[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  
----------------------------------------------------------------------------------------------------------------
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.