[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 1998 the Government owed $3,720 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 $5,479 billion. 
This year the Government is estimated to pay around $234 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: \3\
         Fiscal year             Current       FY 1992                     Credit    ---------------------------
                                 dollars     dollars \1\       GDP       market debt      Total
                                                                             \2\         outlays         GDP
----------------------------------------------------------------------------------------------------------------
1950........................       219.0       1,210.1         80.1          55.3          11.4           1.8
1955........................       226.6       1,098.5         57.3          43.3           7.6           1.3
1960........................       236.8       1,019.5         45.7          33.8           8.5           1.5
1965........................       260.8       1,049.0         38.0          26.9           8.1           1.4
1970........................       283.2         946.2         28.1          20.8           7.9           1.5
1975........................       394.7         969.5         25.4          18.4           7.5           1.6
 
1980........................       709.8       1,197.0         26.1          18.5          10.6           2.3
1981........................       785.3       1,206.2         25.8          18.5          12.0           2.7
1982........................       919.8       1,319.3         28.6          19.8          13.6           3.1
1983........................     1,131.6       1,551.2         33.1          21.9          13.8           3.3
1984........................     1,300.5       1,716.8         34.1          22.1          15.7           3.5
 
1985........................     1,499.9       1,913.6         36.6          22.3          16.2           3.7
1986........................     1,736.7       2,154.7         39.7          22.6          16.1           3.6
1987........................     1,888.7       2,277.4         41.0          22.3          16.0           3.5
1988........................     2,050.8       2,390.2         41.4          22.3          16.2           3.5
1989........................     2,189.9       2,448.7         40.9          22.0          16.5           3.5
 
1990........................     2,410.7       2,587.2         42.4          22.6          16.2           3.6
1991........................     2,688.1       2,767.0         45.9          24.1          16.2           3.7
1992........................     2,998.8       2,998.8         48.8          25.7          15.5           3.5
1993........................     3,247.5       3,163.9         50.2          26.5          14.9           3.2
1994........................     3,432.1       3,264.6         50.1          26.8          14.4           3.1
 
1995........................     3,603.4       3,347.3         50.1          26.6          15.8           3.3
1996........................     3,733.0       3,400.7         49.4          26.2          15.8           3.3
1997........................     3,771.1       3,372.5         47.2          25.3          15.7           3.1
1998........................     3,719.9       3,286.7         44.3          23.4          15.1           3.0
1999 estimate...............     3,669.7       3,201.1         41.9     ............       13.6           2.7
 
2000 estimate...............     3,571.8       3,053.3         39.2     ............       12.5           2.4
2001 estimate...............     3,455.0       2,891.7         36.4     ............       11.8           2.2
2002 estimate...............     3,285.0       2,692.6         33.2     ............       11.1           2.0
2003 estimate...............     3,119.3       2,504.7         30.2     ............       10.1           1.9
2004 estimate...............     2,926.4       2,301.2         27.1     ............        9.3           1.7
----------------------------------------------------------------------------------------------------------------
\1\ Debt in current dollars deflated by the GDP chain-type price index with fiscal year 1992 equal to 100.
\2\ 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 borrow in the credit market primarily in order to finance lending in the credit
  market. Source: Federal Reserve Board flow of funds accounts. Projections are not available.
\3\ 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 on public debt received by
  other Government accounts (revolving funds and special funds).

   After 28 consecutive years of deficits financed mainly by borrowing 
from the public, the Government had a $69 billion surplus in 1998 and 
repaid $51 billion of debt held by the public. This was a large 
improvement in its fiscal position from the record $290 billion deficit 
in 1992. The steady decline in deficits since that year and the eventual 
surplus were due in large part to the strong economic expansion and the 
budget discipline of the Omnibus Budget Reconciliation Act of 1993. The 
surpluses projected in this budget would substantially reduce Federal 
debt held by the public over the next few years both in dollar amount 
and relative to the size of the Nation's gross domestic product (GDP).
  The tables and text in this chapter do not reflect the President's 
proposed reform of the social security system, which would affect the 
borrowing and debt estimates from 2000 onwards. Borrowing and debt 
estimates based on his proposal are, however, presented in Table S-14 of 
the main budget volume, Budget of the United States Government, Fiscal 
Year 2000.

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                          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 
1998 it stood at $3,719.9 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.
   After the end of World War II, Federal debt peaked at 109 percent of 
GDP in 1946. From then until the 1970s, Federal debt grew gradually, 
but, due to inflation, it declined 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 80.1 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 
continued to be large until recently, debt continued to grow 
substantially. With inflation reduced, the rapid growth in nominal debt 
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 18.5 percent to 
26.5 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.
   The growth of Federal debt held by the public was decelerating by 
this time, however, and in 1998 the amount of debt outstanding fell for 
the first time since the last budget surplus in 1969. Since 1994 the 
debt has declined considerably relative to both GDP and total credit 
market debt. Table 12-1 shows that debt as a percentage of GDP is 
estimated to decline significantly more in the next few years, falling 
from 44.3 percent in 1998 to 27.1 percent in 2004. The improvement in 
the last few years reflects the deficit reduction package enacted by the 
Omnibus Budget Reconciliation Act of 1993 and the long economic 
expansion. The further estimated improvement reflects the Balanced 
Budget Act of 1997 and the expectation that economic growth will 
continue at a steady pace without accelerating inflation for the 
foreseeable future. \1\ Interest outlays on the debt held by the public 
are estimated to decline by about one-third relative to both total 
outlays and GDP over the next few years.
---------------------------------------------------------------------------
  \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.
---------------------------------------------------------------------------
   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 thereby 
competes with the borrowing of other sectors for financial resources in 
the credit market, which affects interest rates and private capital 
accumulation. Borrowing from the public thus 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 
provides a better measure of the deficit for analyzing the effect of 
Federal fiscal policy on national saving than the budget deficit or 
Federal borrowing from the public. The Federal sector and its 
differences from the budget are discussed in chapter 16 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. In 1997 Treasury began to sell inflation-protected notes 
and bonds. The recorded value of these securities includes 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 

