    [Analytical Perspectives]
    [Federal Borrowing and Debt]
    [11. Federal Borrowing and Debt]
    [From the U.S. Government Printing Office, www.gpo.gov]

      ======================================================================

                           FEDERAL BORROWING AND DEBT

      ======================================================================

    [[Page 187]]

                         11.  FEDERAL BORROWING AND DEBT

      Debt is the largest legally binding obligation of the Federal
    Government. At the end of 1995 the Government owed $3,603 billion of
    principal to the people who had loaned it the money to pay for past
    deficits. The gross Federal debt, which also includes the securities
    held by trust funds and other Government accounts, was $4,921 billion.
    This year the Government is estimated to pay about $247 billion of
    interest to the public on its debt.

                                 Table 11-1.  TRENDS IN FEDERAL DEBT HELD BY THE PUBLIC
                                              (Dollar amounts in billions)
    ----------------------------------------------------------------------------------------------------------------
                                    Debt held by the public   Debt held by the public as   Interest on debt held by
                                 ----------------------------        a percent of:          the public as a percent
                                                             ----------------------------           of:\4\
             Fiscal year             Current     Constant CY                   Credit    ---------------------------
                                     dollars        1992         GDP\2\        market         Total
                                                 dollars\1\                    debt\3\       outlays         GDP
    ----------------------------------------------------------------------------------------------------------------
    1950........................       219.0       1,235.3         80.1          55.3          11.4           1.8
    1955........................       226.6       1,092.9         57.3          43.3           7.6           1.3
    1960........................       236.8       1,025.3         45.6          33.8           8.5           1.5
    1965........................       260.8       1,051.5         38.0          26.9           8.1           1.4
    1970........................       283.2         950.3         28.1          20.8           7.9           1.5
    1975........................       394.7         699.3         25.4          18.4           7.5           1.7

    1980........................       709.8       1,203.1         26.1          18.4          10.6           2.3
    1981........................       785.3       1,213.8         25.8          18.5          12.1           2.7
    1982........................       919.8       1,329.2         28.6          19.8          13.6           3.1
    1983........................     1,131.6       1,563.0         33.1          21.9          13.8           3.3
    1984........................     1,300.5       1,727.1         34.0          22.1          15.7           3.5

    1985........................     1,499.9       1,927.9         36.5          22.3          16.2           3.7
    1986........................     1,736.7       2,170.9         39.8          22.6          16.1           3.6
    1987........................     1,888.7       2,292.1         41.0          22.3          16.0           3.5
    1988........................     2,050.8       2,404.2         41.4          22.3          16.2           3.5
    1989........................     2,189.9       2,463.3         40.9          22.0          16.5           3.5

    1990........................     2,410.7       2,606.2         42.4          22.5          16.2           3.6
    1991........................     2,688.1       2,785.6         45.9          24.0          16.2           3.7
    1992........................     2,998.8       3,016.9         48.8          25.5          15.5           3.5
    1993........................     3,247.5       3,183.8         50.2          26.4          14.9           3.2
    1994........................     3,432.1       3,287.5         50.2          26.5          14.4           3.1

    1995........................     3,603.4       3,370.8         50.2          26.3          15.7           3.3
    1996 estimate...............     3,768.7       3,429.2         50.1     ............       15.7           3.3
    1997 estimate...............     3,933.0       3,483.6         49.7     ............       15.0           3.1
    1998 estimate...............     4,057.5       3,500.8         48.8     ............       14.4           2.9
    1999 estimate...............     4,150.6       3,485.0         47.5     ............       14.0           2.8

    2000 estimate...............     4,207.1       3,442.8         45.8     ............       13.5           2.6
    2001 estimate...............     4,226.7       3,365.2         43.8     ............       13.0           2.4
    2002 estimate...............     4,209.6       3,265.8         41.5     ............       12.4           2.3
    ----------------------------------------------------------------------------------------------------------------
    \1\Debt in current dollars deflated by the GDP chain-type price index with calendar year 1992 equal to 100. For
      1950 and 1955, indexes were not available from the recent comprehensive revision of the national income and
      product accounts. Estimates of the index for those years were based on the ratio between the GDP chain-type
      price index and the unrevised implicit GDP deflator for FY 1960.
    \2\GDP from the recent comprehensive revision of the national income and product accounts except for 1950 and
      1955. Estimates of GDP for those years were based on the ratio between revised and unrevised GDP for FY 1960.
    \3\Total credit market debt owed by domestic nonfinancial sectors, modified to be consistent with budget
      concepts for the measurement of Federal debt. Financial sectors are omitted to avoid double counting, since
      financial intermediaries both borrow and lend in the credit market. Source: Federal Reserve Board flow of
      funds accounts. Projections are not available.
    \4\Interest on debt held by the public is estimated as the interest on the public debt less the ``interest
      received by trust funds'' (subfunction 901 less subfunctions 902 and 903). It does not include the
      comparatively small amount of interest on agency debt or the offsets for interest on public debt received by
      other Government accounts.

      The present deficit is continuing to increase the amount of Federal
    debt held by the public. However, the Omnibus Budget Reconciliation Act
    of 1993 and the strong economic expansion have reduced the size of the
    deficit for three consecutive years, and the Administration is proposing
    steps to meet its goal of balancing the budget by 2002. The reduction in
    the deficit over the next few years will lower the growth of the debt
    further and will decrease debt held by the public as a percentage of the
    Nation's gross domestic product (GDP).
                             Trends in Federal Debt
      Federal debt held by the public has increased five-fold since 1980, as
    shown in Table 11-1. In 1980 it was $709.8 billion; by the end of 1995
    it stood at $3,603.4 billion. The data in this table are supplemented
    for earlier years by Tables 7.1-7.3 in Historical Tables, which is
    published as a separate volume of the budget.
      At the end of World War II, Federal debt was more than 100 percent of
    GDP. From then until the 1970s, Federal debt grew gradually, but, due to
    inflation, it
    [[Page 188]]
    declined significantly in real terms. Because of an
    expanding economy as well as inflation, Federal debt as a percentage of
    GDP decreased almost every year. With households borrowing heavily to
    buy homes and consumer durables, and with businesses borrowing heavily
    to buy plant and equipment, Federal debt also decreased almost every
    year as a percentage of the total credit market debt outstanding. The
    cumulative effect was impressive. From 1950 to 1975, debt held by the
    public declined from 80.1 percent of GDP to 25.4 percent, and from 55.3
    percent of credit market debt to 18.4 percent. At the same time, despite
    rising interest rates, interest outlays became a smaller share of the
    budget and were roughly stable as a percentage of GDP.
      During the 1970s, large budget deficits emerged as the economy was
    disrupted by oil shocks and inflation. The nominal amount of Federal
    debt more than doubled, and, despite high inflation, the real value of
    Federal debt increased by a fourth. The ratios of Federal debt to GDP
    and credit market debt stopped declining after the middle of the decade.
      The growth of Federal debt held by the public accelerated during the
    early 1980s due to very large budget deficits. Since the deficits have
    continued to be large, debt has continued to grow substantially,
    although the rate of increase has been slowed. With inflation reduced,
    the rapid growth in nominal debt has meant a rapid growth in real debt
    as well. The ratio of Federal debt to GDP rose from 26.1 percent in 1980
    to 50.2 percent in 1993, the highest ratio since the mid-1950s. The
    ratio of Federal debt to credit market debt also rose, though to a much
    lesser extent, from 18.4 percent to 26.4 percent. Interest outlays on
    debt held by the public, calculated as a percentage of both total
    Federal outlays and GDP, increased by about two-fifths.
      Federal debt held by the public increased more slowly in 1994 than in
    any year since 1979, and it increased more slowly still in 1995. In both
    years it approximately stayed the same relative to GDP and total credit
    market debt. Table 11-1 shows that debt as a percentage of GDP is
    estimated to decline further from 50.2 percent in 1995 to 41.5 percent
    in 2002. The improvement in the past two years reflects the $505 billion
    deficit reduction package enacted by the Omnibus Budget Reconciliation
    Act of 1993 and the continuing economic expansion. The further
    improvement to 2002 reflects the proposal for a balanced budget and the
    expectation that economic growth will continue at a moderate pace for
    the foreseeable future.\1\ Interest outlays on the debt held by the
    public are estimated to decline relative to both total outlays and GDP
    over the next few years.
      \1\Chapter 1 of this volume, ``Economic Assumptions,'' reviews recent
    economic developments and explains the economic assumptions for this
    budget.
    ---------------------------------------------------------------------------
                 Debt Held by the Public and Gross Federal Debt
      The Federal Government issues debt for two principal purposes. First,
    it borrows from the public in order to finance the Federal deficit.
    Second, it issues debt to Government accounts, primarily trust funds,
    that accumulate surpluses. By law, most trust fund surpluses must be
    invested in Federal securities. The gross Federal debt is defined to
    consist of both the debt held by the public and the debt held by
    Government accounts. Nearly all the Federal debt has been issued by the
    Treasury and is formally called ``public debt,'' but a small portion has
    been issued by other Government agencies and is called ``agency
    debt.''\2\
      \2\The term ``agency debt'' is defined more narrowly in the budget
    than in the securities market, where it includes not only the debt of
    the Federal agencies listed in Table 11-3 but also the debt of the
    Government-sponsored enterprises listed in Table 8-11 at the end of
    Chapter 8 and certain Government-guaranteed securities.

