    [Budget of the United States Government]
    [V. Investing in the Common Good: Program Performance in Federal Functions]
    [28. Net Interest]
    [From the U.S. Government Publishing Office, www.gpo.gov]

    [[Page 285]]

                                28.  NET INTEREST

      ----------------------------------------------------------------------

                                                Table 28-1.  Net Interest
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                   Estimate
                   Function 900                   1999   -----------------------------------------------------------
                                                 Actual     2000      2001      2002      2003      2004      2005
    ----------------------------------------------------------------------------------------------------------------
    Spending:
      Mandatory Outlays:
        Existing law..........................   229,735   220,314   208,308   198,605   189,244   177,445   163,634
        Proposed legislation..................  ........  ........         4        21        57        85       134
    Tax Expenditures:
      Existing law............................       965     1,015     1,065     1,115     1,175     1,235     1,295
    ----------------------------------------------------------------------------------------------------------------

      ----------------------------------------------------------------------
       The Federal Government pays large amounts of interest to the public,
    mainly on the debt it incurred to finance the excess of past budget
    deficits over surpluses. Net interest closely measures these Federal
    interest transactions with the public.
       The Government also pays interest from one budget account to another,
    mainly because it invests its various trust fund balances in Treasury
    securities. Net interest does not include these internal payments.
       In 2001, Federal outlays for net interest will total an estimated
    $208.3 billion, declining to $163.6 billion in 2005. The amounts shown
    for the mandatory outlay effects of proposed legislation in the table at
    the beginning of this chapter are interest payments to Government
    revolving funds, and therefore have no net effect on the Government
    finances.

    The Interest Burden

       As noted above, the amount of net interest depends on the amount of
    debt held by the public, as well as on the interest rates on the
    Treasury securities that comprise that debt. Debt held by the public is
    the total of all deficits that have accumulated in the past--minus the
    amount offset by budget surpluses. Large deficits in the 1980s and early
    1990s sharply increased the ratio of debt held by the public to the
    Gross Domestic Product (GDP)--from 26.1 percent in 1980 to 49.5 percent
    in 1993. Partly due to the huge rise in debt, interest rates on Treasury
    securities also rose sharply. The combination of much more debt and
    higher interest rates caused a substantial increase in Federal interest
    costs--from 1.9 percent to 3.3 percent of GDP between 1980 and 1991 (see
    Chart 28-1).

       As budget deficits were gradually eliminated, and as interest rates
    declined, the ratio of net interest to GDP fell from 3.3 percent in 1991
    to 2.5 percent in 1999. The combination of budget surpluses starting in
    1998, and continued moderate interest rates, is projected to reduce the
    ratio further, to an estimated 1.4 percent in 2005. Thus, the interest
    burden is projected to fall by one-half in just over a decade. As shown
    in the table above, net interest started to decline in 1999.

    Components of Net Interest

       Net interest is defined as gross interest on the public debt, minus
    the interest received by on-budget and off-budget trust funds, and minus
    all activities that fall under ''other interest'' (discussed later in
    this chapter).

       Gross Interest on the Public Debt: Gross interest on the public debt
    will total an estimated $360.0 billion in 2001 and $372.4 billion in
    2005. At the end of 1999, the gross Federal debt totaled $5.606
    trillion, of which $3.633

    [[Page 286]]

    trillion was held by the public. The debt held by the public accounted
    for 21.7 percent of the total credit-market debt owed by the non-
    financial sector of the U.S. economy. This proportion peaked at 26.7
    percent in 1994 and has trended down over the last few years, as Federal
    Government borrowing diminished with the declining deficits and recent
    surpluses (see Table 12-1 in Analytical Perspectives).
       The Treasury Department plans to buy back outstanding U.S. notes and
    bonds as part of its efforts to manage efficiently the reduction of the
    publicly held debt. The budgetary treatment of the premiums and
    discounts on these repurchases is discussed in detail in Chapter 24 of
    Analytical Perspectives, ``Budget System and Concepts and Glossary''.

       Interest Received by Trust Funds: Under current law, the receipts and
    disbursements of Social Security's old-age and survivors insurance
    (OASI) trust fund and disability insurance (DI) trust fund are excluded
    from the budget. Social Security, however, is a Federal program. Thus,
    the net interest of the Federal Government as a whole includes the off-
    budget interest earnings. Because Social Security will accumulate large
    surpluses over the next several years, its interest earnings will rise
    from an estimated $68.1 billion in 2001 to $110.5 billion in 2005.
       The other trust funds are on-budget. The interest earnings of the
    civil service retirement and disability fund will rise from an estimated
    $35.8 billion in 2001 to $40.1 billion in 2005, and the interest of the
    military retirement fund will rise from $13.0 billion to $14.0 billion.
    The Medicare Hospital Insurance (HI) trust fund will receive $12.5
    billion in 2001. Together with Social Security, these account for most
    of the interest received by trust funds.

    [[Page 287]]

       Other Interest: Other interest includes both interest payments and
    interest collections--much of it consisting of intra-governmental
    payments and collections that arise from Federal revolving funds. These
    funds borrow from the Treasury to carry out lending or other business-
    type activities.

     Budgetary Effect, including the Federal Reserve

       The Federal Reserve System buys and sells Treasury securities in the
    open market to implement monetary policy. The interest that Treasury
    pays on the securities owned by the Federal Reserve is included in net
    interest as a cost, but virtually all of it comes back to the Treasury
    as ``deposits of earnings of the Federal Reserve System.'' These budget
    receipts will total an estimated $29.5 billion in 2001 and $33.8 billion
    in 2005.