    [Economic Outlook, Highlights from FY 1994 to FY 2001, FY 2002 Baseline Projections]
    [III. Major Functions of the Federal Government]
    [19.  Net Interest]
    [From the U.S. Government Printing Office, www.gpo.gov]

    [[Page 197]]

                                19.  NET INTEREST

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

                                                Table 19-1.  Net Interest
                                              (Dollar amounts in millions)
    ----------------------------------------------------------------------------------------------------------------
                                                                                                            Percent
                                    Function 900                                     1993        2001       Change:
                                                                                    Actual     Estimate    1993-2001
    ----------------------------------------------------------------------------------------------------------------
    Spending:
      Mandatory outlays.........................................................    198,736     210,234          6%
    Tax expenditures............................................................      1,130         490        -57%
    ----------------------------------------------------------------------------------------------------------------

      ----------------------------------------------------------------------
      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.

    Falling Interest Burden

      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. In 1993, the Administration inherited a large and
    growing debt, coupled with the prospect of large and growing budget
    deficits for many years into the future. Net interest had grown from
    $14.4 billion (or 1.4 percent of GDP) in 1970 to $198.7 billion (or 3.0
    percent of GDP) in 1993, and was projected to grow still further without
    a change in policy. Over the same period, net interest had increased
    from 7.3 percent of total outlays to 14.1 percent. Largely as a result
    of fiscal policy actions under the Clinton-Gore Administration, and the
    strong economic performance over the past eight years, the unified
    budget deficit of $290 billion in 1993 became an estimated surplus of
    $256 billion in 2001; thus, the long, upward trend for net interest has
    ended. In dollar terms, net interest began to decline in 1998 with the
    first budget surplus in recent years. By 2001, net interest is projected
    to be $210.2 billion, about $34 billion below its 1997 peak (though
    still about $11 billion above the level of 1993). As a percentage of
    GDP, net interest will fall from 3.0 percent in 1993 to an estimated 2.0
    percent in 2001. As a percentage of total outlays, it will fall from
    14.1 percent in 1993 to an estimated 11.3 percent in 2001, freeing
    resources for other purposes (see Chart 19-1).

      The projection at the start of the Administration was that net
    interest would continue to increase in dollars and as a percentage of
    GDP for the foreseeable future, thereby leaving less budgetary resources
    available for programs, and threatening the long-term sustainability of
    the budget. This trend for net interest has improved radically, however,
    largely as a result of fiscal policy actions and the strong economic
    performance over the past eight years. The Omnibus Budget Reconciliation
    Act of 1993 and the Balanced Budget Act of 1997 reduced the size of the
    projected deficits. Actual budget performance exceeded expectations, as
    the economy grew more strongly than expected; receipts grew faster, and
    outlays slower, than expected. The unified budget turned to surplus in
    1998, and the surpluses grew larger in 1999 and 2000. As a consequence,
    the debt held by the public fell from $3.8 trillion at the

    [[Page 198]]

    end of 1997 to $3.4 trillion at the end of 2000.
      The swing to surplus in the unified budget increased national saving
    and enhanced economic growth. The prospect of continuing surpluses
    implies that net interest will continue to fall toward zero over the
    next few years. This improvement is one of the most important reasons
    for the projected long-term stability of the budget, and is a vital
    foundation for the Nation's preparation for the aging of the population,
    including the impending retirement of the baby-boom generation.

    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 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

    [[Page 199]]

    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 the 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.

      Interest on Treasury Debt Securities (Gross): Interest on Treasury
    debt securities (gross) rose from $292.5 billion in 1993 to an estimated
    $361.2 billion in 2001. 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 $4.1 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, as the decrease in debt
    held by the public has been approximately matched by an increase in
    trust fund balances. For the period 1993-2001, the increase in debt held
    by trust funds was greater than the increase in total Treasury debt
    securities (gross).
      Interest Received by Trust Funds: As noted earlier in this chapter,
    interest received by trust funds is deducted from the interest on
    Treasury debt securities (gross) to determine net interest. Total trust
    fund interest receipts were $82.3 billion in 1993, increasing to an
    estimated $142.1 billion in 2001.

      The receipts of Social Security's Old-Age and Survivors Insurance and
    Disability Insurance 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). Because Social Security accumulated large surpluses
    between 1993 and 2001, its interest earnings rose from $26.8 billion in
    1993 to an estimated $69.0 billion in 2001. The other large trust funds
    which earn interest (which are on-budget) include the civil service
    retirement and disability fund (whose interest rose from $25.7 billion
    in 1993 to an estimated $35.3 billion in 2001); the military retirement
    fund (whose interest increased from $9.8 billion to $12.6 billion); and,
    the Medicare Hospital Insurance trust fund (whose interest declined from
    $10.6 billion in 1993 to $9.2 billion in 1998, as that program generated
    small deficits between 1995 and 1997; however, reforms enacted in 1997
    and slower-than-expected cost increases have resulted in an increase in
    the fund balance and an increase in interest received to an estimated
    $12.2 billion in 2001).

      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
    earlier. 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 $27.9 billion in 2001.