[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]
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29. NET INTEREST
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Table 29-1. NET INTEREST
(In millions of dollars)
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Estimate
Function 900 1996 -----------------------------------------------------------------
Actual 1997 1998 1999 2000 2001 2002
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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
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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
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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
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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.