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


                                     



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                       FEDERAL BORROWING AND DEBT

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[[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.
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             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.
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  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.
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                    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 
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\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.