                                  Table 11-2.  FEDERAL GOVERNMENT FINANCING AND DEBT\1\
                                                 (In billions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                              Estimate
                                        1995   ---------------------------------------------------------------------
                                       Actual     1996      1997      1998      1999      2000      2001      2002
    ----------------------------------------------------------------------------------------------------------------
    Financing:
       Surplus or deficit (-).......    -163.9    -145.6    -140.1     -98.0     -64.4     -27.5       8.3      43.9
         (On-budget)................    -226.3    -211.0    -210.4    -175.3    -150.2    -119.7     -90.6     -62.2
         (Off-budget)...............      62.4      65.3      70.3      77.3      85.8      92.1      98.9     106.1
       Means of financing other than
       borrowing from the public:
         Changes in:\2\
           Treasury operating cash
           balance..................      -2.0      -2.1  ........  ........  ........  ........  ........  ........
           Checks outstanding,
           etc.\3\..................      -2.8        -*      -3.3  ........  ........  ........  ........  ........
           Deposit fund balances....       0.9       0.1      -1.5  ........  ........  ........  ........  ........
         Seigniorage on coins.......       0.7       0.7       0.6       0.7       0.7       0.8       0.8       0.8
         Less: Net financing
         disbursements:
           Direct loan financing
           accounts.................      -7.0     -17.9     -20.8     -25.2     -27.3     -27.3     -26.7     -25.7
           Guaranteed loan financing
           accounts.................       2.9      -0.4       0.8      -2.0      -2.2      -2.4      -1.9      -1.9
                                     -------------------------------------------------------------------------------
         Total, means of financing
         other than borrowing from
         the public.................      -7.4     -19.6     -24.2     -26.5     -28.7     -29.0     -27.8     -26.8
                                     -------------------------------------------------------------------------------
       Total, requirement for
       borrowing from the public....    -171.3    -165.3    -164.3    -124.5     -93.1     -56.5     -19.6      17.1
       Change in debt held by the
       public.......................     171.3     165.3     164.3     124.5      93.1      56.5      19.6     -17.1

    Debt Outstanding, End of Year:
       Gross Federal debt:
         Debt issued by Treasury....   4,894.0   5,172.1   5,465.4   5,720.3   5,948.5   6,154.8   6,330.5   6,477.3
         Debt issued by other
         agencies...................      27.0      35.2      33.4      30.1      30.0      29.9      29.6      29.2
                                     -------------------------------------------------------------------------------
         Total, gross Federal debt..   4,921.0   5,207.3   5,498.9   5,750.4   5,978.5   6,184.7   6,360.2   6,506.5
       Held by:
         Government accounts........   1,317.6   1,438.6   1,565.8   1,692.9   1,827.9   1,977.6   2,133.5   2,296.8
         The public.................   3,603.4   3,768.7   3,933.0   4,057.5   4,150.6   4,207.1   4,226.7   4,209.6
           Federal Reserve Banks....     374.1  ........  ........  ........  ........  ........  ........  ........
           Other....................   3,229.3  ........  ........  ........  ........  ........  ........  ........

    Debt Subject to Statutory
     Limitation, End of Year:
       Debt issued by Treasury......   4,894.0   5,172.1   5,465.4   5,720.3   5,948.5   6,154.8   6,330.5   6,477.3
       Less: Treasury debt not
       subject to limitation\4\.....     -15.6     -15.6     -15.6     -15.6     -15.6     -15.6     -15.6     -15.6
       Agency debt subject to
       limitation...................       0.1       0.1       0.1       0.1       0.1       0.1       0.1       0.1
       Adjustment for discount and
       premium\5\...................       6.1       6.1       6.1       6.1       6.1       6.1       6.1       6.1
                                     -------------------------------------------------------------------------------
       Total, debt subject to
       statutory limitation\6\......   4,884.6   5,162.7   5,456.0   5,710.9   5,939.2   6,145.5   6,321.2   6,467.9

    ----------------------------------------------------------------------------------------------------------------
    *$50 million or less.

    \1\Treasury securities held by the public and zero-coupon bonds held by Government accounts are almost entirely
      measured at sales price plus amortized discount or less amortized premium. Agency debt is almost entirely
      measured at face value. Treasury securities in the Government account series are measured at face value less
      unrealized discount (if any).

    \2\A decrease in the Treasury operating cash balance (which is an asset) would be a means of financing the
      deficit and therefore have a positive sign. An increase in checks outstanding or deposit fund balances (which
      are liabilities) would also be a means of financing the deficit and therefore have a positive sign.

    \3\Besides checks outstanding, includes accrued interest payable on Treasury debt, miscellaneous liability
      accounts, allocations of special drawing rights, and, as an offset, cash and monetary assets other than the
      Treasury operating cash balance, miscellaneous asset accounts, and profit on the sale of gold.

    \4\Consists primarily of Federal Financing Bank debt.

    \5\Consists of unamortized discount (less premium) on public issues of Treasury notes and bonds (other than zero-
      coupon bonds) and unrealized discount on Government account series securities.

    \6\The statutory debt limit is $4,900 billion.

