings over a more reasonable period, such as 10 years. Such a plan could include, for instance, extending the Fiscal Responsibility Act caps on discretionary spending; a package of health care reforms including site neutral payments, Medicare Advantage reforms, limits to Medicaid match abuses, and prescription drug savings; agricultural subsidy reform; student loan reform; cuts and reforms to tax expenditures; and/or a deficit reduction surtax.
2. Altering the current sequester to achieve the $1.7 trillion in deficit reduction on a broader base over a longer period of time. If Congress is unwilling to develop a specific plan, they could replace the 2025 sequester with a new across-the-board cut applied to a broader base of spending over a longer period of time. For example, legislation could schedule a reduction of $170 billion per year for ten years to a broader base that includes nearly all spending, as well as individual and corporate tax expenditures.
3. Putting in place a plan to reform Social Security by lifting the payroll tax cap, increasing the retirement age for younger workers, adopting chained CPI, reducing or slowing the growth of benefits for the well-off, and/or some other combination of options.
4. Establishing a bipartisan Fiscal Commission to bring together a group of lawmakers for the purpose of adopting budget-wide reforms designed to put the national debt on a sustainable path.

Additionally, Congress could consider a variety of budget process improvements – including strengthening the existing PAYGO law, PAYGO rules, and Administrative PAYGO – to accompany addressing the sequester and broader fiscal reform. Any reforms that strengthen the nation’s fiscal situation would be an improvement upon the current practice, in which the sequester is routinely either waived or otherwise circumvented without reform.

Given our dire fiscal situation, Congress should not let another year go by in which the PAYGO Scorecard is simply ignored.