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


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                       FEDERAL BORROWING AND DEBT

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                     12.  FEDERAL BORROWING AND DEBT

  Debt is the largest legally binding obligation of the Federal 
Government. At the end of 1996 the Government owed $3,733 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 $5,182 billion. 
This year the Government is estimated to pay around $253 billion of 
interest to the public on its debt.

                                                                                                                
                             TABLE 12-1.  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       CY 1992                     Credit    ---------------------------
                                 dollars     dollars \1\     GDP \2\     market debt      Total                 
                                                                             \3\         outlays         GDP    
----------------------------------------------------------------------------------------------------------------
1950........................       219.0       1,232.5         80.3          55.3          11.4           1.8   
1955........................       226.6       1,128.0         57.3          43.3           7.6           1.3   
1960........................       236.8       1,022.6         45.7          33.8           8.5           1.5   
1965........................       260.8       1,052.4         38.0          26.9           8.1           1.4   
1970........................       283.2         947.9         28.1          20.8           7.9           1.5   
1975........................       394.7         974.1         25.4          18.4           7.5           1.6   
                                                                                                                
1980........................       709.8       1,203.9         26.1          18.4          10.6           2.3   
1981........................       785.3       1,213.1         25.8          18.5          12.0           2.7   
1982........................       919.8       1,327.1         28.6          19.8          13.6           3.1   
1983........................     1,131.6       1,560.6         33.1          21.9          13.8           3.3   
1984........................     1,300.5       1,727.3         34.1          22.1          15.7           3.5   
                                                                                                                
1985........................     1,499.9       1,925.4         36.6          22.3          16.2           3.7   
1986........................     1,736.7       2,168.4         39.7          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       2,405.3         41.4          22.3          16.2           3.5   
1989........................     2,189.9       2,464.4         40.9          22.0          16.5           3.5   
                                                                                                                
1990........................     2,410.7       2,603.9         42.4          22.5          16.2           3.6   
1991........................     2,688.1       2,784.8         45.9          24.0          16.2           3.7   
1992........................     2,998.8       3,018.2         48.8          25.5          15.5           3.5   
1993........................     3,247.5       3,184.4         50.2          26.4          14.9           3.2   
1994........................     3,432.1       3,288.7         50.2          26.5          14.4           3.1   
                                                                                                                
1995........................     3,603.4       3,370.5         50.1          26.3          15.8           3.3   
1996........................     3,733.0       3,415.3         49.9          25.9          15.8           3.3   
1997 estimate...............     3,875.8       3,460.5         49.3     ............       15.5           3.2   
1998 estimate...............     4,021.4       3,499.6         48.9     ............       15.2           3.1   
1999 estimate...............     4,159.4       3,527.6         48.3     ............       14.7           3.0   
                                                                                                                
2000 estimate...............     4,269.0       3,527.2         47.2     ............       14.1           2.8   
2001 estimate...............     4,328.0       3,485.5         45.6     ............       13.7           2.7   
2002 estimate...............     4,333.1       3,401.2         43.5     ............       13.2           2.5   
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\1\ Debt in current dollars deflated by the GDP chain-type price index with calendar year 1992 equal to 100. For
  1950 and 1955, the index is not available from the recent comprehensive revision of the national income and   
  product accounts. The index to 1950 and 1955 was extapolated using the unrevised implicit GDP deflator.       
\2\  GDP for 1950 and 1955 was extrapolated using the unrevised GDP.                                            
\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 received by other Government
  accounts (revolving funds and special funds).                                                                 

  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 four 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 12-1. In 1980 it was $709.8 billion; by the end of 1996 
it stood at $3,733.0 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.

[[Page 218]]

  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 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 80.3 percent of GDP to 25.4 percent, and from 55.3 
percent of credit market debt to 18.4 percent. 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. Federal debt relative 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 and 
1996. By 1996 it had declined slightly relative to both GDP and total 
credit market debt. Table 12-1 shows that debt as a percentage of GDP is 
estimated to decline further from 49.9 percent in 1996 to 43.5 percent 
in 2002. The recent improvement reflects the deficit reduction package 
enacted by the Omnibus Budget Reconciliation Act of 1993 and the 
continuing economic expansion. The further improvement to 2002 reflects 
the Administration's 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.
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  \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, Gross Federal Debt, and Liabilities Other Than 
                                  Debt

  The Federal Government issues debt securities 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, trust fund 
surpluses must generally 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\
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  \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 12-3 but also the debt of the 
Government-sponsored enterprises listed in Table 8-10 at the end of 
Chapter 8 and certain Government-guaranteed securities.

[[Page 219]]

                             Table 12-2.  FEDERAL GOVERNMENT FINANCING AND DEBT \1\                             
                                             (In billions of dollars)                                           
----------------------------------------------------------------------------------------------------------------
                                                                               Estimate                         
                                              1996   -----------------------------------------------------------
                                             Actual     1997      1998      1999      2000      2001      2002  
----------------------------------------------------------------------------------------------------------------
Financing:                                                                                                      
  Surplus or deficit (-)..................    -107.3    -125.6    -120.6    -117.4     -87.1     -36.1      17.0
    (On-budget)...........................    -174.3    -199.5    -197.0    -204.7    -183.3    -139.2     -92.5
    (Off-budget)..........................      67.0      73.9      76.4      87.3      96.2     103.1     109.5
  Means of financing other than borrowing                                                                       
   from the public:                                                                                             
    Changes in: \2\                                                                                             
      Treasury operating cash balance.....      -6.3       4.2  ........  ........  ........  ........  ........
      Checks outstanding, etc. \3\........      -3.9        -*      -1.4  ........  ........  ........  ........
      Deposit fund balances...............      -1.0       0.7      -2.6  ........  ........  ........  ........
     Seigniorage on coins.................       0.6       0.6       0.6       0.6       0.6       0.6       0.6
     Less: Net financing disbursements:                                                                         
      Direct loan financing accounts......     -13.0     -22.6     -21.9     -21.9     -23.8     -24.4     -24.0
      Guaranteed loan financing accounts..       1.3      -0.2       0.4       0.6       0.7       0.9       1.2
                                           ---------------------------------------------------------------------
    Total, means of financing other than                                                                        
     borrowing from the public............     -22.3     -17.2     -24.9     -20.7     -22.4     -22.8     -22.1
                                           ---------------------------------------------------------------------
  Total, requirement for borrowing from                                                                         
   the public.............................    -129.6    -142.8    -145.6    -138.1    -109.6     -59.0      -5.2
  Change in debt held by the public.......     129.6     142.8     145.6     138.1     109.6      59.0       5.2
                                                                                                                
Debt Outstanding, End of Year:                                                                                  
  Gross Federal debt:                                                                                           
    Debt issued by Treasury...............   5,146.9   5,420.4   5,706.3   5,983.1   6,243.0   6,456.6   6,624.3
    Debt issued by other agencies.........      35.1      33.3      29.9      29.5      29.0      28.7      28.2
                                           ---------------------------------------------------------------------
    Total, gross Federal debt.............   5,181.9   5,453.7   5,736.2   6,012.6   6,272.0   6,485.2   6,652.5
  Held by:                                                                                                      
    Government accounts...................   1,449.0   1,577.9   1,714.8   1,853.2   2,003.0   2,157.2   2,319.4
    The public............................   3,733.0   3,875.8   4,021.4   4,159.4   4,269.0   4,328.0   4,333.1
      Federal Reserve Banks...............     390.9  ........  ........  ........  ........  ........  ........
      Other...............................   3,342.0  ........  ........  ........  ........  ........  ........
                                                                                                                
Debt Subject to Statutory Limitation, End                                                                       
 of Year:                                                                                                       
  Debt issued by Treasury.................   5,146.9   5,420.4   5,706.3   5,983.1   6,243.0   6,456.6   6,624.3
  Less: Treasury debt not subject to                                                                            
   limitation \4\.........................     -15.5     -15.5     -15.5     -15.5     -15.5     -15.5     -15.5
  Agency debt subject to limitation.......       0.1       0.1       0.1       0.1       0.1       0.1       0.1
  Adjustment for discount and premium \5\.       5.8       5.8       5.8       5.8       5.8       5.8       5.8
                                           ---------------------------------------------------------------------
  Total, debt subject to statutory                                                                              
   limitation \6\.........................   5,137.2   5,410.7   5,696.6   5,973.4   6,233.3   6,446.9   6,614.7
                                                                                                                
----------------------------------------------------------------------------------------------------------------
* $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 has 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 also 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 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 $5,500 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.\4\
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  \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 and its differences from 
the budget are discussed in Chapter 18 of this volume, ``National Income 
and Product Accounts.'' Also see Chapter 6 of this volume, Part IV, the 
section on the analysis of saving and investment.
  \4\ Debt held by the public was measured until 1988 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 measured value 
of the debt 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. Treasury has announced that in early 1997 it will begin to 
sell a new type of instrument, inflation-protected securities. The 
measured value of these securities will include a periodic adjustment 
for inflation.
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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 for 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 
anticipation of 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 actuarial present value of expected future 
benefits. The future transactions of Federal social insurance and 
em-

[[Page 220]]

ployee 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.\5\ Debt held by the public 
is therefore a better concept than gross Federal debt for analyzing the 
effect of the budget on the economy.
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  \5\ 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.
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  Debt securities do not encompass all the liabilities of the Federal 
Government. For example, accounts payable occur in the normal course of 
buying goods and services; social security benefits are due as of the 
end of the month but, according to statute, are payable as of the 
beginning of the next month; loan guarantee liabilities are assumed when 
the Government guarantees the payment of interest and principal on 
private loans; and liabilities for future pension payments are incurred 
as part of the compensation for the current services performed by 
Federal civilian and military employees in producing Government outputs. 
Like debt securities sold in the credit market, these liabilities have 
their own distinctive effects on the economy. Federal liabilities are 
analyzed within the framework of Federal resources and responsibilities 
in Chapter 2 of this volume, ``Stewardship: Toward a Federal Balance 
Sheet.'' \6\ The different types of liabilities are reported annually in 
the financial statements of the major Federal agencies and in the 
Consolidated Financial Statements of the United States Government.\7\
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  \6\ The balance sheet in Chapter 2 consolidates the Federal Reserve 
System with the rest of the Government, unlike the budget. As a result, 
the ``debt held by the public'' reported in that chapter, unlike the 
amounts reports in this chapter and elsewhere, is net of the Federal 
debt held by the Federal Reserve Banks.
  \7\ The Consolidated Financial Statements are published annually by 
the Financial Management Service, Department of the Treasury.
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                    Borrowing and Government Deficits

  Table 12-2 summarizes Federal borrowing and debt from 1996 through 
2002. In 1996 the borrowing from the public was $129.6 billion, and 
Federal debt held by the public increased to $3,733.0 billion. The 
issuance of debt to Government accounts was $131.3 billion, and gross 
Federal debt increased to $5,181.9 billion. Borrowing from the public is 
estimated to be a little higher during the next three years, due to 
slightly higher deficits and more loan disbursements, and then to 
decline substantially as the budget approaches balance in 2002.
  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.

  Debt held by the public.--Table 12-2 shows the relationship between 
borrowing from the public and the Federal deficit. The total deficit of 
the Federal Government includes not only the on-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.\8\ Since social security had a large surplus in 1996 and is 
estimated to continue having large surpluses over the next few years, 
the off-budget surplus reduces the requirement for Treasury to borrow 
from the public by a substantial amount.
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  \8\ For further explanation of the off-budget Federal entities, see 
Chapter 21, ``Off-Budget Federal Entities.''
---------------------------------------------------------------------------
  The total Federal deficit is financed either by borrowing from the 
public or by the other means shown in Table 12-2, such as a decrease in 
Treasury's cash balance. In 1996 these other accounts added up to a 
negative amount, -$22.3 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 cash flows do not represent costs to the Government above 
and beyond those costs already included in budget outlays. They are 
therefore non-budgetary in nature and are recorded as transactions of 
the financing account for each credit program.\9\
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  \9\ The Federal Credit Reform Act of 1990 (sec. 505(b)) requires that 
the financing accounts be non-budgetary. As explained in Chapter 21, 
``Off-Budget Federal Entities,'' they are non-budgetary in concept 
because they do not measure cost. For additional discussion of credit 
reform, see Chapter 24 of this volume, ``Budget System and Concepts and 
Glossary,'' and the other references cited in Chapter 21.
---------------------------------------------------------------------------
  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 12-2. A positive amount of net 
financing disbursements is shown in the table by the financing account 
having a negative sign, like the deficit, because it adds to the 
requirement for borrowing from the public.
  The financing accounts initially had a very small effect on borrowing 
requirements, but beginning in 1995 

[[Page 221]]

the effect began to get large. They 
added $4.1 billion to borrowing requirements in 1995, $11.7 billion in 
1996, and are estimated to add a little over $20 billion in 1997 and the 
subsequent years in the budget horizon. This is mainly because of the 
growth of the direct student loan program under current law. Beginning 
last year, eligible educational institutions could 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. Federal borrowing requirements are reduced when the 
loans are repaid.