      Borrowing from the public, whether by the Treasury or by some other
    Federal agency, has a significant impact on the economy. Borrowing from
    the public is normally a good approximation to the Federal demand on
    credit markets. Even if the proceeds are used productively for tangible
    or intangible investment, the Federal demand on credit markets has to be
    financed out of the saving of households and businesses, the State and
    local sector, or the rest of the world.\3\ Federal borrowing therefore
    competes with the borrowing of other sectors for financial resources in
    the credit market and affects interest rates. Borrowing from the public
    moreover affects the size and composition of assets held by the private
    sector and the perceived wealth of the public. It also affects the
    amount of taxes required to pay interest to the public on Federal debt.
    Borrowing from the public is therefore an important concern of Federal
    fiscal policy.
      \3\The Federal sector of the national income and product accounts is a
    better measure of the deficit for analyzing the effect of Federal fiscal
    policy on national saving than is the budget deficit or Federal
    borrowing from the public. The Federal sector as defined prior to the
    recent comprehensive revisions, and its differences from the budget, are
    discussed in Analytical Perspectives for Fiscal Year 1996, Chapter 19,
    ``National Income and Product Accounts,'' pp. 267-70. For a major
    conceptual change due to the recent revisions, see chapter 6 of this
    volume, Part IV.
    ---------------------------------------------------------------------------
      Issuing debt securities to Government accounts performs an essential
    function in accounting for the operation of these funds. The balances of
    debt represent the cumulative surpluses of these funds due to the excess
    of their tax receipts and other collections compared to their spending.
    These balances can be used in later years to finance future payments to
    the public. The interest on the debt compensates these funds--and the
    members of the public who pay earmarked taxes or user fees into these
    funds--for spending some of their collections at a later time than when
    they receive it. Public policy may deliberately run surpluses and
    accumulate debt in trust funds and other Government accounts in order to
    finance future spending.
      However, issuing debt to Government accounts does not have any of the
    economic effects of borrowing from the public. It is an internal
    transaction between two accounts, both within the Government itself. It
    is not a current transaction of the Government with the public; it does
    not compete with the private sector for available funds in the credit
    market; and it does not represent the estimated amount of the account's
    future transactions with the public. For example, if the account records
    the transactions of a social insurance program, the debt that it holds
    does not represent the
    [[Page 189]]
    actuarial present value of expected future
    benefits. The future transactions of Federal social insurance and
    employee retirement programs, which own over four-fifths of the debt
    held by Government accounts, are important in their own right and need
    to be considered separately; this can be done through information
    published in actuarial and financial reports.\4\ Debt held by the public
    is therefore a better concept than gross Federal debt for analyzing the
    effect of the budget on the economy.\5\
      \4\A summary of actuarial estimates for many of these programs is
    prepared annually by the Financial Management Service, Department of the
    Treasury, in ``Statement of Liabilities and Other Financial Commitments
    of the United States Government.'' The estimates in that report are not,
    however, all comparable with one another in concept or actuarial
    assumptions.
      \5\Debt held by the public was measured until several years ago as the
    par value (or face value) of the security, which is the principal amount
    due at maturity. The only exception was savings bonds. However, most
    Treasury securities are sold at a discount from par, and some are sold
    at a premium. Treasury debt held by the public is now measured as the
    sales price plus the amortized discount (or less the amortized premium).
    At the time of sale, the value equals the sales price. Subsequently, the
    value equals the sales price plus the amount of the discount that has
    been amortized up to that time. In equivalent terms, the value equals
    par less the unamortized discount. (For a security sold at a premium,
    the definition is symmetrical.) Agency debt, except for zero-coupon
    certificates, is recorded at par. For further analysis of these
    concepts, see Special Analysis E, ``Borrowing and Debt,'' in Special
    Analyses, Budget of the United States Government, Fiscal Year 1990, pp.
    E-5 to E-8, although some of the practices it describes have been
    changed.
    ---------------------------------------------------------------------------
                        Borrowing and Government Deficits
      Table 11-2 summarizes Federal borrowing and debt from 1995 through
    2002. In 1995 the borrowing from the public was $171.3 billion, and
    Federal debt held by the public increased to $3,603.4 billion. The
    issuance of debt to Government accounts was $106.0 billion, and gross
    Federal debt increased to $4,921.0 billion. Borrowing from the public is
    estimated to decline to $164.3 billion in 1997.
      Borrowing from the public depends both on the Federal Government's
    expenditure programs and tax laws and on economic conditions. The
    sensitivity of the budget to economic conditions is analyzed in Chapter
    1 of this volume.
    [[Page 190]]

      Debt held by the public.--Table 11-2 shows the relationship between
    borrowing from the public and the Federal deficit. The total deficit of
    the Federal Government includes not only the budget deficit but also the
    surplus or deficit of the off-budget Federal entities, which have been
    excluded from the budget by law. Under present law the off-budget
    Federal entities are the social security trust funds (old-age and
    survivors insurance and disability insurance) and the Postal Service
    fund.\6\ Since social security had a large surplus in 1995 and is
    estimated to have even larger surpluses over the next few years, the
    off-budget surplus reduces the requirement for Treasury to borrow from
    the public by a substantial amount.
      \6\For further explanation of the off-budget Federal entities, see
    Chapter 20, ``Off-Budget Federal Entities.''
    ---------------------------------------------------------------------------
      The total Federal deficit is financed either by borrowing from the
    public or by the other means shown in Table 11-2, such as a decrease in
    Treasury's cash balance. In 1995 these other accounts added up to a
    negative amount, -$7.4 billion, which increased the need to borrow from
    the public. In some past years, the net amount of these items was
    positive and reduced the Government's borrowing requirements.
      Many of these other means of financing are normally small relative to
    borrowing from the public. This is because they are limited by their own
    nature. Decreases in cash balances, for example, are inherently limited
    by past accumulations, which themselves required financing when they
    were built up.
      However, a new and larger ``other means of financing'' was created by
    the Federal Credit Reform Act of 1990. Budget outlays for direct loans
    and loan guarantees consist of the estimated subsidy cost of the loans
    or guarantees at the time when the direct loans or guaranteed loans are
    disbursed. The portion of the net cash flow that does not represent a
    cost to the Government is non-budgetary in nature and is recorded as a
    transaction of the financing account for each credit program.\7\
      \7\The Federal Credit Reform Act of 1990 (sec. 505(b)) requires that
    the financing accounts be non-budgetary. As explained in Chapter 20,
    ``Off-Budget Federal Entities,'' they are non-budgetary in concept
    because they do not measure cost. For additional discussion of credit
    reform, see Chapter 8, ``Underwriting Federal Credit and Insurance,''
    and Chapter 24, ``Budget System and Concepts and Glossary.''
    ---------------------------------------------------------------------------
      The ``net financing disbursements'' of a financing account are defined
    in the same way as the ``outlays'' of a budgetary account and may be
    either positive or negative. They are positive if the gross
    disbursements by the account--whether to the public or to a budgetary
    account--exceed the collections from both of these sources; they are
    negative if the collections exceed the gross disbursements. If the net
    financing disbursements are positive, they must be paid in cash and thus
    increase the requirement for Treasury borrowing; if the net financing
    disbursements are negative, they provide cash to the Treasury that can
    be used to pay the Government's bills in the same way as tax receipts,
    borrowing, or any other cash collection. The financing accounts are
    therefore a means of financing the Government, positive or negative,
    just like the other means listed in Table 11-2. A positive amount of net
    financing disbursements is shown in the table by the financing account
    having a negative sign, like the deficit, so that it is shown adding to
    the requirement for borrowing from the public.
      The financing accounts added $4.1 billion to borrowing requirements in
    1995. They are estimated to add substantially more in 1996 and later
    years, mainly because of the growth of the direct student loan program
    expected under current law. Beginning this year, eligible educational
    institutions may select either the direct lending or the guaranteed
    lending program for their students. Since direct loans require cash
    disbursements equal to the full amount of the loans when the loans are
    made, Federal borrowing requirements are initially increased. The
    conversion of a Small Business Administration program from loan
    guarantees to direct loans will also contribute to this effect. The
    total net financing disbursements for all credit programs are estimated
    to reach a peak in 2000 and then to decline gradually because of loan
    repayments.

      Debt held by Government accounts.--The amount of Federal debt issued
    to Government accounts depends largely on the surpluses of the trust
    funds, both on-budget and off-budget, which owned 95 percent of the
    total Federal debt held by Government accounts at the end of 1995. In
    1997, for example, the total trust fund surplus is estimated to be
    $123.8 billion, and Government accounts are estimated to invest $127.2
    billion in Federal securities. The small difference is because some
    other accounts hold Federal debt and because the trust funds may change
    the amount of their cash assets not currently invested. The amounts held
    in major accounts and the annual investments are shown in Table 11-4.
                                   Agency Debt
      Several Federal agencies, shown in Table 11-3, sell debt securities to
    the public and to other Government accounts. During 1995, agencies
    repaid $1.2 billion. Agency debt is only one percent of Federal debt
    held by the public.

                                                Table 11-3.  AGENCY DEBT
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                           Borrowing or repayment (-) of
                                                                                        debt                Debt end
                                                                         ---------------------------------  of 1997
                                                                             1995       1996       1997     estimate
                                                                            actual    estimate   estimate
    ----------------------------------------------------------------------------------------------------------------
    Borrowing from the public:
      Defense...........................................................  .........         -6  .........  .........
      Housing and Urban Development:
        Federal Housing Administration..................................        -24  .........  .........         71
      Interior..........................................................  .........  .........  .........         13
      Small Business Administration:
        Participation certificates: SBIC and section 505 development
         company........................................................  .........        -67  .........          7
      Architect of the Capitol..........................................         -1         -1         -2        179
      Farm Credit System Financial Assistance Corporation...............  .........  .........  .........      1,261
      Federal Deposit Insurance Corporation:
        FSLIC Resolution Fund...........................................        -32        -32        -31         95
      National Archives.................................................         -4         -4         -4        286
      Tennessee Valley Authority........................................     -1,162        645     -1,203     24,402
                                                                         -------------------------------------------
          Total, borrowing from the public..............................     -1,223        534     -1,240     26,314
                                                                         ===========================================
    Borrowing from other funds:
      Housing and Urban Development:
        Federal Housing Administration..................................         -1  .........  .........         16
      Postal Service Fund\1\............................................  .........      4,406       -508      3,898
      Tennessee Valley Authority\1\.....................................  .........      3,200  .........      3,200
                                                                         -------------------------------------------
          Total, borrowing from other funds.............................         -1      7,606       -508      7,114
                                                                         ===========================================
          Total, agency borrowing.......................................     -1,224      8,140     -1,748     33,428
    ----------------------------------------------------------------------------------------------------------------
    \1\The ``borrowing from other funds'' by the Postal Service fund and TVA in 1996 was the result of the FFB
      swapping Postal Service and TVA securities with the Civil Service Retirement and Disability trust fund in
      exchange for Treasury securities having an equal present value. The amount of Postal Service securities
      exchanged (in terms of face value) was $4,665 million, of which $258 million was repaid later in 1996 to
      arrive at the estimated net ``borrowing'' of $4,406 million. See the narrative for further explanation.

