Budgeting is very important as it enables people to keep track of their finances. This is because they will account for the revenues they expect to get and the expenses they are likely to incur in the course of various transactions they engage in. Just as individuals and businesses budget for their current and future operations within specific time frames, the state also undertakes its own unique form of budgeting.
It has to budget on how much money it will allocate to various sectors of the economy so as to increase the wealth in the economy and enhance equal distribution of resources across all sectors. The state constantly monitors its budget because to see that it does not operate under a deficit which will occur when Federal spending is more than the revenue it collects. To ensure that the various instruments which affect spending and revenue are stabilized, the state uses various fiscal policy mechanisms. One of these mechanisms is Pay-as-you-go.
Pay-as-you-go (PAYGO) was created under the Bureau of Economic Analysis (BEA) legislation is one of the ways that are used by the United States government to finance its activities by funds which are usually generated within the budget period because at times the funds that are available cannot adequately cater for all the needs. “Moreover it talks of the strategies used by the government to pay for increments in its expenses or reducing revenue from the resources being used without causing a budget deficit (Rabin, 2005). ”
PAYGO’s main aim is to balance the budget as well as control deficits that may occur once in a while during the state transactions. When the Federal State wants to increase its spending, they will have to reduce other forms of spending or find ways which they can use to increase revenue. On the other hand, if revenue is reducing, they must come up with other ways of generating revenue or cut on their spending. PAYGO will therefore entails changes the tax rates by rising or lowering them so as to bring about the desired changes that the Federal State wants to bring about by forming policies to enable them adjust the way they spend their money.
PAYGO financing is in place to ensure that publicly run institutions deal with the financial cases as they occur. This is a role that is played by both the House and the Senate. They will engage in ways that will seek to offset revenue by either raising or lowering tax cuts. Congress also play an important role because they convert long term revenue losers to short term revenue gainers by restructuring the tax laws so that more money is received by the treasury (Schick & LoStracco, 2000). The PAYGO fiscal mechanism does not control the amount of spending that is got either by increase in population or changes in the inflation rate.
Under Social insurance, PAYGO refers to the manner in which people who contributes funds into the system pay for other people’s expenses; usually the retired elderly people. Here, money is not kept to be used at a future date therefore all the collected money is paid out at the same period. In this US, these contributions are made by the people who are employed and a deduction made; which is referred to as the Federal Insurance Contributions Act, in their pay slips to finance social security. ? PAYGO’s History PAYGO was first enacted in 1990 in the USA through the Budget Enforcement Act of 1990.
This is when the Democratic leaders and President George H. W. Bush debated and came to a consensus that the policy was good for the country’s economic situation at that time and ensure that the deficits in the budget were controlled. This policy therefore required any changes on government spending and revenue to be offset by counter changes in spending and revenue. In addition its aim was and still is to control tax reductions. Cuts made on spending otherwise known as sequestration was used to correct the violations of PAYGO thus it provided exemptions to be made to deal with emergency situations that required funding.
In 1993, deficit reduction legislation was made to ensure that when changes were made, there was a standard procedure that guided such actions. In 1997 the balanced budget act was passed which was to be used until 2002. In 1997, PAYGO requirements were further improved on through the FY2006 at the end of the 107th congress. “PAYGO policies were then amended hence setting all its balances to zero and in the process eradicating the PAYGO requirements (Lucas, 2005). ” In 2001, tax cuts were made without paying attention to PAYGO because the congress argued that they could project and plan for the budget surpluses.
The use of PAYGO was ended in 2002 when the Republicans wanted tax cuts to be made permanent but the new PAYGO was standing in the way of progress. It was then that a better and improved version of PAYGO was passed by the senate which included Medicare benefits, amended tax cuts and did away with some of the policies that were on the budget resolution. In 2007 when the Democrats controlled the house, PAYGO was restored by rule. And under his new rules, it was stated that if there were to be any new policies and new spending increases, they ought to be offset by a combination of tax increases.
This rule however can change because the house can vote in favor or against it. This is because PAYGO can be waived by the most votes in the House or 60 votes in the Senate. The rule has no sequestration requirement and this is evident by the congress waiving it to pay for relief from the Alternative Minimum Tax and to expand veterans’ benefits. The new PAYGON rule has been successful and at the same time controversial. Controversial as it no longer represents the original consensus goal thus making its acceptance by everyone difficult.