  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 1996. In 
1998, for example, the total trust fund surplus is estimated to be 
$133.9 billion, and Government accounts are estimated to invest $136.9 
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 12-4.

                               Agency Debt

  Several Federal agencies, shown in Table 12-3, sell debt securities to 
the public and to other Government accounts. During 1996, agencies 
borrowed $0.4 billion from the public. Agency debt is only one percent 
of Federal debt held by the public.

                                            Table 12-3.  AGENCY DEBT                                            
                                            (In millions of dollars)                                            
----------------------------------------------------------------------------------------------------------------
                                                                       Borrowing or repayment (-) of            
                                                                                    debt                Debt end
                                                                     ---------------------------------  of 1998 
                                                                         1996       1997       1998     estimate
                                                                        actual    estimate   estimate           
----------------------------------------------------------------------------------------------------------------
Borrowing from the public:                                                                                      
  Housing and Urban Development:                                                                                
    Federal Housing Administration..................................         12          1  .........         83
  Interior..........................................................  .........  .........  .........         13
  Small Business Administration:                                                                                
    Participation certificates: SBIC and section 505 development                                                
     company........................................................        -67  .........  .........          7
  Architect of the Capitol..........................................         -1         -2         -2        177
  Farm Credit System Financial Assistance Corporation...............  .........  .........  .........      1,261
  Federal Deposit Insurance Corporation:                                                                        
    FSLIC Resolution Fund...........................................        -32        -31        -95  .........
  National Archives.................................................         -4         -4         -5        281
  Tennessee Valley Authority........................................        523     -1,232       -100     24,151
                                                                     -------------------------------------------
      Total, borrowing from the public..............................        431     -1,268       -202     25,975
                                                                     ===========================================
Borrowing from other funds:                                                                                     
  Housing and Urban Development:                                                                                
    Federal Housing Administration..................................        -16  .........  .........  .........
  Postal Service Fund \1\...........................................      4,406       -508     -3,181        717
  Tennessee Valley Authority \1\....................................      3,200  .........  .........      3,200
                                                                     -------------------------------------------
      Total, borrowing from other funds.............................      7,590       -508     -3,181      3,917
                                                                     ===========================================
      Total, agency borrowing.......................................      8,021     -1,776     -3,382     29,892
----------------------------------------------------------------------------------------------------------------
\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 $25.5 billion of securities 
outstanding at the end of 1996, or 93 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 have engaged in similar 
transactions is thus inherent in the way that their programs 
operate.\10\
---------------------------------------------------------------------------
  \10\ 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. Several years ago 
the Federal Government guaranteed the debt used to finance the 
construction of buildings for the National Archives and the Architect 

[[Page 222]]

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, the value of these certificates is measured as 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 1997 or 1998.
  The amount of agency securities sold to the public has been reduced 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 dispute with Congress over the budget and the debt 
limit a year ago. On February 14, 1996, FFB swapped most of its holdings 
of TVA and Postal Service debt to the Civil Service Retirement and 
Disability trust fund (CSRDF) in exchange for Treasury securities. 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 12-2 and are included in Table 12-3 
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 had been 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, agency debt 
increased by $7.9 billion, Treasury debt decreased by $8.6 billion, and 
gross Federal debt decreased by $0.7 billion. (The Postal Service 
redeemed some of its securities later in 1996, so the tables in this 
chapter show a net increase in agency debt of $7.6 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.
  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, annual investment has risen greatly 
since then. It was $131.3 billion in 1996, as shown in Table 12-4, and 
it is estimated to be about the same in 1997 and 1998. The holdings of 
Federal securities by Government accounts are estimated to rise to 
$1,714.8 billion by the end of 1998, or 30 percent of the gross Federal 
debt. This percentage is estimated to rise further in the following 
years as the budget moves toward balance and borrowing from the public 
declines.