      The reason for issuing agency debt differs considerably from one
    agency to another. The predominant agency borrower from the public is
    the Tennessee Valley Authority, which had $25.0 billion outstanding at
    the end of 1995, or 92 percent of all agency debt held by the public.
    TVA debt was primarily sold to finance capital expenditures and to
    refund other issues of its existing debt.
      The Federal Housing Administration, on the other hand, has for many
    years issued both checks and debentures as means of paying claims to the
    public that arise from defaults on FHA-insured mortgages. Issuing
    debentures to pay the Government's bills is equivalent to borrowing from
    the public and then paying the bills by disbursing the cash borrowed, so
    the transaction is recorded as being simultaneously an outlay and a
    borrowing. The notes are therefore classified as agency debt. The
    borrowing by FHA and other agencies that
    [[Page 191]]
    have engaged in similar
    transactions is thus inherent in the way that their programs operate.\8\
      \8\The debt securities of the FSLIC Resolution fund and Department of
    the Interior were also issued as a means of paying specified bills. The
    budgetary treatment of these and similar securities is further explained
    in Special Analysis E of the 1989 Budget, pp. E-25 to E-26; and Special
    Analysis E of the 1988 Budget, pp. E-27 to E-28.
    ---------------------------------------------------------------------------
      Some types of lease-purchase contracts are equivalent to direct
    Federal construction financed by Federal borrowing. The Federal
    Government guaranteed the debt used to finance the construction of
    buildings for the National Archives and the Architect of the Capitol and
    has exercised full control over the design, construction, and operation
    of the buildings. The construction expenditures and interest were
    therefore classified as Federal outlays, and the borrowing was
    classified as Federal agency borrowing from the public. The securities
    used to finance the construction of the building for the Architect of
    the Capitol were zero-coupon certificates, for which the sales price was
    about one-fourth of par value. As an exception to the normal treatment
    of agency debt, but like Treasury zero-coupon bonds, they are recorded
    at the sales price plus the amortized discount. The interest is accrued
    as an outlay.
      The proper budgetary treatment of lease-purchases was further examined
    in connection with the Budget Enforcement Act of 1990. Several changes
    were made. Among other decisions, it was determined that outlays for a
    lease-purchase in which the Government assumes substantial risk will be
    recorded in an amount equal to the asset cost over the period during
    which the contractor constructs, manufactures, or purchases the asset;
    if the asset already exists, the outlays will be recorded when the
    contract is signed. Agency borrowing will be recorded each year to the
    extent of these outlays. The agency debt will subsequently be redeemed
    over the lease payment period by a portion of the annual lease payments.
    This rule was effective starting in 1991. However, no lease-purchase
    agreements in which the Government assumes substantial risk have yet
    been authorized or are estimated for 1996 or 1997.
      The amount of agency securities recognized as part of gross Federal
    debt in tables 11-1 and 11-3 has been substantially affected by
    borrowing from the Federal Financing Bank (FFB). The FFB is an entity
    within the Treasury Department, one of whose purposes is to substitute
    Treasury borrowing for agency borrowing from the public. It has the
    authority to purchase agency debt and finance these purchases by
    borrowing from the Treasury. Agency borrowing from the FFB is not
    included in gross Federal debt. It would be double counting to add
    together (a) the agency borrowing from the FFB and (b) the Treasury
    borrowing from the public that was needed to provide the FFB with the
    funds to lend to the agencies.
      As explained in a later section of this chapter, the debt of the
    agencies that borrow from the FFB is not subject to the statutory debt
    limitation. This enabled Treasury to raise additional cash to avoid
    default during the recent dispute with Congress over the budget and the
    debt limit. On February 14, 1996, FFB swapped most of its holdings of
    TVA and Postal Service debt in exchange for Treasury securities held by
    the Civil Service Retirement and Disability trust fund (CSRDF).
    [[Page 192]]
    The Treasury securities, which were subject to the debt limit, were canceled
    in an exchange that took place between the FFB and the Treasury
    immediately afterwards. This reduced the amount of debt subject to
    limit, which allowed Treasury to sell to the public more securities that
    are subject to the debt limit.
       The TVA and Postal Service securities acquired by CSRDF are included
    in gross Federal debt shown in table 11-2 and are included in table 11-3
    as amounts borrowed from other funds. Including debt held by Government
    accounts in gross Federal debt is not double counting, because Treasury
    does not have to borrow from the public in order for these accounts to
    buy the securities. Moreover, the TVA and Postal Service securities
    acquired by CSRDF replaced Treasury securities, which were counted in
    gross Federal debt.
      The swap between FFB and CSRDF was equal in present value terms,
    measuring how much the securities were worth to CSRDF at the time of the
    exchange, but the face value of the Treasury and agency securities
    differed: $7.9 billion of agency securities at face value were swapped
    for $8.6 billion of Treasury securities at face value. Agency securities
    such as those held by CSRDF and Treasury securities of the type held by
    CSRDF are recorded at face value--rather than at the current amount of
    their discounted or present value--in calculating gross Federal debt and
    the other debt series shown in this chapter. Therefore, the tables in
    this chapter show that agency debt increased by $7.9 billion, Treasury
    debt decreased by $8.6 billion, and gross Federal debt decreased by $0.7
    billion. CSRDF is protected by various provisions from default risk on
    its agency debt securities. It is assumed for purposes of the estimates
    in the budget that CSRDF will hold the agency debt until maturity (or
    call date), at which time the principal repayments will be invested in
    Treasury securities.
                        Debt Held by Government Accounts
      Trust funds, and some public enterprise revolving funds and special
    funds, accumulate cash in excess of current requirements in order to
    meet future obligations. These cash surpluses are invested mostly in
    Treasury debt and, to a very small extent, in agency debt.\9\
      \9\As discussed in the section on the statutory debt limit, certain
    funds were not fully invested during part of fiscal year 1996 due to the
    differences between the President and the Congress over the budget and
    the debt limit. It is assumed for purposes of the estimates in the
    budget that these funds will be fully invested by the end of the year.
    ---------------------------------------------------------------------------
      Investment by trust funds and other Government accounts was around $10
    billion per year in the early 1980s. Primarily due to the Social
    Security Amendments of 1983, an expanding economy, and the creation of
    the military retirement trust fund, investment has risen greatly since
    then. It was $106.0 billion in 1995 and, as shown in Table 11-4, it is
    estimated to be $127.7 billion in 1997. The holdings of Federal
    securities by Government accounts are estimated to rise to $1,565.8
    billion by the end of 1997, or 28 percent of the gross Federal debt.
    This percentage is estimated to rise further as the budget moves toward
    balance and borrowing from the public declines.

