[Budget of the United States Government]
[VI. Investing in the Common Good: Program Performance in Federal Functions]
[30. Net Interest]
[From the U.S. Government Publishing Office, www.gpo.gov]
30. NET INTEREST
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Table 30-1. NET INTEREST
(In millions of dollars)
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Estimate
Function 900 1998 -----------------------------------------------------------
Actual 1999 2000 2001 2002 2003 2004
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Spending:
Mandatory Outlays:
Existing law.......................... 243,359 227,244 215,187 205,905 194,741 183,237 172,959
Tax Expenditures:
Existing law............................ 965 1,015 1,065 1,115 1,175 1,235 1,295
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The Federal Government pays large amounts of interest to the public,
mainly on the debt it incurred to finance past budget deficits.
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 2000, Federal outlays for net interest will total an
estimated $215.2 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. Debt held by the public is
the total of all deficits that have accumulated in the past--minus the
amount offset by budget surpluses. Large deficits in the 1980s and early
1990s 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 a substantial increase in Federal interest
costs--from 1.9 to 3.3 percent of GDP between 1980 and 1991 (see Chart
30-1).
As budget deficits were gradually eliminated, and as interest rates
declined, the ratio of net interest to GDP fell from 3.3 percent in 1991
to 2.9 percent in 1998. The combination of budget surpluses starting in
1998, and continued low interest rates, reduce the projected ratio
further, to an estimated 1.6 percent in 2004. Thus, the interest burden
is projected to fall by one-half in just over a decade. As shown in the
table above, net interest in dollars is expected to begin to decline in
1999.
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 $346.5 billion in 2000 and $339.0 billion in
2004. At the end of 1998, the gross Federal debt totaled $5.479
trillion, of which $3.720 trillion was held by the public. The debt held
by the public accounted for 23.4 percent of the total credit-market debt
owed by the non-financial sector of the U.S. economy. The proportion
peaked at 26.8 percent in 1994 and has trended down over the last few
years as Federal Government borrowing diminished with
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the declining deficits (see Table 12-1 in Analytical Perspectives).
Interest Received by 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,
the net interest of the Federal Government as a whole includes the off-
budget interest earnings. Because Social Security will accumulate large
surpluses over the next several years, its interest earnings will rise
from an estimated $56.5 billion in 2000 to $82.7 billion in 2004.
The other major trust funds are on-budget. The interest earnings of
the civil service retirement and disability fund will rise from an
estimated $34.6 billion in 2000 to $37.4 billion in 2004, and the
interest of the military retirement fund will rise from $12.7 billion to
$13.6 billion. The Medicare Hospital Insurance (HI) trust fund will
receive $9.1 billion in 2000.
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 of earnings of the Federal Reserve System.'' These budget
receipts will total an estimated $25.1 billion in 2000 and $29.0 billion
in 2004.