    [Budget of the U.S. Government]
    [VI. Investing in the Common Good: The Major Functions of the Federal Government]
    [29. Net Interest]
    [From the U.S. Government Publishing Office, www.gpo.gov]

    [[Page 211]]

                                29.  NET INTEREST

      ----------------------------------------------------------------------

                                                Table 29-1.  NET INTEREST
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                Estimate
                Function 900                1996   -----------------------------------------------------------------
                                           Actual      1997       1998       1999       2000       2001       2002
    ----------------------------------------------------------------------------------------------------------------
    Spending:
      Mandatory Outlays:
        Existing law...................    241,090    247,539    249,840    251,792    248,126    244,857    238,623
        Proposed legislation...........  .........       -157         19         51         77        106        139
    Tax Expenditures:
      Existing law.....................      1,300      1,290      1,285      1,270      1,215      1,170      1,155
    ----------------------------------------------------------------------------------------------------------------

      ----------------------------------------------------------------------
       The Federal Government pays large amounts of interest to the public,
    mainly on the securities it sells to finance the budget deficit.
       The Government also pays interest from one account to another, mainly
    due to the Government's investing of trust fund balances in Treasury
    securities. These payments move money from one budget account to
    another. Thus, net interest--which does not include these payments--
    closely measures Federal interest transactions with the public. In 1998,
    Federal outlays for net interest will total an estimated $249.9 billion.

    The Interest Burden

       As noted above, net interest directly relates to debt held by the
    public. It also relates to the interest rates on the Treasury securities
    that comprise that debt. In essence, debt held by the public is the
    total of all deficits that have accumulated in the past--minus the
    amount offset by budget surpluses. Recent large deficits sharply
    increased the ratio of debt held by the public as a percentage of Gross
    Domestic Product (GDP)--from 26.8 percent in 1980 to 51.9 percent in
    1993. Partly due to the huge rise in debt, interest rates on Treasury
    securities also rose sharply. The combination of much more debt and
    higher interest rates caused Federal net interest costs to mushroom--
    from 2.0 to 3.4 percent of GDP between 1980 and 1993 (see Chart 29-1).

       Now that the budget deficits have fallen, the ratio of net interest
    to GDP has begun to fall as well, from 3.4 percent in 1990 to 3.2
    percent in 1996. The President's plan to balance the budget by 2002
    would further reduce the ratio, to 2.4 percent by 2002, reflecting not
    just the gradually falling deficits but also lower interest rates on
    Treasury securities--both in the recent past and projected for the
    future.

     Components of Net Interest

       Net interest is gross interest on the public debt minus interest
    received by on-budget and off-budget trust funds and minus all of the
    activities that fall in the category of ``other interest'' (discussed
    later in this chapter).

       Gross Interest on the Public Debt: Gross interest on the public debt
    will total an estimated $366.1 billion in 1998 and $376.8 billion in
    2002. At the end of 1996, the gross debt totaled $5.147 trillion, of
    which $3.698 trillion was held by the public. The debt held by the
    public accounted for about a quarter of the total credit market debt
    owed by the non-financial sector.
       The Treasury Department's management of the debt, including its
    decisions about how much to invest in securities with different

    [[Page 212]]

    maturities, may substantially influence Federal interest payments. Since
    1993, the average maturity of marketable, privately held public debt
    shrunk from five years and ten months to five years and two months,
    cutting total interest outlays by an estimated $9.6 billion in 1994-
    1998. In 1997, Treasury plans to issue 10-year notes indexed to the
    Consumer Price Index. The principal, paid at maturity, is adjusted each
    month for inflation while interest, paid semiannually, is computed on
    the inflation-adjusted principal. Indexed bonds may have a lower yield
    than fixed-rate securities of similar maturity because the holder faces
    less risk from inflation.

       Interest Received by On-Budget Trust Funds: On-budget trust funds
    will earn, in interest, an estimated $63.7 billion in 1998 and $67.4
    billion in 2002. The civil service retirement and disability fund will
    receive almost half of it, while the military retirement fund will
    receive a fifth. The Medicare Hospital Insurance (HI) trust fund will
    receive over $10 billion in 1998. Without changes in policy, the
    interest receipts of that fund will approach zero as it sells its
    Treasury securities to offset a growing deficit.
       Interest Received by Off-Budget Trust Funds: Under current law, the
    receipts and disbursements of Social Security's old-age and survivors
    insurance (OASI) trust fund and disability insurance (DI) trust fund are
    excluded from the budget. Social Security, however, is a Federal
    program. Thus, net interest includes the off-budget interest earnings.
    Because Social Security will accumulate large surpluses over the next
    several years, interest earnings of the off-budget trust funds will rise
    from an estimated $45.2 billion in 1998 to $61.6 billion in 2002.
       Other Interest: Other interest includes both interest payments and
    interest collections--much of it consisting of intra-governmental
    payments and collections that arise from Federal revolving funds. These
    funds borrow from

    [[Page 213]]

    the Treasury to carry out lending or other business-type activities.

     Budgetary Effect, including the Federal Reserve

       The Federal Reserve System trades Treasury securities in the open
    market to implement monetary policy. The interest that Treasury then
    pays on the securities falls within net interest, but virtually all of
    it comes back to the Treasury as ``deposits of earnings of the Federal
    Reserve System.'' These budget receipts will total an estimated $23.0
    billion in 1998 and $24.2 billion in 2002.