      The large investment by Government accounts is concentrated among a
    few trust funds. The two social security trust funds--old-age and
    survivors insurance and disability insurance--have a large combined
    surplus and invest increasing amounts almost each year: a total of
    $201.6 billion during 1995-97, which constitutes 57 percent of the total
    estimated investment by Government accounts.
      In addition to these two funds, the largest current investors are the
    two major Federal employee retirement funds: the civil service
    retirement and disability trust fund and the military retirement trust
    fund. They account for 28 percent of the total investment by Government
    accounts during 1995-97. Altogether, the investment of social security
    and these two retirement funds comprises 84 percent of the investment by
    all Government accounts during this period. At the end of 1997, they are
    estimated to account for 74 percent of the total holdings by Government
    accounts. Another 8 percent will be accounted for by the hospital
    insurance trust fund, which invested heavily in the past but does not
    add to its invested balances over this period.
      Technical note on measurement.--The Treasury securities held by
    Government accounts consist almost entirely of the Government account
    series. Most were issued at par value (face value), and the securities
    issued at a discount or premium have traditionally been recorded at par
    in the OMB and Treasury reports on Federal debt. However, there have
    recently been two exceptions. First, in 1991 Treasury began to issue
    zero-coupon bonds to the Pension Benefit Guaranty Corporation (PBGC).
    Because the purchase price was a small fraction of par value and the
    amounts were large, the PBGC holdings were recorded at purchase price
    plus amortized discount. The valuation method was the estimated market
    or redemption price. Treasury aggregated all debt held by Government
    accounts at par but subtracted the unamortized discount in calculating
    ``net federal securities held as investments of government accounts.''
    These securities were redeemed during 1994.
      Second, in September 1993 Treasury also began to subtract the
    unrealized discount on other Government account series securities in
    calculating ``net federal securities held as investments of government
    accounts.'' Unlike the discount recorded for PBGC or for debt held by
    the public, this discount is the amount at the time of issue and is not
    amortized over the term of the security. In Table 11-4 it is shown as a
    separate item at the end of the table and not distributed by account.
    The data for 1989-92 were revised retroactively for this change.
                           Limitations on Federal Debt

      Definition of debt subject to limit.--Statutory limitations have
    normally been placed on Federal debt. Until World War I, the Congress
    ordinarily authorized

    [[Page 193]]
                                    Table 11-4.  DEBT HELD BY GOVERNMENT ACCOUNTS\1\
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                         Investment or disinvestment (-)   Holdings
                                                                        ---------------------------------   end of
                                Description                                 1995       1996       1997       1997
                                                                           actual    estimate   estimate   estimate
    ----------------------------------------------------------------------------------------------------------------
    Investment in Treasury debt:
      Overseas Private Investment Corporation..........................        149        104        126       2,330
      Defense-Civil: Military retirement trust fund....................      7,596      4,381      3,686     121,030
      Energy: Nuclear waste disposal fund..............................        455        672        658       6,012
      Health and Human Services:
        Federal old-age and survivors insurance trust fund\2\..........     34,522     50,565     62,293     560,805
        Federal disability insurance trust fund\2\.....................     29,125     14,423     10,681      60,329
        Federal hospital insurance trust fund..........................      1,149     -6,423      3,027     126,468
        Federal supplementary medical insurance trust fund.............     -7,975     11,321      2,504      27,338
      Housing and Urban Development:
        Federal Housing Administration mutual mortgage fund............        946      1,960        720       9,353
        Other HUD......................................................        503        407        421       5,252
      Interior:
        Outer Continental Shelf deposit funds..........................         91         51     -1,468          20
        Abandoned Mine Reclamation fund................................        130        108         93       1,516
      Labor:
        Unemployment trust fund........................................      7,354      6,263      6,442      59,846
        Pension Benefit Guaranty Corporation...........................        460        860      1,043       7,635
      State: Foreign Service retirement and disability trust fund......        622        640        664       9,105
      Transportation:
        Highway trust fund.............................................        837      2,857      2,537      23,925
        Airport and airway trust fund..................................     -1,061     -2,855        393       8,683
        Oil spill liability trust fund.................................        175        -38        238       1,382
      Treasury: Exchange stabilization fund............................     -4,926        151        215       2,765
      Veterans Affairs:
        National service life insurance trust fund.....................        101         29        400      12,383
        Other trust funds..............................................         25         12         12       1,712
        Federal funds..................................................        -34         -6        -10         552
      Environmental Protection Agency:
        Hazardous substance trust fund.................................        840        141      1,599       7,921
        Leaking underground storage tank trust fund....................        154        -17        163       1,209
      Office of Personnel Management:
        Civil Service retirement and disability trust fund\3\..........     27,237     19,725     27,936     413,787
        Employees life insurance fund..................................        910        981        937      17,757
        Employees health benefits fund.................................        316         76        204       8,170
      Federal Deposit Insurance Corporation:
        Bank Insurance fund............................................      7,045      1,435      1,779      24,231
        FSLIC Resolution fund..........................................     -1,122         -9        198         717
        Savings Association Insurance fund.............................      1,107      5,867        106       9,573
      National Credit Union Administration: Share insurance fund.......        276        177        200       3,680
      Postal Service fund\2\...........................................        -21       -249  .........       1,000
      Railroad Retirement Board trust funds............................      2,237       -456        814      14,798
      Tennessee Valley Authority.......................................     -2,712        -22     -1,220  ..........
      Other Federal funds..............................................        311       -139       -296       3,695
      Other trust funds................................................        620        404        639       6,934
      Unrealized discount\1\...........................................     -1,415  .........  .........      -3,188
                                                                        --------------------------------------------
          Total, investment in Treasury debt\1\........................    106,025    113,396    127,734   1,558,726
                                                                        ============================================
    Investment in agency debt:
      Housing and Urban Development: Government National Mortgage
       Association.....................................................         -1  .........  .........          16
      Office of Personnel Management: Civil Service retirement and
       disability trust fund\3\........................................  .........      7,606       -508       7,098
                                                                        --------------------------------------------
          Total, investment in agency debt.............................         -1      7,606       -508       7,114
                                                                        ============================================
          Total, investment in Federal debt\1\.........................    106,024    121,002    127,226   1,565,840
                                                                        ============================================
                                 MEMORANDUM
    Investment by Federal funds (on-budget)............................      2,586     11,565      4,033      77,327
    Investment by Federal funds (off-budget)...........................        -21       -249  .........       1,000
    Investment by trust funds (on-budget)..............................     41,137     44,646     51,687     869,546
    Investment by trust funds (off-budget).............................     63,648     64,988     72,974     621,134
    Investment by deposit funds\4\.....................................         91         51     -1,468          20
    Unrealized discount\1\.............................................     -1,415  .........  .........      -3,188

    ----------------------------------------------------------------------------------------------------------------
    \1\Debt held by Government accounts is measured at face value except for the unrealized discount on Government
      account series securities, which is not distributed by account. Changes in the unrealized discount are not
      estimated.

    \2\Off-budget Federal entity.

    \3\The FFB swapped Treasury securities with the Civil Service retirement and disability trust fund (CSRDF) in
      1996 in exchange for securities having an equal present value. The result is shown in this table as an
      investment in agency debt and a reduction of investment in Treasury debt for CSRDF. CSRDF acquired agency
      securities having a face value of $7,865 million, of which $258 million was redeemed later in 1996 for an
      estimated net investment during the year of $7,606 million. See narrative in the section on agency debt for
      further explanation.

    \4\Only those deposit funds classified as Government accounts.

    [[Page 194]]

    a specific amount of debt for each separate issue.
    Beginning with the Second Liberty Bond Act of 1917, however, the nature
    of the limitation was modified in several steps until it developed into
    a ceiling on the total amount of most Federal debt outstanding. The
    latter type of limitation has been in effect since 1941. The limit
    currently applies to most debt issued by the Treasury since September
    1917, whether held by the public or by Government accounts; and other
    debt issued by Federal agencies that, according to explicit statute, is
    guaranteed as to principal and interest by the United States Government.
      The lower part of Table 11-2 compares total Treasury debt with the
    amount of Federal debt that is subject to the limit. Most of the
    Treasury debt not subject to limit was issued by the FFB (Federal
    Financing Bank). It is authorized to have outstanding up to $15 billion
    of publicly issued debt, and this amount was issued several years ago to
    the Civil Service Retirement and Disability trust fund. The remaining
    Treasury debt not subject to limit consists almost entirely of silver
    certificates and other currencies no longer being issued.
      The sole type of agency debt currently subject to the general limit is
    the debentures issued by the Federal Housing Administration, which were
    only $87 million at the end of 1995. Some of the other agency debt,
    however, is subject to its own statutory limit. For example, the
    Tennessee Valley Authority is limited to $30 billion of securities
    outstanding (including its debt to the FFB, the Treasury, or other
    Government accounts).
      The comparison between Treasury debt and debt subject to limit also
    includes an adjustment for measurement differences in the treatment of
    discounts and premiums. As explained elsewhere in this chapter, debt
    securities may be sold at a discount or premium, and the measurement of
    debt may take this into account rather than recording the face value of
    the securities. However, the treatment differs between gross Federal
    debt (and its components) and the statutory definition of debt subject
    to limit. An adjustment is needed to derive debt subject to limit (as
    defined by law) from Treasury debt, and this adjustment is specified in
    footnote 5 to Table 11-2. The amount is relatively small: $6.1 billion
    at the end of 1995 compared to the total discount (less premium) of
    $80.0 billion recognized on Treasury securities.