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                             Table 12-2.  FEDERAL GOVERNMENT FINANCING AND DEBT \1\
                                             (In billions of dollars)
----------------------------------------------------------------------------------------------------------------
                                                                                  Estimate
                                                     1998  -----------------------------------------------------
                                                    Actual    1999     2000     2001     2002     2003     2004
----------------------------------------------------------------------------------------------------------------
Financing:
  Surplus or deficit (-).........................     69.2     79.3    117.3    134.1    186.7    182.0    207.6
    (On-budget)..................................    -29.9    -41.7    -12.2      0.2     44.4     31.4     49.8
    (Off-budget).................................     99.2    121.0    129.5    133.9    142.3    150.7    157.8
  Means of financing other than borrowing from
   the public:
    Changes in: \2\
      Treasury operating cash balance............      4.7     -1.1  .......  .......  .......  .......  .......
      Checks outstanding, etc. \3\...............    -10.5     -3.7     -0.1  .......  .......  .......  .......
      Deposit fund balances......................     -0.8     -1.7  .......  .......  .......  .......  .......
    Seigniorage on coins.........................      0.6      0.9      1.0      1.0      1.0      1.0      1.0
    Less: Net financing disbursements:
      Direct loan financing accounts.............    -11.5    -25.2    -21.2    -20.1    -19.6    -19.2    -17.7
      Guaranteed loan financing accounts.........     -0.5      1.6      0.9      1.8      1.8      1.8      2.0
        Total, means of financing other than
         borrowing from the public...............    -18.0    -29.1    -19.4    -17.3    -16.7    -16.4    -14.7
                                                  --------------------------------------------------------------
          Total, repayment of debt held by the
           public................................     51.3     50.1     97.9    116.8    170.1    165.7    192.9
  Change in debt held by the public..............    -51.3    -50.1    -97.9   -116.8   -170.1   -165.7   -192.9
 
Debt Outstanding, End of Year:
  Gross Federal debt:
    Debt issued by Treasury......................  5,449.3  5,586.6  5,683.9  5,754.9  5,789.9  5,831.5  5,851.6
    Debt issued by other agencies................     29.4     28.4     27.5     26.4     25.5     24.1     22.8
                                                  --------------------------------------------------------------
      Total, gross Federal debt..................  5,478.7  5,614.9  5,711.4  5,781.4  5,815.3  5,855.6  5,874.4
  Held by:
    Government accounts..........................  1,758.8  1,945.2  2,139.5  2,326.3  2,530.4  2,736.3  2,947.9
    The public...................................  3,719.9  3,669.7  3,571.8  3,455.0  3,285.0  3,119.3  2,926.4
      Federal Reserve Banks \4\..................    458.1
      Other......................................  3,261.7
 
Debt Subject to Statutory Limitation, End of
 Year:
  Debt issued by Treasury........................  5,449.3  5,586.6  5,683.9  5,754.9  5,789.9  5,831.5  5,851.6
  Less: Treasury debt not subject to limitation
   \5\...........................................    -15.5    -15.5    -15.5    -15.5    -15.5    -15.5    -15.5
  Agency debt subject to limitation..............      0.2      0.1      0.1      0.1      0.1      0.1      0.1
   Adjustment for discount and premium \6\.......      5.5      5.5      5.5      5.5      5.5      5.5      5.5
                                                  --------------------------------------------------------------
    Total, debt subject to statutory limitation
     \7\.........................................  5,439.4  5,576.6  5,673.9  5,744.9  5,779.9  5,821.5  5,841.6
 
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\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 has 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\ Debt held by the Federal Reserve Banks is not estimated for future years.
 
\5\ Consists primarily of Federal Financing Bank debt.
 
\6\ 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.
 
\7\ The statutory debt limit is $5,950 billion.

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 the money. 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; it does not provide the account with resources other than a 
claim on the U.S. Treasury; and it does not represent the estimated 
amount of the account's future transactions with the

