[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)
----------------------------------------------------------------------------------------------------------------
                                                                               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
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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.
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