President Obama, PAYGO, and the Deficit Hole

By Theresa Cook

Jun 9, 2009 4:20pm

Jake Tapper and Sunlen Miller report:

Attempting to channel his inner deficit hawk, President Obama today called for the restoration of the “pay as you go” rules to rein in the deficit.

“Paying for what you spend is basic common sense,” said the president in the East Room standing alongside congressional Democrats, including House Speaker Nancy Pelosi, D-Calif.. “Perhaps that’s why, here in Washington, it has been so elusive. The ‘pay as you go rule’ is very simple. Congress can only spend a dollar if it saves a dollar elsewhere.”

The administration will submit a proposal to Congress to codify the rule into law, and Mr. Obama today called for a quick passage in the House and the Senate.  The PAYGO rules will apply to new tax cuts and mandatory spending, with four major exemptions – any renewal of the 2001 and 2003 tax cuts, the continued efforts to “patch” the Alternative Minimum Tax, any effort to address physician’s payments in Medicare, and modifying the estate tax.

In addition, discretionary spending – roughly 40% of the federal budget – is not covered by PAYGO.

“This is like quitting drinking, but making an exception for beer and hard liquor,” said Maya MacGuineas, President of the Committee for a Responsible Federal Budget (CRFB). “Exempting these measures from PAYGO would increase the ten-year deficit by over $2.5 trillion dollars. That’s not fiscal responsibility.”

President Obama today hailed the record surpluses of the 1990s, when the “PAYGO” rules were in place, and said it was no coincidence when it was abandoned by the Bush administration there was a return to deficits and an increase to the national debt.

“Entitlement increases and tax cuts need to be paid for,” said the president. “They are not free, and borrowing to finance them is not a sustainable long-term policy.”

The new push by the Obama administration comes as recent polls show, for the first time, more Americans disapprove than approve of the President’s handling of the deficit and spending. The announcement today changes the original proposal rules in the President’s budget plan; this version would require legislation to be financed over the next 10 years, instead all legislation to be paid for in the very first year.

But the administration acknowledged that this is a minor step in the scheme of the $11.4 trillion national debt.

“Pay as you go embodies the common- sense principle that you shouldn’t dig the hole deeper,” Office of Management and Budget director Peter Orszag said today at the White House press briefing. “ It doesn’t deal with the underlying hole. “

Orszag acknowledged that there are significant exemptions to these PAYGO rules.

“The thrust of current policy embodies, for example, an assumption that we’re not going to allow the alternative minimum tax to take over the tax code,” Orszag said. “It embodies an assumption that at least a significant part of the 2001 and 2003 tax cuts will be extended past their scheduled expiration in 2010.  And it embodies an assumption that we’re not going to reduce physician payments by 20 percent arbitrarily in the near future.”

But the CRFB’s MacGuineas said, “It’s pretty simple: if you want to pass a law to increase government spending or cut taxes, you should have to pay for it. No matter whether it is a new law or the continuation of an existing policy.  And even doing that won’t be enough to close our fiscal gap.  We should be discussing hard discretionary caps, long-term entitlement reform, and tax reform as well. The U.S. government is in a fiscally precarious position; other than borrowing for fiscal stimulus, the government should be focused on reducing the deficit. This policy would merely limit by how much it is permitted to increase.”

Orszag said by addressing health care reform, the president was taking on a major entitlement reform.

“If health care costs grow at the same rate over the next four decades as they did over the past four decades, Medicare and Medicaid go from 5 percent of the economy today to 20 percent of the economy by 2050,” he said. “That is the core driver of our entitlement problem.  If we succeed in bending that curve, we will have done more to improve the long-term health — fiscal health — of the nation than any other single thing we could do.  Which is not to say other things aren’t important, but what I’m saying is, over the next two months we have an opportunity, our best shot, at addressing that problem, and that’s what we want to do.”

After the president’s announcement members of the Democratic Blue Dog Coalition, which profess fiscal conservatism,  talked to reporters to hail the announcement.

“Were obviously very pleased with the President’s support of our signature issues,” said Rep. Barron Hill, D-Ind. “Today is a good day. We have as Blue Dogs suspended a lot of our philosophy to give the president what he has needed to jump start this economy.  We are flexible on that with the insurance from him that he would support pay as you go rules. Today he is keeping his promise and we are delighted that he is doing that.”

But on Capitol Hill, Senate Budget Committee Chairman Ken Conrad, D-ND, cautioned that he has “serious concerns” about aspects of the administration’s proposal, which he found wanting.

PAYGO, he said, “can only do so much.  It can prevent the passage of new legislation that would worsen the deficit, but it does not address the deficits and debt projected under existing policy.  To truly solve our long-term budget crisis, I believe we need a special bipartisan process, where everything is on the table and where Congress is required to vote on a legislative solution.”

Conrad said that he’s concerned about the PAYGO exemptions, and highlighted that the administration’s PAYGO proposal differs from the House and Senate rules covering differing time periods and differ rules. Conrad said this would mean that Congressional committees would have to comply with two sets of estimates and procedures.  

Sen. Chuck Grassley, the ranking Republican on the Senate Finance Committee argued that during the 1990s, most programs were exempt from PAYGO, “and Congress consistently voted to waive the required spending cuts. This proposal is simply a fig leaf to appease those who say they support fiscal discipline but continue to vote for more spending.”

-Jake Tapper and Sunlen Miller

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