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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 for either the 
current participants or a larger group. The future transactions of 
Federal social insurance and employee 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 
for these programs. \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\  Extensive actuarial analyses of the social security and medicare 
programs are published in the annual reports of the boards of trustees 
of these funds. A summary of actuarial estimates for these and other 
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 incurred 
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 current compensation for the 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 broader conceptual 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 1998 through 
2004. In 1998 the Government repaid $51.3 billion of debt held by the 
public, and the debt outstanding decreased to $3,719.9 billion. The 
Treasury issued $160.3 billion of debt to Government accounts, and gross 
Federal debt increased to $5,3478.7 billion. Table S-14 in the main 
budget volume summarizes Federal borrowing and debt in the same way as 
Table 12-2 but reflects the President's proposal to reform the social 
security system in the estimates for 2000-2004.
   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 surplus or deficit. The total 
surplus or deficit of the Federal Government includes both the on-budget 
surplus or deficit and 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\ Social security, which comprises almost 
all of the off-budget totals, had a large surplus in 1998 and is 
estimated to have large and rising surpluses throughout the projection 
period. Its surplus more than offsets the on-budget deficit in 1998 and 
the estimated on-budget deficits in 1999 and 2000, as a result of which 
debt held by the public is repaid in these years. Beginning in 2001, 
when the on-budget accounts are estimated to also have a surplus, the 
social security surplus adds substantially to the amount of debt repaid.
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  \8\ For further explanation of the off-budget Federal entities, see 
chapter 19, ``Off-Budget Federal Entities and Non-Budgetary 
Activities.''
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   The Government's ability to repay debt held by the public, or its 
need to borrow, depends on the size of the total surplus or deficit and 
on several other factors such as the net financing disbursements of 
credit programs and changes in the level of cash balances held by the 
Treasury. As shown in Table 12-2, these other factors--which are 
formally called ``means of financing other than borrowing from the 
public''--can either increase or decrease the Government's repayment of 
debt. (An increase in its ability to repay debt is representated by a 
positive sign, like the surplus; a decrease is represented by a negative 
sign, like a deficit.) In 1998 the surplus was $69.2 billion and the 
``other means of financing'' were -$18.0 billion, so the Government was 
able to repay $51.3 billion of debt held by the public. In 1999 the 
surplus is estimated to grow to $79.3 billion, but the ``other means of 
financing'' are estimated to grow even more, to $29.1 billion. As a 
result, despite the growing surplus, the estimated repayment of debt 
held by the public deceases slightly to $50.1 billion. In 2000 and later 
years, the estimated surplus increases substantially, as a result of 
which the Government repays large and generally increasing amounts of 
debt each year.
   When the surplus or deficit is large, it is usually a good 
approximation to say that ``the surplus is used to repay debt held by 
the public'' or ``the deficit is financed by borrowing from the 
public.'' Over the last 10 years, the cumulative deficit was $1,616 
billion and the increase in debt held by the public was $1,669 billion--
nearly equal amounts. The other factors added a total of $53 billion of 
borrowing over that period, an average of $5.3 billion per year. The 
variation was wide, ranging from additional borrowing of $22 billion to 
reduced borrowing of $18 billion. The other factors that affect 
borrowing do not depend on the size of the surplus or deficit. Thus, 
when the surplus or deficit is moderate in size, as in 1998, the other 
factors that

[[Page 263]]

affect borrowing may account for a significant proportion of the change 
in Federal debt held by the public.
   Many of these other factors are small in most years compared to 
borrowing from the public, even when the surplus or deficit is 
relatively small. 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 factor that affects borrowing 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 to and from the public resulting 
from these loans and guarantees are not costs to the Government above 
and beyond those costs already included in budget outlays. Therefore, 
they are non-budgetary in nature and are recorded as transactions of the 
non-budgetary financing account for each credit program. \9\ The net 
cash flows of the financing accounts, including intragovernmental 
transactions as well as transactions with the public, are called ``net 
financing disbursements.'' They are defined in the same way as the 
``outlays'' of a budgetary account and therefore affect the ability to 
repay debt held by the public, or the requirements for borrowing from 
the public, in the same way as the surplus or deficit.
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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 19, 
``Off-Budget Federal Entities and Non-Budgetary Activities,'' they are 
non-budgetary in concept because they do not measure cost. For 
additional discussion of credit reform, see chapter 23 of this volume, 
``Budget System and Concepts and Glossary,'' and the other references 
cited in chapter 19.
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   The net financing disbursements are partly due to intragovernmental 
transactions with budgetary accounts (the receipt of subsidy payment and 
the receipt or payment of interest) and partly due to transactions with 
the public (disbursement and repayment of loans, receipt of interest and 
fees, payment of default claims, and so forth). An intragovernmental 
transaction does not affect Federal borrowing from the public. (Although 
the surplus or deficit changes, the net financing disbursements change 
in an equal amount with the opposite sign, so the effects cancel out on 
a net basis.) On the other hand, financing account disbursements to the 
public increase the requirement for borrowing from the public in the 
same way as an increase in budget outlays for cash payments to the 
public. Financing account receipts from the public can be used to 
finance the payment of the Government's obligations and therefore reduce 
the requirement for Federal borrowing from the public in the same way as 
an increase in budget receipts.
   In the early years of credit reform the financing accounts had little 
net effect on borrowing requirements, but their effect began to get 
large in 1995. The financing accounts added $4.1 billion to borrowing 
requirements in 1995, $11.7 billion in 1996, and $20.9 billion in 1997. 
Although they added only $12.0 billion in 1998, they are estimated to 
add $16-24 billion every year during 1999-2004. The expansion was mainly 
because of the growth of the direct student loan program. 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. Later, when the loans are repaid, Federal borrowing 
requirements will decrease.

   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 94 percent of the 
total Federal debt held by Government accounts at the end of 1998. In 
2000, for example, the total trust fund surplus is estimated to be 
$184.8 billion, and Government accounts are estimated to invest $194.4 
billion in Federal securities. The difference is because some revolving 
funds and special funds also hold Federal debt and because the trust 
funds may change the amount of their cash assets not currently invested. 
The amounts of debt 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 1998, agencies 
repaid $0.6 billion of debt held by the public. Agency debt is only one 
percent of Federal debt held by the public.
   The reason for issuing agency debt differs considerably from one 
agency to another. The predominant agency borrower is the Tennessee 
Valley Authority, which had sold $23.5 billion of securities held by the 
public at the end of 1998, or 92 percent of the total for all agencies. 
TVA sells debt primarily 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 debentures are therefore classified as agency debt. The 
borrowing by FHA and a few 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. A number of years 
ago the Federal Government guaranteed the debt used to finance the 
construction of buildings for the National Archives and the Architect of 
the Capitol and has exercised full control over the design, 
construction, and operation of the buildings. The construction 
expenditures and interest were therefore 

