PAYGO (Pay As You GO) is the practice of financing expenditures with funds that are currently available rather than borrowed.

The PAYGO compels new spending or tax changes not to add to the federal debt. Not to be confused with pay-as-you-go financing, which is when a government saves up money to fund a specific project. Under the PAYGO rules, a new proposal must either be "budget neutral" or offset with savings derived from existing funds. The goal of this is to require those in control of the budget to engage in the diligence of prioritizing expenses and exercising fiscal restraint.

An important example of such a system is the use of PAYGO in both the statutes of the U.S. Government and the rules in the U.S. Congress. First enacted as part of the Budget Enforcement Act of 1990 (which was incorporated as Title XIII of the Omnibus Budget Reconciliation Act of 1990), PAYGO required all increases in direct spending or revenue decreases to be offset by other spending decreases or revenue increases. It was thought that this would control increases in deficit spending. Direct spending (or "mandatory spending") is largely composed of "entitlement spending," which means that a group of beneficiaries are entitled to a benefit and, without further legislative action, the government must provide that benefit—hence it is considered to be "mandatory." Only by legislative action can the benefit be either expanded or reduced. If a benefit is expanded or increased, that increase in direct spending must be offset by an increase in revenue or a decrease in direct spending.

In terms of revenue, PAYGO is designed to control revenue reductions. If revenue is estimated to be reduced through a reduction in tax rates of any kind or other effects on revenue collected by the Federal Government, that effect on the deficit must be offset either through increased tax rates or increase in revenue collection elsewhere, or spending reductions of the same amount.

In the initial PAYGO regimen, enacted in the Omnibus Budget Reconciliation Act of 1990 (OBRA '90), by statutory requirement, if legislation enacted during a session of Congress had the effect of increasing the projected debt for the following year, a "sequestration" would be triggered. A sequestration is an across the board spending reduction of non-exempt mandatory programs to offset this increase in the deficit, as calculated by the Office of Management and Budget.

These rules were in effect from FY1991–FY2002. Enacted in 1990, it was extended in the Omnibus Budget Reconciliation Act of 1993 and the Balanced Budget Act of 1997. In FY 1991, the Federal deficit was 4.5% of GDP, and by FY 2000, the Federal surplus was 2.4%. Total Federal spending as a percentage of GDP decreased each year from FY1991 through FY 2000, falling from 22.3% to 18.4%. Deficits, though, returned by the last year PAYGO was in effect: There was a "return to deficits ($158 billion, 1.5% of GDP) in 2002".

Beginning in 1998, in response to the first federal budget surplus since 1969, Congress started enacting, and the President signing, increases in discretionary spending above the statutory limit using creative means such as advance appropriations, delays in making obligations and payments, emergency designations, and specific directives. While staying within the technical definition of the law, this allowed spending that otherwise would not be allowed. The result was emergency spending of $34 billion in 1999 and $44 billion in 2000.

The PAYGO statute expired at the end of 2002. After this, Congress enacted President George W. Bush's proposed 2003 tax cuts (enacted as the Jobs and Growth Tax Relief Reconciliation Act of 2003), and the Medicare Prescription Drug, Improvement, and Modernization Act. The White House acknowledged that the new Medicare prescription drug benefit plan would not meet the PAYGO requirements: