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