      Methods of changing the debt limit.--The statutory debt limit has
    frequently been changed. Since 1960, Congress has passed 65 separate
    acts to raise the limit, extend the duration of a temporary increase, or
    revise the definition.
      The statutory limit can be changed by normal legislative procedures.
    It can also be changed as a consequence of the annual congressional
    budget resolution, which is not itself a law. The budget resolution
    includes a provision specifying the appropriate level of the debt
    subject to limit at the end of each fiscal year. The rules of the House
    of Representatives provide that, when the budget resolution is adopted
    by both Houses of the Congress, the vote in the House of Representatives
    is deemed to have been a vote in favor of a joint resolution setting the
    statutory limit at the level specified in the budget resolution. The
    joint resolution is transmitted to the Senate for further action. It may
    be amended in the Senate to change the debt limit provision or in any
    other way. If it passes both Houses of the Congress, it is sent to the
    President for his signature. This method directly relates the decision
    on the debt limit to the decisions on the Federal deficit and other
    factors that determine the change in the debt subject to limit. Both
    methods have been used numerous times. In 1995, however, the House of
    Representatives suspended its special rule for the fiscal year 1996
    budget resolution.

      Recent changes in the debt limit.--Major increases in the debt limit
    were enacted as part of the deficit reduction packages in 1990 and 1993.
    The Omnibus Budget Reconciliation Act of 1990 raised the limit to $4,145
    billion as part of the budget negotiations between the President and the
    Congress. The Omnibus Budget Reconciliation Act of 1993, which the
    President signed into law on September 30, 1993, raised the limit to
    $4,900 billion. Both changes in law were preceded by one or more
    temporary increases in the limit before agreement was reached on the
    debt and the deficit reduction measures. These increases in the debt
    limit were both large enough to last over two years without a further
    change in law, the longest times without an increase since the period
    from 1946 to 1954.
      The debt again approached the limit in 1995, and the limit again
    became part of the larger issue of deficit reduction. The Congressional
    Budget Resolution instructed the Ways and Means and the Finance
    Committees to submit provisions for the reconciliation bill that would
    increase the limit to $5,500 billion.
      As the debt came close to the limit in October and November 1995
    without a budget agreement, the Treasury Department took several actions
    to control debt and cash more tightly in order to stay under the limit.
    It reduced or postponed auctions, suspended the issuance of State and
    local government series securities, and suspended ``foreign add-ons'' to
    Treasury bills and notes (additional amounts issued to Federal Reserve
    Banks as agents for foreign and international monetary authorities).
    Congress passed a bill raising the debt limit temporarily, but the
    President vetoed it on November 13. It would have limited the Treasury's
    powers to manage Federal debt to avoid default, and it would have
    reduced the limit by $100 billion (to $4,800 billion) when the temporary
    increase expired on December 13.
      By November 15, 1995, the debt subject to limit was virtually at the
    limit and Treasury was obligated to make large cash payments. On that
    date, the Secretary of Treasury announced two steps to avoid default. He
    authorized the redemption of $39.8 billion of Treasury securities held
    by the Civil Service Retirement and Disability trust fund (CSRDF), and
    he authorized not reinvesting the $21.5 billion of Treasury securities
    held by the ``G-fund'' portion of the Thrift Savings Fund (the Federal
    Employees Retirement System's Government
    [[Page 195]]
    Securities Investment Trust).
    This provided $61.3 billion of additional borrowing authority. The law
    provides that at the end of a ``debt limit suspension period'' both
    funds are to be made whole with respect to lost interest and principal,
    so the beneficiaries of these funds do not suffer any losses.
      The disagreement over how to reduce the deficit continued. Congress
    passed a budget reconciliation bill in December that included a
    provision increasing the debt limit to $5,500 billion, but the bill
    included many provisions unacceptable to the President and he vetoed it.
    On December 29, Treasury was unable to issue securities to the CSRDF to
    invest the $14.0 billion of interest payments that it received from the
    general fund and the FFB. In January, Treasury announced three further
    steps. The Secretary authorized the redemption of $6.4 billion
    additional Treasury securities from CSRDF; the reinvestment of Treasury
    securities held by the Exchange Stabilization Fund (about $3.9 billion)
    would be suspended; and agency securities held by the Federal Financing
    Bank would be swapped with an equivalent amount of Treasury securities
    held by CSRDF. As explained in the section of this chapter on agency
    securities, the latter step reduced the debt subject to limit by $8.6
    billion.
      This was not enough, however, to ensure timely payment of social
    security benefits and other amounts payable at the beginning of March,
    and the Secretary of Treasury said he had no other options that were
    both legal and prudent. Congress passed an act temporarily exempting
    from limit an amount of Treasury securities equal to the social security
    benefits payable in March 1996, with the exemption expiring at the
    earlier of an increase in the debt limit or March 15, 1996. The
    President signed the bill into law on February 8, the amount of the
    social security benefits was $29.0 billion, and $29.0 billion of cash
    management bills were sold under this authority later in the month. The
    debt limit issue remained to be resolved.

      Federal funds financing and the change in debt subject to limit.--The
    change in debt held by the public, as shown in Table 11-2, is determined
    principally by the total Government deficit. The debt subject to limit,
    however, includes not only debt held by the public but also debt held by
    Government accounts. The change in debt subject to limit is therefore
    determined both by the factors that determine the total Government
    deficit and by the factors that determine the change in debt held by
    Government accounts.

                   Table 11-5.  FEDERAL FUNDS FINANCING AND CHANGE IN DEBT SUBJECT TO STATUTORY LIMIT
                                                (In billions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                              Estimate
               Description               1995  ---------------------------------------------------------------------
                                       actual     1996      1997      1998      1999      2000      2001      2002
    ----------------------------------------------------------------------------------------------------------------
    Federal funds surplus or deficit
     (-)............................    -263.2    -256.5    -263.9    -224.3    -200.6    -177.2    -146.7    -118.4
      (On-budget)...................    -265.2    -256.8    -261.3    -224.2    -202.1    -177.7    -148.5    -120.3
      (Off-budget)..................       2.0       0.3      -2.6        -*       1.5       0.5       1.8       1.8
                                     ===============================================================================
    Means of financing other than
     borrowing:
      Change in:\1\
        Treasury operating cash
         balance....................      -2.0      -2.1  ........  ........  ........  ........  ........  ........
        Checks outstanding, etc.\2\.      -8.3       1.2      -4.1  ........  ........  ........  ........  ........
        Deposit fund balances\3\....       0.9       0.1      -1.5  ........  ........  ........  ........  ........
      Seigniorage on coins..........       0.7       0.7       0.6       0.7       0.7       0.8       0.8       0.8
      Less: Net financing
       disbursements:
        Direct loan financing
         accounts...................      -7.0     -17.9     -20.8     -25.2     -27.3     -27.3     -26.7     -25.7
        Guaranteed loan financing
         accounts...................       2.9      -0.4       0.8      -2.0      -2.2      -2.4      -1.9      -1.9
          Total, means of financing
           other than borrowing.....     -12.9     -18.4     -25.1     -26.5     -28.7     -29.0     -27.8     -26.8
                                     ===============================================================================
    Decrease or increase (-) in
     Federal debt held by Federal
     funds and deposit funds\4\.....      -2.7     -11.4      -2.6      -0.7       1.2        -*      -0.9      -1.0
    Increase or decrease (-) in
     Federal debt not subject to
     limit..........................      -1.2       8.1      -1.7      -3.4      -0.1      -0.1      -0.2      -0.5
                                     ===============================================================================
          Total, requirement for
           Federal funds borrowing
           subject to debt limit....    -280.0    -278.1    -293.3    -254.9    -228.3    -206.3    -175.7    -146.7
                                     ===============================================================================
    Adjustment for change in
     discount or premium\5\.........       0.8  ........  ........  ........  ........  ........  ........  ........
    Increase in debt subject to
     limit..........................     279.3     278.1     293.3     254.9     228.3     206.3     175.7     146.7