[[Page 223]]

                                Table 12-4.  DEBT HELD BY GOVERNMENT ACCOUNTS \1\                               
                                            (In millions of dollars)                                            
----------------------------------------------------------------------------------------------------------------
                                                                     Investment or disinvestment (-)   Holdings 
                                                                    ---------------------------------   end of  
                            Description                                 1996       1997       1998       1998   
                                                                       actual    estimate   estimate   estimate 
----------------------------------------------------------------------------------------------------------------
Investment in Treasury debt:                                                                                    
  Overseas Private Investment Corporation..........................        188        181        166       2,634
  Defense-Civil: Military retirement trust fund....................      3,926      8,385      6,926     132,199
  Energy: Nuclear waste disposal fund..............................        629        802        843       6,956
  Health and Human Services:                                                                                    
    Federal old-age and survivors insurance trust fund \2\ ........     51,457     64,581     71,089     635,073
    Federal disability insurance trust fund \2\ ...................     14,875     11,351      9,370      70,821
    Federal hospital insurance trust fund..........................     -4,059    -10,553      2,113     117,365
    Federal supplementary medical insurance trust fund.............     13,662      3,112      1,171      31,458
  Housing and Urban Development:                                                                                
    Federal Housing Administration mutual mortgage fund............      1,057      3,431        797      11,958
    Other HUD......................................................        512        589        584       6,110
  Interior:                                                                                                     
    Outer Continental Shelf deposit funds..........................        138         50     -1,575          50
    Abandoned Mine Reclamation fund................................        111        148        117       1,691
  Labor:                                                                                                        
    Unemployment trust fund........................................      6,751      5,777      6,860      66,530
    Pension Benefit Guaranty Corporation...........................        801      1,250      1,263       9,045
  State: Foreign Service retirement and disability trust fund......        596        620        652       9,668
  Transportation:                                                                                               
    Highway trust fund.............................................      2,652      3,185      3,377      27,746
    Airport and airway trust fund..................................     -3,463        118       -128       7,672
    Oil spill liability trust fund.................................          3        -39        235       1,381
  Treasury: Exchange stabilization fund............................      9,453        566        248      12,667
  Veterans Affairs:                                                                                             
    National service life insurance trust fund.....................         53        -93       -122      11,792
    Other trust funds..............................................         31          7          3       1,729
    Federal funds..................................................          3        -12        -12         547
  Environmental Protection Agency:                                                                              
    Hazardous substance trust fund.................................        195      1,506       -606       7,276
    Leaking underground storage tank trust fund....................         37         12         83       1,194
  Office of Personnel Management:                                                                               
    Civil Service retirement and disability trust fund \3\.........     19,317     28,996     32,618     447,057
    Employees life insurance fund..................................      1,122      1,042      1,231      19,235
    Employees health benefits fund.................................        294     -1,020       -126       7,037
  Federal Deposit Insurance Corporation:                                                                        
    Bank Insurance fund............................................      1,169      3,201      1,182      26,569
    FSLIC Resolution fund..........................................        167        688        118       1,500
    Savings Association Insurance fund.............................      1,077      4,499        405       9,580
  National Credit Union Administration: Share insurance fund.......        181        162        168       3,815
  Postal Service fund \2\ .........................................       -389        240       -600         500
  Railroad Retirement Board trust funds............................      2,682     -2,470        555      15,207
  Tennessee Valley Authority.......................................       -291       -951  .........  ..........
  Other Federal funds..............................................        717       -264        515       5,339
  Other trust funds................................................        406        346        560       7,126
  Unrealized discount \1\ .........................................     -2,324  .........  .........      -5,643
                                                                    --------------------------------------------
      Total, investment in Treasury debt \1\.......................    123,731    129,444    140,080   1,710,884
                                                                    ============================================
Investment in agency debt:                                                                                      
  Housing and Urban Development:                                                                                
    Government National Mortgage Association.......................        -16  .........  .........  ..........
  Office of Personnel Management:                                                                               
    Civil Service retirement and disability trust fund \3\.........      7,606       -508     -3,181       3,917
                                                                    --------------------------------------------
      Total, investment in agency debt.............................      7,590       -508     -3,181       3,917
                                                                    ============================================
      Total, investment in Federal debt \1\........................    131,321    128,936    136,899   1,714,801
                                                                    ============================================
                             MEMORANDUM                                                                         
Investment by Federal funds (on-budget)............................     15,757     14,291      6,394      98,411
Investment by Federal funds (off-budget)...........................       -389        240       -600         500
Investment by trust funds (on-budget)..............................     51,809     38,423     52,221     915,589
Investment by trust funds (off-budget).............................     66,331     75,932     80,459     705,894
Investment by deposit funds \4\....................................        138         50     -1,575          50
Unrealized discount \1\............................................     -2,324  .........  .........      -5,643
----------------------------------------------------------------------------------------------------------------
\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.                                                 

