A (Very Small) PAYGO Sequester is Scheduled To Happen

Small automatic cuts may be coming soon because Congress added to deficits last year. An $800 million (0.1 percent cut) was supposed to go into effect today, but the Office of Management and Budget (OMB) has said that it will delay releasing any sequestration report until after the shutdown ends. It isn't clear when the sequester will actually go into effect (if at all).

If Congress ends its session having added to deficits on net, the statutory Pay-As-You-Go (PAYGO) law requires that there is an across-the-board spending cut to certain mandatory programs to recover the savings. Even after Congress exempted many of its largest deficit increases, the 115th Congress still ended with a slight deficit. Most large mandatory programs – such as Social Security, major safety net programs, and health care programs other than Medicare – are exempt from the cuts, but programs like farm subsidies and student loans are not exempt.

Lawmakers have avoided triggering a PAYGO sequester in the past because they either have exempted costs from the PAYGO scorecard or waived the PAYGO sequester.

For 2018, OMB's PAYGO scorecard shows a deficit increase that will trigger a $482 million cut in 2019. However, the scorecard does not yet account for the farm bill, which is deficit-neutral over ten years but increases deficits by $1.8 billion over five years; as a result, the cut will likely be in the $800 million range. This cut is very small in percentage terms – around 0.1 percent of non-exempt spending – and will fall almost entirely on Medicare, which represents nearly 90 percent of non-exempt spending and will absorb roughly $700 million of cuts. 

In particular, the Bipartisan Budget Act (BBA) of 2018 increased deficits by $320 billion over ten years, but most of its costs were in discretionary spending, and it exempted almost all of the other net deficit increase, including disaster relief that was designated as an emergency. However, the legislation designated certain changes to farm subsidies as an emergency only for 2018, so OMB recorded a $3.1 billion ten-year cost for the legislation on the PAYGO scorecard. The BBA also cleared previous negative balances from the PAYGO scorecard, which would have reduced the net deficit score.

In addition, the 2018 omnibus appropriations bill included mandatory spending and revenue changes that would increase deficits by $3 billion, but exemptions reduce the cost on the PAYGO scorecard to $1.3 billion. Other major entries on the PAYGO scorecard include the Miscellaneous Tariff Bill Act of 2018, which temporarily reduced certain tariffs and will cost $920 million over five years (though it's deficit neutral over ten years), and the partial rollback of Dodd-Frank, which saves $544 million over five years and $428 million over ten years.

The PAYGO report is due 15 business days after Congress adjourns (January 24). Because OMB has said that it will delay issuing any report until after the shutdown ends, it is not clear when the cuts would be implemented. Going forward, lawmakers may choose to wipe the PAYGO scorecard and avert the cuts, as one of the House-passed funding bills would do. Last year, lawmakers wiped the scorecard of the much larger PAYGO debit resulting from the 2017 tax law, a debit that would have required non-exempt spending to be eliminated and Medicare to be cut by the full 4 percent allowed by law.

If lawmakers are going to wipe the PAYGO scorecard clean, they should offset the ten-year deficit increases currently on the scorecard. This would be a small down-payment on working to correct the deficit increases lawmakers have enacted over the past few years.