[[Page 264]]



                                            TABLE 12-3.  AGENCY DEBT
                                            (In millions of dollars)
----------------------------------------------------------------------------------------------------------------
                                                                       Borrowing or repayment (-) of
                                                                                    debt                Debt end
                                                                     ---------------------------------  of 2000
                                                                         1998       1999       2000     estimate
                                                                        actual    estimate   estimate
----------------------------------------------------------------------------------------------------------------
Borrowing from the public:
  Housing and Urban Development:
    Federal Housing Administration..................................        105       -110  .........         64
  Interior..........................................................  .........  .........  .........         13
  Small Business Administration:
    Participation certificates: Section 505 development company.....  .........  .........  .........          7
  Architect of the Capitol..........................................         -2         -2         -2        173
  Farm Credit System Financial Assistance Corporation...............  .........       -397        -89        775
  Federal Deposit Insurance Corporation:
    FSLIC Resolution Fund...........................................        -32  .........  .........         63
  National Archives.................................................         -5         -5         -6        271
  Tennessee Valley Authority........................................       -701      2,776       -701     25,560
                                                                     -------------------------------------------
      Total, borrowing from the public..............................       -634      2,262       -798     26,927
                                                                     ===========================================
Borrowing from other funds:
  Postal Service Fund \1\...........................................     -3,181        -83        -83        551
  Tennessee Valley Authority \1\....................................  .........     -3,200  .........  .........
                                                                     -------------------------------------------
      Total, borrowing from other funds.............................     -3,181     -3,283        -83        551
                                                                     ===========================================
      Total, agency borrowing.......................................     -3,814     -1,021       -881     27,478
----------------------------------------------------------------------------------------------------------------
\1\ The Postal Service and TVA debt held by other funds is the result of the FFB swapping Postal Service and TVA
  securities with the Civil Service Retirement and Disability trust fund during 1996 in exchange for Treasury
  securities having an equal present value. See the narrative for further explanation.

classified as Federal outlays, and the borrowing was classified as 
Federal agency borrowing from the public.
   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 1999 or 2000. The 
budgetary treatment was reviewed in connection with the Balanced Budget 
Act of 1997. Some clarifications were made but no substantive changes 
from existing practice.
   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.
   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 three years 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, are included in Table 12-3 as 
amounts that agencies borrowed from other funds, and are included in 
Table 12-4 as agency debt held by Government accounts. Including agency 
debt held by Government accounts in gross Federal debt is not double 
counting, because Treasury did 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. It is assumed 
for purposes of the budget estimates that CSRDF will hold the agency 
debt until maturity (or call date), at

[[Page 265]]

which time the principal repayments will be invested in Treasury 
securities. \11\
---------------------------------------------------------------------------
  \11\ For further discussion of the debt limit dispute and the swap of 
securities between the FFB and CSRDF, see Analytical Perspectives, 
Budget of the United States Government, Fiscal Year 1998, pp. 222 and 
225.
---------------------------------------------------------------------------
   TVA prepaid its entire $3.2 billion of debt securities held by CSRDF 
in October 1998. The Omnibus Consolidated and Emergency Appropriations 
Act of 1999 permitted TVA to prepay this debt at par and provided an 
appropriation to FFB to cover the prepayment charge otherwise owed. (The 
appropriation to FFB was used to make CSRDF whole.) The Act also 
prohibited TVA from borrowing from the FFB in the future. TVA financed 
the prepayment by borrowing from the public. As a result, its debt held 
by the public is estimated to increase $2.8 billion in 1999, while its 
total debt decreases by $0.4 billion.

                     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, the creation of the military retirement 
trust fund, and an expanding economy, annual investment has risen 
greatly since then. It was $160.3 billion in 1998, as shown in Table 12-
4, and it is estimated to rise to $194.4 billion in 2000. The holdings 
of Federal securities by Government accounts are estimated to grow to 
$2,139.5 billion by the end of 2000, or 37 percent of the gross Federal 
debt. This percentage is estimated to rise further in the following 
years as the budget surpluses reduce the debt held by the public.
   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 amount each year: a total of $352.5 
billion during 1998-2000, which constitutes 65 percent of the total 
estimated investment by Government accounts.
   In addition to these two funds, the largest investment is by the 
Federal employee retirement and disability trust funds. The principal 
trust fund for Federal civilian employees is the civil service 
retirement and disability trust fund, which accounts for 18 percent of 
the total investment by Government accounts during 1998-2000. The 
military retirement trust fund accounts for 4 percent. Altogether, 
social security and these two retirement funds account for 87 percent of 
the investment by all Government accounts during this period. At the end 
of 2000, they are estimated to own 77 percent of the total debt held by 
Government accounts. The largest other holdings are by the hospital 
insurance trust fund, which invested heavily in the past, and the 
unemployment trust fund.
   The Transportation Equity Act for the 21st Century (TEA-21), which 
the President signed in June 1998, increased Federal spending for 
highway programs and established a linkage between future trust fund tax 
receipts and highway spending The Act also changed the investments and 
investment policy of the trust fund. It provided that highway account 
balances in excess of $8 billion would be transferred to the general 
fund as of September 30, 1998. (This did not affect the mass transit 
account within the highway trust fund.) The amount of this transfer was 
$8.1 billion. It also provided that as of October 1998 the interest on 
any obligation held by the highway trust fund would not be credited to 
the fund. The Omnibus Consolidated and Emergency Supplemental 
Appropriations Act of 1999 subsequently amended this provision to say 
that the obligations held by the trust fund would not bear interest.
   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.