In 2007, another PAYGO bill and FY 2008 Budget Resolution rules were introduced by the senate. The budgetary proposals that the democrats had passed for 2007 and 2008 are not in line with the PAYGO principle. In addition, it has become difficult to pay for the expiring tax cuts and this has caused time delays in settling debts. It is also in 2007 that the under PAYGO, $700 billion was set aside as an emergency exception to fund the financial sector. ? How PAYGO works The PAYGO process does no necessarily require offsetting actions in either increasing spending or reducing revenue.
Federal State spending is mainly on the things that it has budgeted for under the entitlement programs which are established under the permanent law hence it does not need legislative actions. “It is only through legislative action that the changes in spending and revenue can be expanded or reduced (Lucas, 2005). ’ The Congress can still raise debates and change legislation that if it sees that they need further amendment. Spending for social security benefits and federal deposit insurance commitments and direct spending and revenue legislation is not included in the PAYGO process.
The remaining direct spending programs are covered in the process as long as there is legislation governing the increments and reductions in the budget deficit. If PAYGO is used consistently, then direct spending will have to be reduced. The Sequestration rules are used to enforce the policies that are made by BEA. If the a mount of budget authority is correctly specified by an appropriate act or what has been placed the budget is more than what is found in the corresponding caps, then according to BEA, the spending is supposed to reduce (Muhleisen, Towe & Cardarelli, 2004).
But there are rules which are supposed to be followed to reduce some programs while others which can be exempted from sequestration. The office of Management and Budget is responsible for seeing that the laws which are enacted go in hand with the PAYGO requirements. When they do not follow up the laws and there is a deficit, then uniform reductions will be made in all the programs that will be budgeted. Enforcement is through a point of order where members of the Congress ask the chair to rule on whether the new legislation can violate the chamber rules (Primo, 113).
PAYGO does not restrict against increases in spending or tax reductions but seeks to ensure that there is extra cash to finance state operations and also to pay off debts. This fiscal mechanism requires all changes in taxes and spending to lead to a neutral budget deficit for a period of one to five years. In addition, it does not require Congress to make any judgments this is because when revenue falls as a result of changing economic conditions. ? How PAYGO is being used today The economic fluctuations have greatly impacted on the domestic as well as the global market prices.
Inflation has increased ad the general cost of living has increased because of the high cost of products. There is therefore a great need by the government to find ways which they will use to fight the financial crisis it is facing and how to improve the economy so that they can create jobs for the thousands of people who are losing their jobs if these issues are not addressed urgently. Short term amendments in various policies will therefore be necessary as they will create room for solid long terms structures that will propel the economy in the right way.
PAYGO as a form of fiscal stimulus is supposed to offer temporary solutions for poor economic situation and also provide long term solutions so as to prevent the frequent imbalances in the budget. “It is also important to recognize the various exemptions made especially during harsh economic times because they do not create a problem but tries to come up with ways that make the situation more bearable (Garrett, Graddy, & Jackson, 2008). ” ? Effects of PAYGO on the Budget Deficit
PAYGO puts limitations by providing policies to be followed so as to reduce the budget deficit. In addition, it also provides Congress with a frame to fall back on when formulating tax cut policies. PAYGO generally requires the congress to identify ways they can use to offset some of the costs it will incur in spending. The budget deficit can change can change in several ways depending on the way spending and revenue change. When the state needs to fund some activities in the economy, they will need to increase their spending.
Increment in spending when revenue received has not changed will mean that the there will be a budget deficit because they will be spending more than what they will be receiving. When PAYGO policies are introduced, it will mean that they will have extra funding which is mainly in form of debts which will be used to cater for the additional expenses. In this way, the budget will remain neutral as the cause of the deficit will be controlled. Federal Revenue needs to be increased so as to deal with the budge deficit and still finance state activities.
Though this is necessary, there are instances where the revenue has had to be reduced. This has entailed using PAYGO to reducing or limiting the amount of funding on some projects so that there can be enough funds to support other sectors of the economy that require the funds. These illustrations show that PAYGO rules and laws in place and how they are used can either increase or decrease the budget deficit. That is why it is necessary for there to be proper policies and proper decisions passed that will enhance the progress of the country.
? Problems Facing PAYGO PAYGO does not necessarily decrease the growth of federal spending. This is because it is only limits the amount of spending that is allocated to various sectors in specific time frames. Moreover, it was not created with the intention of cutting down on federal expenses or slowing the rate of spending. It exempts discretionary spending in that discretionary programs which account for almost 40% of the budgetary allocations are not mentioned any where in the PAYGO rules.
For this reason, Congress can increase funding to these programs and this will cause them to unequally locate funds such that other sectors will not have enough money. This will basically lead to the unequal distribution of resources. PAYGO exempts entitlement Benefits because the programs that PAYGO supports will continue to increase while it offers limited funding to programs like nominal entitlement spending, Medicare and Medicaid and social security. Though PAYGO is thought to reduce the emergence of other alternatives it cannot do much to regulate the growth of the other current problems.
