The term pay-as-you-go has a long history, going back to at least the early part of the 20th Century. It was established as a budget process by which deficit could be controlled from expanding by the Budget Enforcement Act of 1990, as part of a comprehensive bipartisan budget agreement in that year. It was in force as section 252 of the Balanced Budget and Emergency Deficit Control Act of 1985 through the end of 2002, though certain aspects did not expire until the end of 2006.
It was re-established by the Statutory Pay-As-You-Go Act of 2010, which has no expiration date. It also exists as a Senate enforcement tool, setting forth a point of order as an enforcement mechanism against legislation that would cause deficits to increase. This may be waived by 60 votes.
Office of Management and Budget
Statutory-Pay-As-You-Go Act of 2010: A Description
The following is an excerpt from a description of the S-Paygo Act describing the enforcement procedures for a sequestration, should one be ordered:
C. Enforcement. If Congress enacts PAYGO bills cutting taxes or increasing mandatory expenditures without fully offsetting the costs, the Act specifies a penalty, called “sequestration.” If Congress adjourns at the end of a session with net costs – that is, more costs than savings – on the scorecard, the Office of Management and Budget (OMB) is required to calculate, and the President is required to issue a sequestration order implementing, across-the-board cuts to a select group of mandatory programs in an amount sufficient to offset the net costs on the PAYGO scorecard.
PAYGO subjects mandatory spending to sequestration, with specified exemptions. Exemptions from sequestration include Social Security; most unemployment benefits; veterans’ benefits; interest on the debt; federal retirement; and the low-income entitlements such as Medicaid, SNAP (food stamps), and Supplemental Security Income. The major remaining mandatory programs, which are subject to sequestration, include most Medicare payments, farm price supports, vocational rehabilitation basic state grants, mineral leasing payments to states, the Social Services block grant, and many smaller programs.
If a sequestration is ordered, each non-exempt mandatory program is reduced for one year by the same percentage, with one exception: Medicare payments subject to sequestration cannot be reduced more than 4 percent. Consequently, if an overall 4 percent sequestration would not suffice to offset net costs on the PAYGO scorecard, sequestrable Medicare payments would be cut 4 percent and all other non-exempt programs would be cut by a higher uniform percentage. In effect, if a large sequestration is needed, the bar to cutting sequestrable Medicare payments by more than 4 percent means that other non-exempt programs must make up the difference.
 Though many programs are exempt from sequestration, they are not exempt from PAYGO. A bill to increase veterans’ disability benefits or Medicaid benefits must be offset, even though a sequestration, if it is required, will not reduce those benefits.
 Medicare payments for services, devices, or insurance plans are subject to sequestration within the limit described above; other payments – such as the low-income subsidy that is part of the prescription drug benefit—are not subject to sequestration.
A budgetary enforcement mechanism originally set forth in the Budget Enforcement Act (BEA), which effectively expired at the end of fiscal year 2002. Under this mechanism, proposed changes in, or new permanent, law were expected to be deficit neutral in the aggregate in the fiscal year of enactment or in a period of years. PAYGO was intended to control growth in direct spending and tax legislation. The Senate, in the concurrent resolution on the budget, has established an internal rule enforcing a requirement that direct spending or receipts legislation under consideration in the Senate be deficit neutral over certain periods of time. This Senate PAYGO rule is enforced by points of order. (See also Point of Order; Sequestration.)
Senate Pay-As-You-Go Rule (Point of Order)
Congressional Record (LIS Link): https://www.congress.gov/congressionalrecord/2010/01/28/senate-section/article/S291-1