Special Bulletin: Why “PAYGO” Still Matters

“PAYGO” (Pay-As-You-Go) refers to a budget enforcement rule designed to impose fiscal discipline: when lawmakers pass legislation that increases mandatory spending or reduces revenue without offsets, the excess must be “paid for” to prevent worsening the deficit.

Under the Statutory PAYGO Act of 2010, the Office of Management and Budget (OMB) tracks the net effects of enacted legislation on two rolling scorecards (5-year and 10-year). If, at the end of a congressional session, the net effect is a deficit increase, OMB must order sequestration – automatic across-the-board cuts to eligible mandatory programs – unless Congress acts to waive it.

However, not all programs are subject to PAYGO sequestration. Many major social safety net and so-called entitlement programs (e.g. Medicaid, Social Security, veterans’ benefits, Supplemental Nutrition Assistance Program) are exempt. Medicare, by contrast, is partly subject, but with a critical constraint: under law, Medicare payments subject to sequestration cannot be cut by more than 4 percent in a given year.

In effect, if the uniform percentage cut needed to balance the scorecard is higher than 4 percent, the Medicare cut is capped, and the remainder of the burden must be borne by other non-exempt mandatory programs.

Interestingly, although PAYGO is on the books, a statutory PAYGO sequestration has fully taken effect. Congress has historically circumvented the cuts by waiving the requirements, “wiping” the scorecard, or excluding newly enacted laws from the scorecard in order to avoid triggering automatic cuts. That said, the mechanism remains a latent and powerful fiscal backstop.

Enter H.R. 1: a sweeping reconciliation package that promises tax cuts, spending changes, and significant fiscal shifts. Key to its impact is that the Congressional Budget Office (CBO) and related analyses estimate it will increase the federal deficit substantially over the 10-year window, triggering the PAYGO enforcement mechanism unless Congress intervenes.

According to a fact sheet from House Democrats, H.R. 1 will trigger $535 billion in Medicare cuts over the next decade via the statutory PAYGO mechanism, applying uniform cuts to affected programs – but constrained by the existing 4-percent Medicare cap. KFF echoed this projection, warning that if Congress takes no further action, the deficit increase embedded in H.R. 1 could lead to roughly $500 billion in cuts to Medicare between 2026 and 2034.

The CBO, in its PAYGO analysis, explicitly estimates that the Medicare cuts would hit $45 billion in fiscal year 2026 under PAYGO implementation.

Put simply: H.R. 1 is likely to push sequestration to the full 4-percent Medicare cap because (a) it is expected to raise the deficit significantly, (b) Medicaid and many safety-net programs are exempt from sequestration (so the burden falls more heavily on Medicare and other subject accounts), and (c) Medicare’s allowable cut is already capped at 4 percent.

Still, the structural forces are aligning: the H.R. 1 massive deficit posture, combined with the existing statutory framework capping Medicare cuts at 4 percent, means that 4 percent is not just plausible; it’s the ceiling that the mechanism will likely hit, unless policymakers intervene.