Definition: A funding source used to pay for new government spending, usually comprised of reductions to, or elimination of, other government programs.
Used in a sentence: “GOP Lawmakers Not Calling for Offsets for Sandy Aid”
What it means: When Congress passes legislation that costs the government money—with the exception of the annual appropriations bills—they look to find “offsets,” or savings from other government programs to “pay for” the new legislation. Sometimes, offsets are colloquially referred to as “pay-fors”—literally, paying for something that the government wants to buy. Finding an offset can be a challenge because every Member of Congress has specific priorities and programs he or she wants to protect and taking funding from one program to pay for another often leads to internal debates between political parties or chambers.
History: It was not always the case that offsets were required for new government spending. In years past, when the economy was doing better and fiscal constraint was not governing Washington, new legislation could be passed without a specific offset—meaning the government would just pay for the program with new money—either adding to the deficit, or using tax revenue.
Off and on over the past 20 years, Congress has operated under a mechanism called PAYGO, under which any new government spending needed to be offset by savings from (or cuts to) current programs. In 2010 President Obama signed the Statutory Pay-As-You-Go Act into law, thus making PAYGO mandatory. Occasionally, Congress will pass legislation for disaster relief—as could be the case with Hurricane Sandy—or emergency spending to stimulate the economy—as with the American Recovery and Reinvestment Act—that is exempt from the PAYGO rules. This exemption allows money to move more quickly through the legislative process without finding an offset.
As an example of offsets in practice, the current fiscal cliff negotiations must deal the disagreement over how to offset the cost of extending several tax provisions like middle income tax cuts and unemployment benefits. If cost was no obstacle, extending these popular provisions would be a no-brainer, but finding a politically acceptable offset presents a real challenge.