On the spending side, paygo provided Congress a fig leaf against charges of fiscal profligacy by making it more difficult for Congress to enact new discretionary spending increases over and above the automatic entitlement spending growth. On the revenue side, paygo made it difficult for Congress to offset the damaging economic consequences of automatically increasing tax rates. In other words, paygo hung a revenue millstone around the neck of the economy in the name of "fiscal discipline" that didn't even stop the automatic growth in government.
During the 1990s, when Gingrich Republicans controlled the Congress and Clinton Democrats were in the White House, the paygo environment put the lid on federal spending growth but allowed federal revenues to rise rapidly. This situation resulted in a fiscal stalemate that produced uncontainable political pressure.
For example, the year Bill Clinton left the presidency, federal spending fell to 18.4 percent of GDP. During that same year, the federal tax burden as a share of GDP rose to 20.9 percent, matching its all-time wartime high in 1944.
The Congressional Budget Office projected that without tax cuts, revenue would stay near this record level indefinitely into the future.
The political pressure was released when George W. Bush became president and pushed a tax cut through the Congress to revive the economy. Interestingly, if the Bush tax cuts are made permanent and the Alternative Minimum Tax is indexed for inflation, revenues will level off at the historic average over the past 30 years.
If the Bush tax cuts are not made permanent, however, CBO projects the federal government will consume a record high of 20.5 percent of GDP in 2015, an unprecedented 22.6 percent in 2030 and an unimaginable 24.7 percent in 2050.
But even if revenue growth is put back on automatic pilot, spending increases sown into the fabric of current law will drive deficits ever higher. As Empower America's Chief Economist Lawrence Hunter points out in a forthcoming Institute for Policy Innovation report:
"Federal outlays are expected to hit 20 percent of GDP this year, and according to the Congressional Budget Office, if current trends continue, spending will rise to 24.5 percent of GDP by 2030 and to 32.8 percent by 2050.
Hence, no matter how fast the incredible federal revenue machine sucks in taxes, unless some kind of spending limitation is put into law, it will never be sufficient to keep pace with spending."
In order for Congress' budgeting rules to be neutral, they must ensure that, everything else being equal, government does not automatically increase as a share of the nation's income. Rather than reinstituting paygo and ensuring the continued growth of government and an unbearable burden on the U.S. economy, Congress should adopt rules prohibiting overall federal spending growth from exceeding the economy's growth rate. Now that would be a real budget.