[[Page 266]]



                                TABLE 12-4. DEBT HELD BY GOVERNMENT ACCOUNTS  \1\
                                            (In millions of dollars)
----------------------------------------------------------------------------------------------------------------
                                                            Investment or disinvestment (-)            Holdings
                                                 ----------------------------------------------------   end of
                   Description                    1998     1999       2000       2000
                                                             actual              estimate   estimate   estimate
----------------------------------------------------------------------------------------------------------------
Investment in Treasury debt:
  Energy: Nuclear waste disposal fund...........                4,921              -2,855        983       9,297
  Health and Human Services:
    Federal hospital insurance trust fund.......                1,629                -617      6,340     123,973
    Federal supplementary medical insurance
     trust fund.................................                5,037               6,697       -808      45,391
    Vaccine injury compensation trust fund......                   29                 111        118       1,514
  Housing and Urban Development:
    Federal Housing Administration mutual
     mortgage fund..............................                  877               1,800      2,500      18,644
    Other HUD...................................                   65                 708        677       7,008
  Interior:
    Outer Continental Shelf deposit funds.......                   59              -1,680  .........          76
    Abandoned Mine Reclamation fund.............                  114                 136        108       1,912
  Labor:
    Unemployment trust fund.....................                8,718               7,200      6,259      84,100
    Pension Benefit Guaranty Corporation........                  937                 837      1,040      10,574
  State: Foreign Service retirement and
   disability trust fund........................                  572                 589        603      10,742
  Transportation:
    Highway trust fund..........................               -4,415               9,832        938      28,696
    Airport and airway trust fund...............                2,189               3,746      1,554      13,850
    Oil spill liability trust fund..............                  -49                 -43        268       1,344
  Treasury: Exchange stabilization fund.........                  521                 877        270      17,128
  Veterans Affairs:
    National service life insurance trust fund..                  -14                -134       -223      11,651
    Other trust funds...........................                   21                   5         10       1,774
    Federal funds...............................                   -5                 -12        -15         531
  Defense-Civil:
    Military retirement trust fund..............                7,821               6,146      7,126     147,115
    Harbor maintenance trust fund...............                  108                 614  .........       1,889
  Environmental Protection Agency:
    Hazardous substance trust fund..............                 -582                -851      1,004       5,449
    Leaking underground storage tank trust fund.                  134                 207        189       1,630
  International Assistance Programs:
    Overseas Private Investment Corporation.....                  306                 359         57       3,258
  Office of Personnel Management:
    Civil Service retirement and disability
     trust fund \2\.............................               32,353              33,532     29,711     510,000
    Employees life insurance fund...............                1,338               1,323      1,467      22,167
    Employees health benefits fund..............                 -522                -245       -127       5,893
  Social Security Administration:
    Federal old-age and survivors insurance
     trust fund \3\ ............................               85,837             106,941    113,262     873,485
    Federal disability insurance trust fund \3\                13,434              15,014     18,028     110,038
  Farm Credit System Insurance Corporation:
    Farm Credit Insurance Fund..................                  146                  99        104       1,519
  Federal Deposit Insurance Corporation:
    Bank Insurance fund.........................                1,116                 788        791      29,024
    FSLIC Resolution fund.......................                  281                 142         53       2,282
    Savings Association Insurance fund..........                  337                 434        313      10,349
  National Credit Union Administration: Share
   insurance fund...............................                  206                 192        199       4,269
  Postal Service fund \3\ ......................                  140                  -*  .........       1,000
  Railroad Retirement Board trust funds.........                2,572              -3,854        905      18,862
  Other Federal funds...........................                  491               1,318        923       8,120
  Other trust funds.............................                  434                 275       -191       5,133
  Unrealized discount \1\ ......................               -3,688           .........  .........     -10,688
                                                 ---------------------------------------------------------------
      Total, investment in Treasury debt \1\ ...              163,468             189,634    194,436   2,138,999
                                                 ===============================================================
Investment in agency debt:
  Office of Personnel Management:
    Civil Service retirement and disability
     trust fund \2\.............................               -3,181              -3,283        -83         551
                                                 ---------------------------------------------------------------
      Total, investment in agency debt..........               -3,181              -3,283        -83         551
                                                 ===============================================================
      Total, investment in Federal debt \1\ ....              160,287             186,351    194,353   2,139,550
                                                 ===============================================================
                   MEMORANDUM
Investment by Federal funds (on-budget).........               10,312               4,823      8,003     123,915
Investment by Federal funds (off-budget)........                  140                  -*  .........       1,000
Investment by trust funds (on-budget)...........               54,192              61,253     55,060   1,041,724

[[Page 267]]

 
Investment by trust funds (off-budget)..........               99,271             121,956    131,290     983,523
Investment by deposit funds \4\.................                   59              -1,680  .........          76
Unrealized discount \1\ ........................               -3,688           .........  .........     -10,688
----------------------------------------------------------------------------------------------------------------
* $500 thousand or less.
\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\ The investment in agency debt is the result of the FFB swapping Postal Service and TVA securities with the
  Civil Service Retirement and Disability trust fund during 1996 in exchange for Treasury securities having an
  equal present value. See the narrative in the section on agency debt for further explanation.
\3\ Off-budget Federal entity.
\4\ Only those deposit funds classified as Government accounts.

   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.

                       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 $174 million at the end of 1998. 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.
   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 measurement 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 defined in 
footnote 5 to Table 12-2. The amount is relatively small: $5.5 billion 
at the end of 1998 compared to the total discount (less premium) of 
$76.8 billion on all Treasury securities.

