Analytical Perspectives - 12. Federal Borrowing and Debt

[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)
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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
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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
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\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.
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\1\ Chapter 1 of this volume, ``Economic Assumptions,'' reviews recent
economic developments and explains the economic assumptions for this
budget.
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Debt Held by the Public, Gross Federal Debt, and Liabilities Other Than
Debt

The Federal Government issues debt securities for two principal
purposes. First, it borrows from the public in order to finance the
Federal deficit. Second, it issues debt to Government accounts,
primarily trust funds, that accumulate surpluses. By law, trust fund
surpluses must generally be invested in Federal securities. The gross
Federal debt is defined to consist of both the debt held by the public
and the debt held by Government accounts. Nearly all the Federal debt
has been issued by the Treasury and is formally called ``public debt,''
but a small portion has been issued by other Government agencies and is
called ``agency debt.'' \2\
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\2\ The term ``agency debt'' is defined more narrowly in the budget
than in the securities market, where it includes not only the debt of
the Federal agencies listed in Table 12-3 but also the debt of the
Government-sponsored enterprises listed in Table 8-10 at the end of
Chapter 8 and certain Government-guaranteed securities.
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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)
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Estimate
1998 -----------------------------------------------------
Actual 1999 2000 2001 2002 2003 2004
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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
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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
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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

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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\
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\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.
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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

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TABLE 12-3. AGENCY DEBT
(In millions of dollars)
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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
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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.