[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)
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Estimate
Function 900 2000 -----------------------------------------------------------
Actual 2001 2002 2003 2004 2005 2006
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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
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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 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
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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
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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.