[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]
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28. NET INTEREST
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Table 28-1. Net Interest
(In millions of dollars)
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Estimate
Function 900 1999 -----------------------------------------------------------
Actual 2000 2001 2002 2003 2004 2005
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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
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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
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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.
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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.