    [Budget of the United States Government]
    [III. Creating a Better Government]
    [19. Net Interest]
    [From the U.S. Government Publishing Office, www.gpo.gov]

                                19.  NET INTEREST

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                                                Table 19-1.  Net Interest
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                   Estimate
                   Function 900                   2000   -----------------------------------------------------------
                                                 Actual     2001      2002      2003      2004      2005      2006
    ----------------------------------------------------------------------------------------------------------------
    Spending:
      Mandatory Outlays:
        Existing law..........................   223,218   206,369   188,126   175,223   161,456   144,626   127,132
        Proposed legislation..................  ........  ........         5        21        37        53        68
    Tax Expenditures:
      Existing law............................       470       490       520       540       570       600       630
    ----------------------------------------------------------------------------------------------------------------

      ----------------------------------------------------------------------
      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 the Government invests its various trust fund balances in
    Treasury securities. Net interest does not include these internal
    payments.

    A Falling Interest Burden

      Largely as a result of the strong economic performance over the past
    several years, and policy actions to reduce the deficits, the long
    upward trend for net interest has ended. Since 1998, the budget
    surpluses have led to a reduction in debt and interest costs. This trend
    will accelerate over the next several years.
      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 the debt. Net interest grew from 1.4 percent of GDP in 1970 to
    a peak of 3.3 percent of GDP in 1991 as a consequence of growing budget
    deficits. In dollar terms, net interest began to decline in 1998 with
    the first budget surplus in recent years. In 2006, net interest is
    projected to be $127.2 billion, about $116.8 billion below its 1997
    peak. As a percentage of GDP, net interest will fall to an estimated 1.0
    percent in 2006. And the interest burden as a percent of total outlays
    will plunge from a peak of 15.4 percent in 1996 to 5.8 percent in 2006.
    (See Chart 19-1.)

      With the prospect of continuing surpluses, the Administration plans to
    reduce debt held by the public, and thus net interest will continue to
    decline rapidly over the next few years. The reduction in the debt
    burden will help to increase the resources for private sector
    investment, lower interest rates, and raise productivity growth.

    Components of Net Interest

      Net interest is defined as interest on Treasury debt securities
    (gross), minus the interest received by on-budget and off-budget trust
    funds, and adjusted for the receipts and outlays that are recorded as
    ``other interest'' (discussed later in this chapter).
      An important part of the net interest function is to bring together
    the payment and receipt of interest from one Government account to
    another. The largest portion of these transactions involves the payment
    of interest to trust funds, which have invested their cash surpluses in
    Treasury securities. Within the interest function, the payments of
    interest to trust funds are included in

    [[Page 144]]

    interest on Treasury debt securities (gross) and the receipts of
    interest by trust funds are shown, as negative amounts, in interest
    received by trust funds. A similar treatment is given to several special
    funds, such as the Nuclear Waste Disposal Fund and Abandoned Mine
    Reclamation Fund. For these special funds, payments of interest are
    included in interest on Treasury debt securities (gross) and the
    receipts of interest are shown, as negative amounts, in ``other
    interest.'' A smaller category of intragovernmental interest payment
    occurs primarily in connection with Federal credit programs, when
    certain Government accounts borrow from the Treasury, which, in turn,
    must borrow from the public. In these instances, the payment of interest
    on the Treasury's borrowing from the public is shown as interest on
    Treasury debt securities (gross) and Treasury's receipt of interest from
    the borrowing agency is shown as ``other interest.''
      Thus, the net interest total includes, where possible, both the paying
    side and receiving side of intragovernmental interest payments. The
    exception to this practice occurs where only the paying side is included
    in the interest function, as happens with payments of interest to
    revolving funds, such as the Bank Insurance Fund, Exchange Stabilization
    Fund, or Employee Life Insurance Fund. The payments to these funds are
    shown as interest on Treasury debt securities (gross), but the receipts
    by these funds are reported as offsetting collections within the fund,
    rather than offsetting receipts in the interest function. This practice
    leaves net interest as a close, though not precise, measure of the
    interest paid to the public.
      In 2008 through 2011, the surplus exceeds the amount of maturing debt.
    When this happens, excess balances begin to accumulate and reach $1,288
    billion by the end of 2011. These balances are assumed to earn interest.
    Because no institutional arrange

    [[Page 145]]

    ments are assumed regarding how or where the excess balances might be
    deposited, these interest earnings on excess balances are included, as
    offsetting receipts, in ``interest on Treasury debt securities
    (gross).'' The relationships among the surplus, debt held the public,
    and excess balances are discussed further in Chapter 12, ``Federal
    Borrowing and Debt'' in Analytical Perspectives.

      Interest on Treasury Debt Securities (gross): Interest on Treasury
    debt securities (gross) is estimated to increase slightly from $351.0
    billion in 2002 to $352.7 billion in 2006. The underlying debt includes
    the rising amount of trust fund balances in on-budget and off-budget
    Government accounts. At the end of 2000, the gross Federal debt totaled
    $5.6 trillion, compared to $4.0 trillion at the end of 1992. However,
    most of the growth in the gross Federal debt occurred by 1998; during
    the last two years, gross debt has increased only slightly. It will
    continue to increase through 2006 as the increase in trust fund balances
    exceeds the decline in debt held by the public.
      Interest Received by Trust Funds: As was noted earlier, interest
    received by trust funds is deducted from the interest on Treasury debt
    securities (gross) to determine net interest. Total trust fund interest
    receipts are estimated to rise from $152.4 billion in 2002 to $213.4
    billion in 2006.
      The receipts of Social Security's Old-Age and Survivors Insurance and
    Disability Insurance (OASDI) trust funds are the largest of all the
    trust funds (and are excluded from the budget, and thus shown as ``off-
    budget,'' under current law). OASDI trust fund interest is estimated to
    increase from $76.1 billion in 2002 to $120.1 billion in 2006. The other
    large trust funds which earn interest (and which are on-budget) include
    the civil service retirement and disability fund (whose interest is
    expect to rise from $36.5 billion in 2002 to $41.6 billion in 2006); the
    military retirement fund (whose interest is expected to rise from $12.6
    billion in 2002 to $13.6 billion in 2006); and the Medicare Hospital
    Insurance (HI) trust fund (whose interest is expected to rise from an
    estimated $13.7 billion in 2002 to $22.6 billion in 2006).

      Other Interest: Other interest includes both interest payments and
    interest collections. Receipts of interest are included for credit
    liquidating accounts and the Federal Financing Bank (which borrowed from
    the Treasury, mostly to support certain Federal credit programs).
    Receipts of interest are also included for special funds, as described
    above. Payments of interest include IRS payments on certain refunds, and
    payments to credit financing accounts that have deposited cash balances
    with the Treasury.

    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 $31.8 billion in 2002, rising to $36.7
    billion in 2006.