[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.