   Methods of changing the debt limit.--The statutory debt limit has 
frequently been changed. Since 1960, Congress has passed 68 separate 
acts to raise the limit, extend the duration of a temporary increase, or 
revise the definition. \12\
---------------------------------------------------------------------------
  \12\ The Acts and the statutory limits since 1940 are enumerated in 
Historical Tables, Budget of the United States Government, table 7.3.
---------------------------------------------------------------------------
   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 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 Reconcili

[[Page 268]]

ation 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 together. Both increases in 
the debt limit were large enough to last over two years without a 
further change in law, the longest times 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. During an extended 
period of dispute between the President and the Congress, the Treasury 
Department took a number of administrative actions to keep within the 
limit and the Congress passed two acts providing temporary exemptions 
from the limit. In March 1996, although agreement had not been reached 
on deficit reduction, 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.
   During 1997, unlike 1996, the President and the Congress reached 
agreement on a plan to balance the budget. This included a sufficient 
increase in the debt limit to accommodate Government finances for longer 
than possible under the limit enacted in the previous year, even though 
the amount of debt at that time was considerably under the limit. As a 
result, the Balanced Budget Act of 1997, which the President signed into 
law on August 5, 1997, increased the debt limit to $5,950 billion.

   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 
primarily by the total Government deficit or surplus. The debt subject 
to limit, however, includes not only debt held by the public but also 
debt held by Government accounts. The change in debt subject to limit is 
therefore determined both by the factors that determine the total 
Government deficit or surplus 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                        1998 -----------------------------------------------------------------
                                                                     actual                1999       2000       2001       2002       2003       2004
--------------------------------------------------------------------------------------------------------------------------------------------------------
Federal funds surplus or deficit (-)....................               -92.0              -110.5      -67.5      -52.7      -17.3      -23.9       -4.0
  (On-budget)...........................................               -91.8              -109.5      -65.7      -50.9      -16.4      -23.7       -3.7
  (Off-budget)..........................................                -0.2                -1.0       -1.8       -1.8       -0.9       -0.2       -0.3
                                                         ===============================================================================================
Means of financing other than borrowing:
  Change in: \1\
    Treasury operating cash balance.....................                 4.7                -1.1   .........  .........  .........  .........  .........
    Checks outstanding, etc. \2\ .......................                -2.8                 2.9       -1.6   .........  .........  .........  .........
    Deposit fund balances \3\ ..........................                -0.8                -1.7   .........  .........  .........  .........  .........
  Seigniorage on coins..................................                 0.6                 0.9        1.0        1.0        1.0        1.0        1.0
  Less: Net financing disbursements:
    Direct loan financing accounts......................               -11.5               -25.2      -21.2      -20.1      -19.6      -19.2      -17.7
    Guaranteed loan financing accounts..................                -0.5                 1.6        0.9        1.8        1.8        1.8        2.0
      Total, means of financing other than borrowing....               -10.2               -22.6      -20.9      -17.3      -16.7      -16.4      -14.7
                                                         ===============================================================================================
Decrease or increase (-) in Federal debt held by Federal
 funds and deposit funds \4\ ...........................               -10.5                -3.1       -8.0   .........  .........  .........  .........
Increase or decrease (-) in Federal debt not subject to
 limit..................................................                -0.3                -0.9       -0.9       -1.0       -1.0       -1.3       -1.3
                                                         ===============================================================================================
      Total, requirement for Federal funds borrowing
       subject to debt limit............................               112.9               137.1       97.3       71.0       35.0       41.6       20.1
                                                         ===============================================================================================
Adjustment for change in discount or premium \5\........                -1.1            .........  .........  .........  .........  .........  .........
Increase in debt subject to limit.......................               111.8               137.1       97.3       71.0       35.0       41.6       20.1
 
                        ADDENDUM
Debt subject to statutory limit \6\.....................             5,439.4             5,576.6    5,673.9    5,744.9    5,779.9    5,821.5    5,841.6
--------------------------------------------------------------------------------------------------------------------------------------------------------
\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 liabilities) would also be a means of financing the deficit and would 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 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 $5,950 billion.

   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. \13\
---------------------------------------------------------------------------
  \13\ For further discussion of the trust funds and Federal funds 
groups, see chapter 15, ``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 that

[[Page 269]]

