[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

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

                                            Table 19-1.  Net Interest
                                            (In millions of dollars)
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                                                                               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

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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.