  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 an increasing total amount each year: $222.7 billion 
during 1996-98, which constitutes 56 percent 

[[Page 224]]

of the total estimated investment by Government accounts.
  In addition to these two funds, the largest current investor is the 
civil service retirement and disability trust fund. It accounts for 21 
percent of the total investment by Government accounts during 1996-98, 
and the military retirement trust fund accounts for 5 percent. 
Altogether, the investment of social security and these two retirement 
funds comprises 82 percent of the investment by all Government accounts 
during this period. At the end of 1998, they are estimated to own 75 
percent of the total holdings by Government accounts. The hospital 
insurance trust fund, which invested heavily in the past, disinvested in 
1996 and is estimated to disinvest more in 1997. Under Administration 
proposals, it will have a small surplus and invest again beginning in 
1998.
  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. 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 12-4 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 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 12-2 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 $82 million at the end of 1996. 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, and 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 12-2. The amount is relatively small: $5.8 billion 
at the end of 1996 compared to the total discount (less premium) of 
$77.9 billion recognized on Treasury securities.

  Methods of changing the debt limit.--The statutory debt limit has 
frequently been changed. Since 1960, Congress has passed 67 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 

[[Page 225]]

debt subject to limit. Both methods have been used numerous times.

  Recent changes in the debt limit.--Major increases in the debt limit 
were enacted as part of the deficit reduction packages in the Omnibus 
Budget Reconciliation Acts of 1990 and 1993. 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. 
Both increases in the debt limit were large enough to last over two 
years without a further change in law, the longest periods 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 from $4,900 billion 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 Securities Investment Trust). 
This provided $61.3 billion of additional borrowing authority. The law 
requires 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 1996, Treasury announced three 
further steps that it subsequently took on February 14. The Secretary 
authorized the redemption of $6.4 billion of additional Treasury 
securities from CSRDF; the reinvestment of Treasury securities held by 
the Exchange Stabilization Fund (about $3.9 billion) was suspended; and 
agency securities held by the Federal Financing Bank were swapped for an 
equivalent amount of Treasury securities held by CSRDF. As explained in 
the section of this chapter on agency debt, the latter step reduced the 
debt subject to limit by $8.6 billion.
  These steps were not enough, however, to ensure the 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 
monthly 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 
that month. The social security benefits and other amounts payable at 
the beginning of March were paid.
  Congress passed another debt limit act in early March, which 
temporarily extended this exemption and exempted from limit certain 
obligations issued to trust funds and other accounts to which the 
Secretary of Treasury issues obligations. (The latter exemption was 
based on the deposits made to those funds and on the obligations held by 
those funds that matured during the period.) Both exemptions expired at 
the earlier of an increase in the debt limit or March 30. The President 
signed the bill into law on March 12. Under this authority, Treasury 
issued $58.2 billion of securities to trust funds and other accounts. 
Treasury was able to invest trust fund receipts as they were received, 
to reinvest the Exchange Stabilization Fund and the G-fund portion of 
the Thrift Savings Fund, and to completely invest the interest payments 
that CSRDF had received on December 29.
  On March 28, 1996, Congress passed the Contract with America 
Advancement Act of 1996, one provision of which increased the debt limit 
from $4,900 billion to $5,500 billion. The President signed the bill 
into law on March 29. This enabled Treasury to raise cash to pay its 
bills by borrowing from the public in the following days. On the same 
day as the President signed the Act, Treasury reinvested CSRDF for the 
securities that had been redeemed and restored to the G-fund the 
interest it had temporarily lost. (The interest temporarily lost by 
CSRDF due to early redemptions was restored on the next payment date for 
interest on those securities.)

  Federal funds financing and the change in debt subject to limit.--The 
change in debt held by the public, as shown in Table 12-2, 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 

[[Page 226]]

