[Budget of the United States Government]
[VI. Investing in the Common Good: Program Performance in Federal Functions]
[29. Net Interest]
[From the U.S. Government Publishing Office, www.gpo.gov]
29. NET INTEREST
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Table 29-1. NET INTEREST
(In millions of dollars)
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Estimate
Function 900 1997 -----------------------------------------------------------
Actual 1998 1999 2000 2001 2002 2003
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Spending:
Mandatory Outlays:
Existing law.......................... 244,013 242,694 241,750 236,489 233,541 227,116 220,575
Proposed legislation.................. ........ ........ 4 7 15 20 26
Tax Expenditures:
Existing law............................ 915 965 1,015 1,065 1,115 1,175 1,235
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The Federal Government pays large amounts of interest to the public,
mainly on the securities it sold to finance the budget deficits in past
years.
The Government also pays interest from one budget account to another,
mainly because it invests its various trust fund balances in Treasury
securities. Net interest--which does not include these internal
payments--closely measures Federal interest transactions with the
public. In 1999, Federal outlays for net interest will total an
estimated $241.8 billion.
The Interest Burden
As noted above, the amount of net interest depends on the amount of
debt held by the public, as well as on the interest rates on the
Treasury securities that comprise that debt. In essence, debt held by
the public is the total of all deficits that have accumulated in the
past--minus the amount offset by budget surpluses. Recent large deficits
sharply increased the ratio of debt held by the public to the Gross
Domestic Product (GDP)--from 26.1 percent in 1980 to 50.2 percent in
1993. Partly due to the huge rise in debt, interest rates on Treasury
securities also rose sharply. The combination of much more debt and
higher interest rates caused Federal net interest costs to mushroom--
from 1.9 to 3.3 percent of GDP between 1980 and 1991 (see Chart 29-1).
Now that budget deficits have fallen dramatically, the ratio of net
interest to GDP has begun to fall as well, from 3.3 percent in 1991 to
3.1 percent in 1997. The combination of the 1997 Balanced Budget Act,
the prospect of a balanced budget, low interest rates, and forecasts of
lower rates in the future reduce the projected ratio further, to an
estimated 2.1 percent in 2003.
Components of Net Interest
Net interest is defined as gross interest on the public debt minus the
interest received by on-budget and off-budget trust funds and minus all
activities that fall under ``other interest'' (discussed later in this
chapter).
Gross Interest on the Public Debt: Gross interest on the public debt
will total an estimated $366.6 billion in 1999 and $378.9 billion in
2003. At the end of 1997, the gross debt totaled $5.370 trillion, of
which $3.771 trillion was held by the public. The debt held by the
public accounted for about a quarter of the total credit-market debt
owed by the non-financial sector.
The Treasury Department's management of the debt, including its
decisions about how much to borrow in securities with different
maturities, may substantially influence Federal interest payments. Since
1993, the average maturity of marketable, privately held public debt has
shrunk from five years
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and 10 months to five years and four months, cutting total interest
outlays by an estimated $9.6 billion from 1994 to 1998. In 1997, the
Treasury began issuing five- and 10-year notes indexed to the Consumer
Price Index. The principal, payable at maturity, is adjusted each month
for inflation, while interest, paid semiannually, is computed on the
inflation-adjusted principal.
Interest Received by On-Budget Trust Funds: On-budget trust funds will
earn an estimated $67.4 billion in interest in 1999, and $74.5 billion
in 2003. The civil service retirement and disability fund will receive
almost half of it, while the military retirement fund will receive about
a fifth. The Medicare Hospital Insurance (HI) trust fund will receive
over $8 billion in 1999.
Interest Received by Off-Budget Trust Funds: Under current law, the
receipts and disbursements of Social Security's old-age and survivors
insurance (OASI) trust fund and disability insurance (DI) trust fund are
excluded from the budget. Social Security, however, is a Federal
program. Thus, net interest includes the off-budget interest earnings.
Because Social Security will accumulate large surpluses over the next
several years, interest earnings of all the off-budget trust funds will
rise from an estimated $51.6 billion in 1999 to $76.3 billion in 2003.
Other Interest: Other interest includes both interest payments and
interest collections--much of it consisting of intra-governmental
payments and collections that arise from Federal revolving funds. These
funds borrow from the Treasury to carry out lending or other business-
type activities.
Budgetary Effect, including the Federal Reserve
The Federal Reserve System buys and sells Treasury securities in the
open market to implement monetary policy. The interest that Treasury
pays on the securities owned by the Federal Reserve is included in net
interest as a cost, but virtually all of it comes back to the Treasury
as ``deposits
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of earnings of the Federal Reserve System.'' These budget receipts will
total an estimated $24.6 billion in 1999 and $26.9 billion in 2003.