are not within the Federal funds group. 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. Very little debt subject to statutory limit is 
issued for other reasons. The change in debt subject to limit is 
therefore determined primarily 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 (pending 
social security reform). In 2000 the Federal funds deficit is estimated 
to be $67.5 billion, and other factors increase the requirement to 
borrow subject to limit by $29.8 billion. The largest other factor 
($21.2 billion) is the direct loan financing accounts. As explained in 
an earlier section, their net financing 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. 
The next largest factor ($8.0 billion) is investment in Treasury 
securities by revolving funds and special funds in the Federal funds 
group. As a result of all these factors, the debt subject to limit is 
estimated to increase by $97.3 billion, in contrast to a $97.9 billion 
decrease in debt held by the public.
   The budget surplus or deficit equals the sum of the Federal funds 
surplus or deficit and the trust fund surplus or deficit. The trust 
funds currently have a large surplus, as they have for a number of 
years, and it is estimated to grow through 2004. The Federal funds, in 
contrast, as shown in Table 12-5, continue to have a deficit every year 
over this period though a sharply declining one. Mainly because of the 
Federal funds deficit, the debt subject to limit continues to increase 
every year while the debt held by the public decreases. This can be seen 
by comparing the annual increase in debt subject to limit in Table 12-5 
with the annual decrease in debt held by the public in Table 12-2. In 
2004, for example, when the Government has a $207.6 billion total 
surplus and the debt held by the public decreases by $192.9 billion, the 
debt subject to limit increases by $20.1 billion. From the end of 1998 
to 2004, debt held by the public decreases $793.5 billion in total while 
debt subject to limit increases $402.1 billion. The debt subject to 
limit remains under the present statutory limit of $5,950 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 almost entirely 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 1998 foreign 
holdings of Treasury debt were $1,216.9 billion, which was 33 percent of 
the total debt held by the public. \14\ Foreign central banks owned 44 
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.
---------------------------------------------------------------------------
  \14\ The amounts of debt reported by the Bureau of Economic Analysis, 
Department of Commerce, are different, but similar in size, due to a 
different method of valuing the securities.
---------------------------------------------------------------------------
   Although the amount of debt Federal held by foreign residents grew 
greatly over this period, the proportion they own, after growing 
abruptly in the very early 1970s, did not change much again until 1995. 
During 1995-97, however, foreign holdings increased on average by about 
$200 billion each year, considerably more than total Federal borrowing 
from the public. \15\ As a result, the Federal debt held by individuals 
and institutions within the United States decreased in absolute amount 
during those years, and the percentage of Federal debt held by foreign 
residents grew from 19 percent at the end of 1994 to 32 percent at the 
end of 1997. The rapid growth of foreign debt holdings ceased in 1998 
and turned into a slight decline, almost the only year with a decrease 
since 1970. Because total debt held by the public decreased in 1998, the 
percentage held by foreigners rose again but by a very small amount.
---------------------------------------------------------------------------
  \15\ Table 12-6 shows foreign holdings increasing by only $144.6 
billion in 1995. However, as explained in footnote 5 to that table, a 
benchmark revision reduced the estimated holdings as of December 1994 
(by $47.9 billion). Since debt estimates were not revised retroactively, 
the increase in 1995 was more than the table shows. Before the benchmark 
revision, the increase was estimated to be $192.6 billion.
---------------------------------------------------------------------------
   Foreign holdings of Federal debt are about one-fifth of the foreign-
owned assets in the U.S. 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 

[[Page 270]]



                                                      TABLE 12-6. FOREIGN HOLDINGS OF FEDERAL DEBT
                                                              (Dollar amounts in billions)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                Debt held by the public         Borrowing from the       Interest on debt held by the
                                                          ----------------------------------          public                        public
                       Fiscal year                                                          ------------------------------------------------------------
                                                            Total   Foreign \1\  Percentage                                                   Percentage
                                                                                   foreign   Total \2\   Foreign \1\  Total \3\  Foreign \4\    foreign
--------------------------------------------------------------------------------------------------------------------------------------------------------
1965.....................................................    260.8       12.3          4.7         3.9         0.3         9.6         0.5          4.9
1966.....................................................    263.7       11.6          4.4         2.9        -0.7        10.1         0.5          5.1
1967.....................................................    266.6       11.4          4.3         2.9        -0.2        11.1         0.6          5.1
1968.....................................................    289.5       10.7          3.7        22.9        -0.7        11.9         0.7          5.6
1969.....................................................    278.1       10.3          3.7        -1.3        -0.4        13.5         0.7          5.3
 
1970.....................................................    283.2       14.0          5.0         3.5         3.8        15.4         0.8          5.5
1971.....................................................    303.0       31.8         10.5        19.8        17.8        16.2         1.3          7.9
1972.....................................................    322.4       49.2         15.2        19.3        17.3        16.8         2.4         14.2
1973.....................................................    340.9       59.4         17.4        18.5        10.3        18.7         3.2         17.2
1974.....................................................    343.7       56.8         16.5         2.8        -2.6        22.7         4.1         17.9
 
1975.....................................................    394.7       66.0         16.7        51.0         9.2        25.0         4.5         18.2
1976.....................................................    477.4       69.8         14.6        82.2         3.8        29.3         4.4         15.1
TQ.......................................................    495.5       74.6         15.1        18.1         4.9         7.8         1.2         14.9
1977.....................................................    549.1       95.5         17.4        53.6        20.9        33.8         5.1         15.0
1978.....................................................    607.1      121.0         19.9        58.0        25.4        40.2         7.9         19.5
1979 \5\ ................................................    640.3      120.3         18.8        33.2        -0.7        49.9        10.7         21.5
 
1980.....................................................    709.8      121.7         17.1        69.5         1.4        62.8        11.0         17.5
1981.....................................................    785.3      130.7         16.6        75.5         9.0        81.7        16.4         20.1
1982.....................................................    919.8      140.6         15.3       134.4         9.9       101.2        18.7         18.5
1983.....................................................  1,131.6      160.1         14.1       211.8        19.5       111.6        19.2         17.2
1984.....................................................  1,300.5      175.5         13.5       168.9        15.4       133.5        20.3         15.2
 
1985 \5\ ................................................  1,499.9      222.9         14.9       199.4        47.4       152.9        23.0         15.1
1986.....................................................  1,736.7      265.5         15.3       236.8        42.7       159.3        24.2         15.2
1987.....................................................  1,888.7      279.5         14.8       152.0        14.0       160.4        25.7         16.0
1988.....................................................  2,050.8      345.9         16.9       162.1        66.4       172.3        29.9         17.4
1989.....................................................  2,189.9      394.9         18.0       139.1        49.0       189.0        37.1         19.6
 
