The House passed legislation (H.R. 2920) on July 22 that would reinstate statutory "pay-as-you-go" (PAYGO) budgeting rules, which were allowed to expire in 2002.

The bill was championed by Majority Leader Steny Hoyer (D-MD) and was largely based on language developed by President Obama. Despite criticism from key Republican leaders, the bill attracted 24 Republican votes and passed by a large margin (265-166). The bill now moves to the Senate, where it may face obstacles, particularly the lack of support from Senate Budget Committee Chairman Kent Conrad (D-ND).

Since Congress allowed statutory PAYGO rules to lapse, a number of expensive fiscal policies, such as the 2001 and 2003 Bush tax cuts and the Medicare prescription benefit, were approved in Congress, substantially adding to the national debt. These policies, combined with the economic instability of the past two years and massive spending initiated to help jumpstart the economy, have pushed the federal government deeply into the red. The result has been an increase in public demand to restore fiscal responsibility in government budget and tax policies.

PAYGO rules were first created as part of the Budget Enforcement Act of 1990 to help control deficit spending by requiring any proposed new mandatory spending or tax cuts to be "paid for" with reduced spending or tax increases elsewhere in the federal budget.

Under the House-passed bill, the Office of Management and Budget (OMB) would tally at the end of the calendar year the sum total of legislation enacted into law and whether it equaled a surplus or a deficit over five- and ten-year budget windows. This is called the PAYGO scorecard. If the PAYGO scorecard was out of balance at the end of the year in either the five- or ten-year budget window, OMB would institute automatic across-the-board reductions to program spending, known as sequestration.

Imposing sequestration is a key difference between a statutory PAYGO requirement and chamber-specific PAYGO rules put in place when Democrats took back control of the House and Senate in 2006. This difference is crucial to forcing Congress to actually follow the rules. For example, the entire time statutory PAYGO was in effect from 1990 through 2002, sequestration was never triggered because Congress passed legislation that complied with the rules. The current chamber-specific rules, on the other hand, lack an automatic enforcement mechanism. This allows Congress to ignore PAYGO whenever it becomes too difficult to pass deficit-neutral legislation, something that has happened quite frequently since 2006.

While the passage of H.R. 2920 is a step toward forcing Congress to develop more responsible and sustainable fiscal policies, the bill has significant exceptions and loopholes that will weaken its overall effectiveness. Under the bill’s current language, discretionary programs, such as Head Start, WIC (the Women, Infants, and Children nutrition program), and other economic recovery programs are not subject to spending caps. In addition, the bill includes a long list of mandatory spending programs primarily benefitting low-income populations that are also exempt, including Social Security. A fix to payment rates for doctors under the Medicare program – an expensive legislative agenda item for Congress – is also exempt.

On the tax side, three major tax policies – the annual fix to the Alternative Minimum Tax (AMT), extension of 2009 rates for the estate tax, and a substantial portion of the 2001 and 2003 Bush tax cuts that primarily benefit middle-class families – also received a special exemption. Finally, there is also a loophole that allows Congress to designate spending as "emergency" in order to bypass PAYGO requirements. This last exemption is a carryover from previous versions of statutory PAYGO, but overuse of the "emergency" designation during the George W. Bush administration has shown this provision can be abused.

The sum total of these exemptions is massive and is at the heart of Conrad's opposition to the bill. He has stated multiple times that he is concerned about the exemptions in the bill, particularly the three major tax exemptions and the Medicare doctor payment fix. At a recent House Budget Committee hearing on PAYGO in June, OMB Director Peter Orszag explained that the exemption of those four policies was done, in fact, to prevent waivers.

Conrad is also hesitant to abdicate control of the budget to the executive branch by giving OMB the sole power to determine sequestrations.

Conrad is not alone in his criticism of the House legislation. Rep. Paul Ryan (R-WI), the ranking member of the House Budget Committee, has criticized the bill because it does not subject discretionary spending to PAYGO. Ryan is also disappointed that the bill does not place caps on discretionary spending. Also, some critics felt the five- and ten-year budget windows used to create the PAYGO scorecard would not do enough to curb spending from year-to-year because legislators would try to work around the system by instituting awkward sunset dates for different policies.

Conrad's opposition to this bill in the Senate and a general willingness among senators to waive PAYGO at any time, particularly for tax cuts, makes it unlikely that this legislation will progress further during this legislative session. Despite the attempt by the House to institute more responsible controls on the federal budget process, the president and congressional leaders will need to return to this issue repeatedly and with a sincere desire to pass sustainable fiscal policies in order to avoid making annual deficits even worse than already projected.