[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%
----------------------------------------------------------------------------------------------------------------

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