1990 \5\ ................................................  2,410.7      440.3         18.3       220.8        45.4       202.4        40.2         19.9
1991.....................................................  2,688.1      477.3         17.8       277.4        37.0       214.8        41.3         19.2
1992.....................................................  2,998.8      535.2         17.8       310.7        57.9       214.5        39.3         18.3
1993.....................................................  3,247.5      591.3         18.2       247.4        56.1       210.2        39.0         18.6
1994.....................................................  3,432.1      655.8         19.1       184.6        64.5       210.6        41.9         19.9
 
1995 \5\.................................................  3,603.4      800.4         22.2       171.3       144.6       239.2        54.5         22.8
1996.....................................................  3,733.0      978.1         26.2       129.6       177.7       246.6        63.6         25.8
1997.....................................................  3,771.0    1,218.2         32.3        38.2       240.0       250.8        83.7         33.4
1998.....................................................  3,719.9    1,216.9         32.7       -51.3        -1.2       250.0        91.1         36.4
--------------------------------------------------------------------------------------------------------------------------------------------------------
\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; increased the estimated foreign holdings as of
  December 1984 and December 1989; and reduced the estimated holdings as of December 1994. 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, 1989, and 1995 reflects the benchmark revision as
  well as the net purchases of Federal debt securities.

      trends since 1965 in terms of both dollar amounts and, more significantly, as percentages of total credit market borrowing or lending by domestic 
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                                .
   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 was due to higher GSE borrowing as well as 
Federal deficits. More recently, the Federal borrowing participation 
rate has declined, falling to nearly 30.0 percent in 1997 and 1998, 
despite large guaranteed and GSE borrowing. The Federal lending 
participation rate has been smaller in most years than the borrowing 
participation rate, primarily because Federal direct loans are 
ordinarily much smaller than Federal borrowing. In 1998, however, 
because of the Federal surplus, the lending participation rate was 
higher.

[[Page 271]]



                                                 TABLE 12-7. FEDERAL PARTICIPATION IN THE CREDIT MARKET
                                                              (Dollar amounts in billions)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                       Actual                                               Estimates
                                             -----------------------------------------------------------------------------------------------------------
                                                1965     1970     1975     1980     1985     1990     1995     1996     1997     1998     1999     2000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total net borrowing in credit market \1\ ...     66.8     88.2    169.6    336.9    829.3    704.1    705.6    713.7    687.1    933.7  .......  .......
                                             -----------------------------------------------------------------------------------------------------------
Federal borrowing from the public...........      3.9      3.5     51.0     69.5    199.4    220.8    171.3    129.6     38.2    -51.3    -50.1    -97.9
Guaranteed borrowing........................      5.0      7.8      8.6     31.6     21.6     40.7     26.2     89.9     57.8     58.5    102.1     97.9
Government-sponsored enterprise borrowing
 \2\ .......................................      1.2      4.9      5.3     21.4     57.9    115.4    125.7    141.5    112.8    293.1    265.3    221.7
                                             -----------------------------------------------------------------------------------------------------------
  Total, Federal and federally assisted
   borrowing................................     10.1     16.2     65.0    122.5    278.9    376.9    323.2    361.1    208.7    300.3    317.4    221.7
Federal borrowing participation rate
 (percent)..................................     15.1     18.4     38.3     36.4     33.6     53.5     45.8     50.6     30.4     32.2  .......  .......
                                             ===========================================================================================================
Total net lending in credit market \1\ .....     66.8     88.2    169.6    336.9    829.3    704.1    705.6    713.7    687.1    933.7  .......  .......
                                             -----------------------------------------------------------------------------------------------------------
Direct loans................................      2.0      3.0     12.7     24.2     28.0      2.8      1.6      4.0     12.8      6.8     14.7     11.1
Guaranteed loans............................      5.0      7.8      8.6     31.6     21.6     40.7     26.2     89.9     57.8     58.5    102.1     97.9
Government-sponsored enterprise loans \2\ ..      1.4      5.2      5.5     24.1     60.7     90.0     68.2    161.2    107.9    276.2    306.9    223.1
                                             -----------------------------------------------------------------------------------------------------------
  Total, Federal and federally assisted
   lending..................................      8.3     15.9     26.9     79.9    110.3    133.5     90.4    255.1    178.4    341.5    423.7    332.1
Federal lending participation rate (percent)     12.4     18.0     15.9     23.7     13.3     19.0     12.8     35.7     26.0     36.6  .......  .......
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Total net borrowing (or lending) in credit market by domestic nonfinancial sectors, excluding equities. Credit market borrowing (lending) is the
  acquisition (loan) of funds other than equities through formal credit channels. Financial sectors are omitted from the series used in this table to
  avoid double counting, since financial intermediaries borrow in the credit market primarily in order to finance lending in the credit market.
  Equities, trade credit, security credit, and other sources of funds are also excluded from this series. 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) by nonfinancial sectors, because GSE borrowing (lending) is a proxy for the borrowing (lending) by nonfinancial sectors that the
  GSEs assist through intermediation. The GSEs assist the ultimate nonfinancial borrower by purchasing its loans from the initial, direct lender or by
  other methods, which they finance by issuing securities themselves in the credit market. Borrowing and lending include mortgage-backed securities,
  because the GSEs assist nonfinancial borrowers through this type of intermediation as well as by types of intermediation that involve financial
  instruments recognized on the GSEs' balance sheets. The data for this table are adjusted, with some degree of approximation, to remove double counting
  in calculating a consolidated total for Federal and federally assisted borrowing (lending): GSE borrowing and lending are calculated net of
  transactions between components of GSEs and transactions in guaranteed loans; GSE borrowing is also calculated net of borrowing from other GSEs and
  purchases of Federal debt securities.