                ADDENDUM
    Debt subject to statutory
     limit\6\.......................   4,884.6   5,162.7   5,456.0   5,710.9   5,939.2   6,145.5   6,321.2   6,467.9
    ----------------------------------------------------------------------------------------------------------------
    *$50 million or less.
    \1\A decrease in the Treasury operating cash balance (which is an asset) would be a means of financing the
      deficit and therefore have a positive sign. An increase in checks outstanding or deposit fund balances (which
      are liabiities) would also be a means of financing the deficit and therefore also have a positive sign.
    \2\Besides checks outstanding, includes accrued interest payable on Treasury debt, miscellaneous liability
      accounts, allocations of special drawing rights, and, as an offset, cash and monetary assets other than the
      Treasury operating cash balance, miscellaneous asset accounts, and profit on sale of gold.
    \3\Does not include investment in Federal debt securities by deposit funds classified as part of the public.
    \4\Only those deposit funds classified as Government accounts.
    \5\Consists of unamortized discount (less premium) on public issues of Treasury notes and bonds (other than zero-
      coupon bonds) and unrealized discount on Government account series securities.
    \6\The statutory debt limit is $4,900 billion.

      The budget is composed of two groups of funds, Federal funds and trust
    funds. The Federal funds, in the main, are derived from tax receipts and
    borrowing and are used for the general purposes of the Government. The
    trust funds, on the other hand, are financed by taxes or other
    collections earmarked by law for specified
    [[Page 196]]
    purposes, such as paying social security benefits or grants to State governments for highway construction.\10\
      \10\For further discussion of the trust funds and Federal funds
    groups, see Chapter 18, ``Trust Funds and Federal Funds.''
    ---------------------------------------------------------------------------
      A Federal funds deficit must generally be financed by borrowing,
    either by selling securities to the public or by issuing securities to
    Government accounts. Federal funds borrowing consists almost entirely of
    the Treasury issuing securities that are subject to the statutory debt
    limit. Trust fund surpluses are almost entirely invested in these
    securities, and trust fund holdings include most of the debt held by
    Government accounts. The change in debt subject to limit is therefore
    determined principally by the Federal funds deficit, which is equal to
    the arithmetic sum of the total Government deficit and the trust fund
    surplus.
      Table 11-5 derives the change in debt subject to limit. In 1997 the
    Federal funds deficit is estimated to be $263.9 billion, and other
    factors increase the requirement to borrow subject to limit by $29.4
    billion. The largest other factor is the direct loan financing accounts.
    As explained in an earlier section, their disbursements are excluded
    from the budget by law because they do not represent a cost to the
    Government, but they have to be financed and they are currently growing.
    As a result, the debt subject to limit is estimated to increase by
    $293.3 billion, which is $129.0 billion more than the increase in debt
    held by the public.
      As long as the trust fund surplus is large, the Federal funds deficit
    will be much more than the total Government deficit; and the increase in
    debt subject to limit will be much more than the increase in debt held
    by the public. The trust fund surplus through 2002 is estimated to grow
    still larger, so the debt limit will have to be increased in the future
    by much more than needed to finance the total Government deficit. This
    can be seen by comparing the annual increase in debt subject to limit in
    Table 11-5 with the annual deficit and borrowing from the public in
    Table 11-2. The increase in debt subject to limit is more than $100
    billion higher every year. In 2002, when the budget has a $43.9 billion
    surplus, debt subject to limit increases by $146.7 billion.
                         Debt Held by Foreign Residents
      During most of American history the Federal debt was held almost
    entirely by individuals and institutions within the United States. In
    the late 1960s, as shown in Table 11-6, foreign holdings were just over
    $10.0 billion, less than 5 percent of the total Federal debt held by the
    public.

                                                          Table 11-6.  FOREIGN HOLDINGS OF FEDERAL DEBT
                                                                  (Dollar amounts in billions)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                         Debt held by the public           Borrowing from the public         Interest on debt held by the
                                                   ----------------------------------------------------------------------               public
                      Fiscal year                                                                                        -----------------------------------
                                                     Total    Foreign\1\  Percentage   Total\2\   Foreign\1\  Percentage                          Percentage
                                                                            foreign                             foreign    Total\3\   Foreign\4\    foreign
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    1965..........................................    260.8       12.3          4.7        3.9         0.3          6.4        9.6         0.5          4.9
    1966..........................................    263.7       11.6          4.4        2.9        -0.7         n.a.       10.1         0.5          5.1
    1967..........................................    266.6       11.4          4.3        2.9        -0.2         n.a.       11.1         0.6          5.1
    1968..........................................    289.5       10.7          3.7       22.9        -0.7         n.a.       11.9         0.7          5.6
    1969..........................................    278.1       10.3          3.7       -1.3        -0.4         n.a.       13.5         0.7          5.3

    1970..........................................    283.2       14.0          5.0        3.5         3.8        107.2       15.4         0.8          5.5
    1971..........................................    303.0       31.8         10.5       19.8        17.8         89.8       16.2         1.3          7.9
    1972..........................................    322.4       49.2         15.2       19.3        17.3         89.5       16.8         2.4         14.2
    1973..........................................    340.9       59.4         17.4       18.5        10.3         55.3       18.7         3.2         17.2
    1974..........................................    343.7       56.8         16.5        2.8        -2.6         n.a.       22.7         4.1         17.9

    1975..........................................    394.7       66.0         16.7       51.0         9.2         18.0       25.0         4.5         18.2
    1976..........................................    477.4       69.8         14.6       82.2         3.8          4.6       29.3         4.4         15.1
    TQ............................................    495.5       74.6         15.1       18.1         4.9         26.9        7.8         1.2         14.9
    1977..........................................    549.1       95.5         17.4       53.6        20.9         39.0       33.8         5.1         15.0
    1978..........................................    607.1      121.0         19.9       58.0        25.4         43.5       40.2         7.9         19.5
    1979\5\.......................................    640.3      120.3         18.8       33.2        -0.7         n.a.       49.9        10.7         21.5

    1980..........................................    709.8      121.7         17.1       69.5         1.4          2.0       62.8        11.0         17.5
    1981..........................................    785.3      130.7         16.6       75.5         9.0         12.0       81.7        16.4         20.1
    1982..........................................    919.8      140.6         15.3      134.4         9.9          7.4      101.2        18.7         18.5
    1983..........................................  1,131.6      160.1         14.1      211.8        19.5          9.2      111.6        19.2         17.2
    1984..........................................  1,300.5      175.5         13.5      168.9        15.4          9.1      133.5        20.3         15.2

    1985\5\.......................................  1,499.9      222.9         14.9      199.4        47.4         n.a.      152.9        23.0         15.1
    1986..........................................  1,736.7      265.5         15.3      236.8        42.7         18.0      159.3        24.2         15.2
    1987..........................................  1,888.7      279.5         14.8      152.0        14.0          9.2      160.4        25.7         16.0
    1988..........................................  2,050.8      345.9         16.9      162.1        66.4         40.9      172.3        29.9         17.4
    1989..........................................  2,189.9      394.9         18.0      139.1        49.0         35.2      189.0        37.1         19.6