Another problem associated with PAYGO is that it contributes to the increase in prices. Since the house amends taxes occasionally, PAYGO sees the changes in taxes as new tax cuts which need to be offset. This also creates conflicting ideas with the entitlement spending regulations as they favor them and it claims that the changes in tax affect the system altogether. Another problem is that new PAYGO rules are not enforced. This makes it difficult for the people to believe that if another motion is passed that is meant to increase or reduce spending or revenues will ever be passed.
“This is because the institutions responsible for allocating the funds do not have a formal basis and rules that they can use to distribute funds and since they are not mandated by law to give out the funds; in case of shortages they will not bother funding some initiatives (Seidman, 1999). ” These problems are some of the issues that the stimulus package being proposed by the new administration highlights and are debated in the House and Senate. ? Stimulus Package Debate PAYGO will not hinder the senate from passing the recession stimulus package.
It will just make it a bit difficult because there will have taxes which may cause an increase of the deficit. Because the debate will be depending on PAYGO it will therefore need to be offset and in the absence of proper procedures to be followed yet, the house will be suspended for awhile and the president decide whether to sign the increment. Since the focus is on correcting recession, the appropriations bill will be most applicable for bringing about the change that s needed therefore PAYGO will not be appropriate.
The Obama Administration does not need to hurry to use PAYGO for making tax cuts. Though the current economic situation may make them want to use this tool for long term benefits, they should focus on ensuring that they solve the current problem through the using workable short term solutions. The use of PAYGO is allowed especially in creating additional funds. This is because the unemployment rate is increasing as businesses collapse and the extra funding will help in restoring such businesses to their original positions if not better.
Of course the money got used on other ventures will have to be accounted for. Today, the country’s budget is shaky as there are many sectors of the economy that rely heavily on government funding and value of the amount budgeted for is diminishing thus leading to poor budgetary decisions. That is why it is necessary for changes to be mad and the PAYGO fiscal responsibility mechanism comes in handy. It PAYGIO is ignored, and then the country will have a lot of problems which will continue to increase as the economy changes.
Some of the consequences of ignoring PAYGO include: most of the policies that were made on the new tax cut will expire in 2010 and on top of that, no further relief is given on top of the AMT. To amend this action, it will take lengthy talks and procedures by the government and Congress. When the house votes to allow borrowing it will mean that they will increase the country’s debts they will have to pay and this will be increasing the budget deficit further (Schick & LoStracco, 2000). For this reason, when PAYGO is waived to increase tax cuts, they will be increasing the debts they have to pay making their current situation worse.
Another concern is that the issues of Medicare and Social Security are standard therefore, there is no way that they can be changed as the government will have to show there commitment of supporting research, access to proper health care by providing them with the funds they require. Therefore, the state will have to find other ways of restructuring the problem. Ignoring PAYGO would mean that the government would have to deal with the increasing inflation rates as they will negatively impact on the economy. Kent Conrad in 2008 examined two scenarios which were the extended baseline and the income tax provisions during the period 2001-2003.
Under the extended baseline, it was found out that the budget deficit is relatively stable and the debt falls because the economy is growing faster. The revenues increase but not with time it is forecasted that it will reduce. In the optimistic scenario, the debt will keep on increasing as and over time, it will reach a point where it cannot be sustained. Both cases showed that the interest payable on the debt will keep on increasing and this will be attributed to the borrowings made to fund the aging population and health care provisions.
Therefore, this research showed that there needs to be a mechanism that can be used to enhance saving which h will be used to cut down on the costs that have been presented. For this reason, PAYGO will not be able to cater for these increments in spending but it will relevant for formulating new policies that will seek to extend the tax cuts (Shaviro, 2007). These scenarios therefore highlighted that if PAYGO is disregarded, there are chances of incurring huge budgetary deficits which will be difficult to monitor hence putting the country at financial in future.
In addition, to finance the increasing debt, the savings in place will have to be used and this will consequently improve the levels of investment in the country. This will mean that the capital used to run businesses will be limited hence the level of production will reduce and real wages will reduce. This situation will cut across all the sectors of the economy and this will mean that the country will have to borrow from abroad and this will mean further increasing the country’s budget deficit. ? Reasons for Retaining PAYGO
In trying to address the current economical problems that face the country, the budget will have to be adjusted so that tax cuts are taken into consideration. The house has constantly argued that there if the tax cuts made by Bush were passed without looking at the how the will affect individuals and businesses first, and then they might as well cause harm the economy. This is because a huge deficit will be incurred and will continue to grow if the policies that were made are not stopped by 2010. In addition, keeping the AMT standard will increase the deficit.