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 12-5.  FEDERAL FUNDS FINANCING AND CHANGE IN DEBT SUBJECT TO STATUTORY LIMIT               
                                            (In billions of dollars)                                            
----------------------------------------------------------------------------------------------------------------
                                                                               Estimate                         
                Description                    1996  -----------------------------------------------------------
                                             actual     1997      1998      1999      2000      2001      2002  
----------------------------------------------------------------------------------------------------------------
Federal funds surplus or deficit (-)......    -221.9    -242.2    -254.5    -255.8    -237.0    -190.3    -145.2
  (On-budget).............................    -222.6    -240.3    -250.4    -254.9    -237.2    -192.1    -146.5
  (Off-budget)............................       0.6      -2.0      -4.1      -0.9       0.2       1.8       1.3
                                           =====================================================================
Means of financing other than borrowing:                                                                        
  Change in: \1\                                                                                                
    Treasury operating cash balance.......      -6.3       4.2  ........  ........  ........  ........  ........
    Checks outstanding, etc. \2\ .........      -7.4       2.3      -0.2  ........  ........  ........  ........
    Deposit fund balances \3\ ............      -1.0       0.7      -2.6  ........  ........  ........  ........
  Seigniorage on coins....................       0.6       0.6       0.6       0.6       0.6       0.6       0.6
  Less: Net financing disbursements:                                                                            
    Direct loan financing accounts........     -13.0     -22.6     -21.9     -21.9     -23.8     -24.4     -24.0
    Guaranteed loan financing accounts....       1.3      -0.2       0.4       0.6       0.7       0.9       1.2
      Total, means of financing other than                                                                      
       borrowing..........................     -25.8     -14.9     -23.7     -20.7     -22.4     -22.8     -22.1
                                           =====================================================================
Decrease or increase (-) in Federal debt                                                                        
 held by Federal funds and deposit funds                                                                        
 \4\ .....................................     -15.5     -14.6      -4.2  ........  ........  ........  ........
Increase or decrease (-) in Federal debt                                                                        
 not subject to limit.....................       8.0      -1.8      -3.4      -0.4      -0.5      -0.4      -0.5
                                           =====================================================================
      Total, requirement for Federal funds                                                                      
       borrowing subject to debt limit....    -255.2    -273.5    -285.9    -276.8    -259.9    -213.6    -167.8
                                           =====================================================================
Adjustment for change in discount or                                                                            
 premium \5\..............................      -2.7  ........  ........  ........  ........  ........  ........
Increase in debt subject to limit.........     252.6     273.5     285.9     276.8     259.9     213.6     167.8
                                                                                                                
                 ADDENDUM                                                                                       
Debt subject to statutory limit \6\.......   5,137.2   5,410.7   5,696.6   5,973.4   6,233.3   6,446.9   6,614.7
----------------------------------------------------------------------------------------------------------------
\1\ A decrease in the Treasury operating cash balance (which is an asset) would be a means of financing the     
  deficit and therefore has 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 primium) 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 $5,500 billion.                                                                 

[[Page 227]]

                                                      Table 12-6.  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      655.8         19.1       184.6        64.5         34.8      210.6        44.5         21.1 
                                                                                                                                                        
1995.........................................  3,603.4      848.4         23.5       171.3       192.6        112.4      239.2        58.3         24.4 
1996.........................................  3,733.0    1,027.7         27.5       129.6       179.3        138.4      246.6        67.7         27.4 
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Estimated by Treasury Department. These estimates exclude agency debt, the holdings of which are believed to be small. The data on foreign holdings 
  are not recorded by methods that are strictly comparable with the data on debt held by the public. Projections are not available.                     
\2\ Borrowing from the public is defined as equal to the change in debt held by the public from the beginning of the year to the end, except to the     
  extent that the amount of debt is changed by reclassification.                                                                                        
\3\ Estimated as interest on the public debt less ``interest received by trust funds'' (subfunction 901 less subfunctions 902 and 903). Does not include
  the comparatively small amount of interest on agency debt or the offsets for interest on public debt received by other Government accounts (revolving 
  funds and special funds).                                                                                                                             
\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. 
                                                                                                                                                        
                                                                                                                                                        

  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 purposes, such as paying 
social security benefits or grants to State governments for highway 
construction.\11\
---------------------------------------------------------------------------
  \11\ For further discussion of the trust funds and Federal funds 
groups, see Chapter 17, ``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 funds hold 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 12-5 derives the change in debt subject to limit. In 1998 the 
Federal funds deficit is estimated to be $254.5 billion, and other 
factors increase the requirement to borrow subject to limit by $31.3 
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 sizable 
and growing. As a result, the debt subject to limit is estimated to 
increase by $285.9 billion, which is $140.3 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 larger than the total Government deficit; and the increase 
in debt subject to limit will be much larger than the increase in debt 
held by the public. The trust fund surplus is currently large and is 
estimated to grow through 2002, 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 12-5 with the annual deficit and the 
annual increase in debt held by the public in Table 12-2. The increase 
in debt subject to limit is more than $100 billion higher every year. In 
2002, when the budget has a $17.0 billion surplus and the debt held by 
the public increases by $5.2 billion, the debt subject to limit 
increases by $167.8 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 12-6, foreign holdings were just over 
$10.0 billion, less than 5 percent of the total Federal debt held by the 
public.
  Foreign holdings began to grow significantly 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 1996 foreign holdings of Treasury 
debt were $1,027.7 billion, which was 27.5 percent of the total debt 
held by the public. Foreign central banks owned 54 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. In 1995 and 1996, however, 
foreign holdings increased by $192.6 billion and $179.3 billion,\12\ 
respectively, 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 27.5 percent at 
the end of 1996.
---------------------------------------------------------------------------
  \12\ The amounts reported by the Bureau of Economic Analysis, 
Department of Commerce, were different, but similarly large, 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 for-