    1990\5\.......................................  2,410.7      440.3         18.3      220.8        45.4         n.a.      202.4        40.3         19.9
    1991..........................................  2,688.1      477.3         17.8      277.4        37.0         13.3      214.8        42.0         19.5
    1992..........................................  2,998.8      535.2         17.8      310.7        57.9         18.6      214.5        40.5         18.9
    1993..........................................  3,247.5      591.3         18.2      247.4        56.1         22.7      210.2        41.1         19.6
    1994..........................................  3,432.1      655.6         19.1      184.7        64.3         34.8      210.6        44.5         21.1
    1995..........................................  3,603.4      848.1         23.5      171.3       192.5        112.4      239.2        58.4         24.4
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\Estimated by Treasury Department. These estimates exclude agency debt, the holdings of which are believed to be small. The data on foreign holdings
      are not recorded by methods that are strictly comparable with the data on debt held by the public. Projections are not available.
    \2\Borrowing from the public is defined as equal to the change in debt held by the public from the beginning of the year to the end, except to the
      extent that the amount of debt is changed by reclassification.
    \3\Estimated as interest on the public debt less ``interest received by trust funds'' (subfunction 901 less subfunctions 902 and 903). Does not include
      the comparatively small amount of interest on agency debt or the offsets for interest on public debt received by other Government accounts.
    \4\Estimated by Bureau of Economic Analysis, Department of Commerce. These estimates include small amounts of interest from other sources, including the
      debt of Government-sponsored enterprises, which are not part of the Federal Government.
    \5\Benchmark revisions reduced the estimated foreign holdings of Federal debt as of December 1978 and increased the estimated foreign holdings as of
      December 1984 and December 1989. As a result, the data on foreign holdings in different time periods are not strictly comparable, and the
      ``borrowing'' from foreign residents in 1979, 1985, and 1989 reflects the benchmark revision as well as the net purchases of Federal debt securities.
    n.a.=Not applicable due to negative numbers or benchmark revision.

      Foreign holdings began to grow much faster starting in 1970. This
    increase has been primarily due to foreign decisions, both official and
    private, rather than the direct marketing of these securities to foreign
    residents. At the end of fiscal year 1995 foreign holdings of Treasury
    debt were $848.1 billion, which was 23.5 percent of the total debt held
    by the public. Foreign central banks owned 55 percent of the Federal
    debt held by foreign residents; private investors owned nearly all the
    rest. All the Federal debt held by foreign residents is denominated in
    dollars.
      Although the amount of debt held by foreigners has grown greatly since
    the early 1980s, the proportion they own did not change much during this
    period until 1995. Last year, however, foreign holdings increased by
    $192.5 billion,\11\ which was more than the total Federal borrowing from
    the public. As a result, the percentage of Federal debt held by foreign
    residents grew from 19.1 percent at the end of 1994 to 23.5 percent at
    the end of 1995. The largest part of foreign purchases was by private
    investors, influenced, among other factors, by rising U.S. bond prices.
    Foreign central banks purchases to support the dollar were a
    contributing factor.
      \11\The amount reported by the Bureau of Economic Analysis, Department
    of Commerce, was less due to a different method of valuing the
    securities.
    ---------------------------------------------------------------------------
      Foreign holdings of Federal debt are almost one-fourth of the foreign-
    owned assets in the U.S., and foreign purchases of Federal debt
    securities are normally only a moderate part of the total capital inflow
    from abroad. The foreign purchases of Federal debt securities do not
    measure the full impact of the capital inflow from abroad on the market
    for Federal debt securities. The capital inflow supplies additional
    funds to the credit market generally, which affect the market for
    Federal debt. For example, the capital inflow includes deposits in U.S.
    financial intermediaries that themselves buy Federal debt.
                          Federally Assisted Borrowing
      The effect of the Government on borrowing in the credit market arises
    not only from its own borrowing to finance Federal operations but also
    from its assistance to certain borrowing by the public. Federally
    assisted borrowing is of two principal types: Government-guaranteed
    borrowing, which is another term for guaranteed lending, and borrowing
    by Government-sponsored enterprises (GSEs). The Federal Government also
    exempts the interest on most State and local government debt from income
    tax; and it insures the deposits of banks and thrift institutions, which
    themselves make loans.
      Federal credit assistance is discussed in Chapter 8, ``Underwriting
    Federal Credit and Insurance.'' Detailed data are presented in tables at
    the end of that chapter. Table 11-7 brings together the totals of
    Federal and federally assisted borrowing and lending and shows the
    trends since 1965 in terms of both dollar amounts and, more
    significantly, as percentages of total credit market borrowing or
    lending. The Federal and federally assisted lending is recorded at face
    value. It does not measure the degree of subsidy provided by the credit
    assistance, nor does it indicate the extent to which the credit
    assistance changed the allocation of financial and real resources.
      The Federal borrowing participation rate has trended strongly upward
    since the 1960s. Much of the increase of the past decade compared to
    earlier periods has been
    [[Page 197]]
    due to higher GSE borrowing as well as Federal
    deficits. Furthermore, a rising part of federally assisted borrowing and
    lending in 1996 and 1997 is estimated to come from loan guarantees. The
    Federal lending participation rate has been smaller and more stable over
    time than the borrowing participation rate, because Federal direct loans
    are much smaller than Federal borrowing.

                                                     Table 11-7.  FEDERAL PARTICIPATION IN THE CREDIT MARKET
                                                                  (Dollar amounts in billions)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                       Actual                                                   Estimates
                                        --------------------------------------------------------------------------------------------------------------------
                                           1965     1970     1975     1980     1985     1990     1991     1992     1993     1994     1995     1996     1997
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Total net borrowing in credit
     market\1\.........................     66.7     87.9    169.7    336.3    826.5    722.3    502.0    540.8    578.5    618.4    717.5  .......  .......
                                        --------------------------------------------------------------------------------------------------------------------
    Federal borrowing from the public..      3.9      3.5     51.0     69.5    199.4    220.8    277.4    310.7    247.4    184.7    171.3    165.3    164.3
    Guaranteed borrowing...............      5.0      7.8      8.6     31.6     21.6     40.7     22.1     19.7     -2.0     38.7     26.2     55.8     63.2
    Government-sponsored enterprise
     borrowing\2\......................      1.2      4.9      5.3     21.4     57.9    115.4    124.6    150.8    170.2    140.0    158.3    130.0    154.4
                                        --------------------------------------------------------------------------------------------------------------------
      Total, Federal and federally
       assisted borrowing..............     10.1     16.2     65.0    122.5    278.9    376.9    424.1    481.2    415.6    363.4    355.8    351.1    381.9
    Federal borrowing participation
     rate (percent)....................     15.1     18.4     38.3     36.4     33.7     52.2     84.5     89.0     71.8     58.8     49.6  .......  .......
                                        ====================================================================================================================
    Total net lending in credit
     market\1\.........................     66.7     87.9    169.7    336.3    826.5    722.3    502.0    540.8    578.5    618.4    717.5  .......  .......
                                        --------------------------------------------------------------------------------------------------------------------
    Direct loans.......................      2.0      3.0     12.7     24.2     28.0      2.8     -7.5      7.0     -1.7     -0.8      1.6      8.6     15.0
    Guaranteed loans...................      5.0      7.8      8.6     31.6     21.6     40.7     22.1     19.7     -2.0     38.7     26.2     55.8     63.2
    Government-sponsored enterprise
     loans\2\..........................      1.4      5.2      5.5     24.1     60.7     90.0     90.7    145.2    163.2    144.0     88.7    144.1    144.4
                                        --------------------------------------------------------------------------------------------------------------------
      Total, Federal and federally
       assisted lending................      8.3     15.9     26.9     79.9    110.3    133.5    105.3    171.9    159.5    181.9    116.5    208.5    222.6
    Federal lending participation rate
     (percent).........................     12.4     18.1     15.9     23.8     13.3     18.5     21.0     31.8     27.6     29.4     16.2  .......  .......
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\Total net borrowing (or lending) in credit market by domestic nonfinancial sectors excluding equities. Financial sectors are omitted to avoid double
      counting, since financial intermediaries both borrow and lend in the credit market. Source: Federal Reserve Board flow of funds accounts. Projections
      are not available.
    \2\Most Government-sponsored enterprises (GSEs) are financial intermediaries. GSE borrowing (lending) is nevertheless compared with total credit market
      borrowing (lending) because GSE borrowing (lending) is a proxy for the borrowing (lending) by nonfinancial sectors that is intermediated by GSEs. It
      assists the utlimate nonfinancial borrower (lender) whose loans are purchased or otherwise financed by GSEs. In order to avoid double counting, GSE
      borrowing and lending are calculated net of transactions with Federal agencies, transactions between GSEs, and transactions in guaranteed loans.