When tax cuts are made, they will eventually have to be paid and the future cost will be more because of the interest accrued. During the presidential campaigns, Obama said that he would enhance what PAYGO has achieved by making a few changes. He would do by extending the tax cuts and the AMT relief. Not following the guidelines of PAYGO using tax cuts, is because they will enable him to use part of the money for other new initiatives (Concord Coalition, 2008). But assuming he is improving on what Bush started, it would mean that they will be able to increase the countries revenues.
This is likely to take a long time and in the mean time there will still be a budget deficit because funds will have been transferred to fund other things. Obama also said that they will be targeting increasing the middle class tax cuts and allocating more money to Federal Health Care spending. Additional US$35 billion was said to be injected into the economy so as to help in the recovery process. These new strategies proposed will not do much to improve savings but are meant to steer the economy in the right direction so that the underlying problems are dealt with first before other measures are imposed.
In addition, they will reduce debt and regulate spending such that the Democrats have projected that there will be a surplus in 2012 and 2013. Though there are some positive possible outcomes of using the proposals made by the New Administration, there have been doubts with the applicability of the issues they have said and raised. For instance, the Concord Coalition said that the tax proposals were most likely going to decrease the federal revenue by approximately US$1 trillion in five years time after its enactment and an additional $2 trillion over 10 years.
Thy have also argued that the PAYGO was originally a statutory requirement which was formed in such a way that it did not talk of exceptions for any emergencies hence the new administration should not be allowed to introduce finances into the economy as part of their strategic rescue plan mission (Concord Coalition, 2008). ? Improvements in PAYGO policies and laws Some of the improvements that can be made to solve the PAYGO problems include: both taxes and the entitlement programs should be equally treated. This means that if there are exemptions on one hand, then there ought to be exemptions on the other side.
Another solution is that the House and senate should pledge to rule against those PAYGO policies that do not enhance development of the economy. Otherwise, if nothing is done, they can continue creating new entitlements and even increasing on the existing ones without paying attention to the costs. Statutory discretionary spending caps should be introduced so that they can deal with various problems within the system especially those that will govern non-entitlement spending. Strict controls should be set such that there will be targets set for programs that will be covered by PAYGO.
If the projects undertaken exceed the stated targets and limits, the president will then be required to review the policies in place to reduce spending and Congress should immediately upon approval act on raised proposals. Conclusion Despite the problems that that country is facing with crisis in the financial sectors and a dwindling economy, PAYGO is still a useful fiscal policy tool as it is helping to control and balance the budget so that the government operates at a steady state keeping tack of its finances.
It is important to consider what PAYGO is doing because it has helped to bring about positive actions that have tried to keep the budget stable. The budgetary decisions should therefore be made when the first proposals have been made on either to increase the amount of spending or reduce revenues. Congress as well as the president needs to consider using PAYGO as a fiscal responsibility mechanism as it offers them somewhere to start on how they can deal with taxation and spending. References Garrett, E. , Graddy, E. & Jackson H. E. (2008). Fiscal Challenges: An Interdisciplinary Approach to Budget Policy.
Cambridge University Press, 2008 p. 12 Lucas, J. B. (2005). National deficit and debt: where to next? Nova Publishers, 2005 p. 25 Muhleisen, M. , Towe, M. C. & Cardarelli, R. (2004). U. S. fiscal policies and priorities for long-run sustainability. International Monetary Fund Concord Coalition (2008). PAYGO’s Continued Relevance in Economic Recovery and Strategic Budgeting http://www. concordcoalition. org/issue-briefs/2008/1119/paygos-continued-relevance-economic-recovery-and-strategic-budgeting Paygo Is Not Dead, It’s the Way Ahead. (2008, March 12). Wall Street Journal (Eastern Edition), p. A.
19. Primo D. M. (2007). Rules and Restraint: Government Spending and the Design of Institutions University of Chicago Press, p. 113-115 Rabin J. (2005). Encyclopedia of public administration and public policy, CRC Press, 2005 p. 200 Schick, A. & LoStracco F. (2000). The Federal Budget: Politics, Policy, Process 2nd ed Brookings Institution Press, 2000 p. 147 Seidman L. S. (1999). Funding social security: a strategic alternative, Cambridge University Press, p. 64 Shaviro D. N. (2007). Taxes, Spending, and the U. S. Government’s March Toward Bankruptcy Cambridge University Press, 2007 p. 147, 148