[[Page 228]]

eign purchases of Federal debt securities are normally only a moderate part of the gross 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 12-7 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 by domestic nonfinancial sectors. The Federal and federally 
assisted lending is recorded at the principal amount. 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 estimates for GSE 
borrowing in 1997 and 1998 were developed by the GSEs based on certain 
assumptions but are subject to periodic review and revision and do not 
represent official GSE forecasts of future activity.
  The Federal borrowing participation rate trended strongly upward from 
the 1960s to the early 1990s, though with cyclical variation. Much of 
the increase in the 1980s and early 1990s was due to higher GSE 
borrowing as well as Federal deficits. Since 1992, the Federal borrowing 
participation rate has declined, falling to a little under 50 percent in 
1995 and 1996. 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 12-7.  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    1998 
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total net borrowing in credit market \1\                                                                                                                
 .......................................    66.7    88.0   169.2   336.9   819.2   722.5   504.7   539.7   576.2   624.7   733.5   706.0  ......  ......
                                         ---------------------------------------------------------------------------------------------------------------
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   129.6   142.8   145.6
Guaranteed borrowing....................     5.0     7.8     8.6    31.6    21.6    40.7    22.1    19.7    -2.0    38.7    26.2    89.9    55.4    49.2
Government-sponsored enterprise                                                                                                                         
 borrowing \2\ .........................     1.2     4.9     5.3    21.4    57.9   115.4   124.6   150.8   169.3   121.3   133.9   117.6   178.2   186.0
                                         ---------------------------------------------------------------------------------------------------------------
  Total, Federal and federally assisted                                                                                                                 
   borrowing............................    10.1    16.2    65.0   122.5   278.9   376.9   424.1   481.2   414.7   344.7   331.4   337.1   376.4   380.8
Federal borrowing participation rate                                                                                                                    
 (percent)..............................    15.1    18.4    38.2    36.4    34.0    52.2    84.0    89.2    72.0    55.2    45.2    47.8  ......  ......
                                         ===============================================================================================================
Total net lending in credit market \1\ .    66.7    88.0   169.2   336.9   819.2   722.5   504.7   539.7   576.2   624.7   733.5   706.0  ......  ......
                                         ---------------------------------------------------------------------------------------------------------------
Direct loans............................     2.0     3.0    12.7    24.2    28.0     2.8    -7.5     7.0    -1.7    -0.8     1.6     4.0    18.0    15.7
Guaranteed loans........................     5.0     7.8     8.6    31.6    21.6    40.7    22.1    19.7    -2.0    38.7    26.2    89.9    55.4    49.2
Government-sponsored enterprise loans                                                                                                                   
 \2\ ...................................     1.4     5.2     5.5    24.1    60.7    90.0    90.7   145.2   162.3   125.3    68.2   135.8   160.5   187.8
                                         ---------------------------------------------------------------------------------------------------------------
  Total, Federal and federally assisted                                                                                                                 
   lending..............................     8.3    15.9    26.9    79.9   110.3   133.5   105.3   171.9   158.6   163.2    96.0   229.7   233.9   252.7
Federal lending participation rate                                                                                                                      
 (percent)..............................    12.4    18.1    15.9    23.7    13.3    18.5    20.9    31.9    27.5    26.1    13.1    32.5  ......  ......
--------------------------------------------------------------------------------------------------------------------------------------------------------
\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. Data are adjusted, with some degree of   
  approximation, to remove double counting: GSE borrowing and lending are calculated net of transactions with Federal agencies, transactions between    
  GSEs, transactions between components of GSEs, and transactions in guaranteed loans. Borrowing and lending include mortgage-backed security programs.