    [Analytical Perspectives]
    [Federal Borrowing and Debt]
    [13. Federal Borrowing and Debt]
    [From the U.S. Government Publishing Office, www.gpo.gov]

    [[Page 265]]

      ======================================================================

                           FEDERAL BORROWING AND DEBT

      ======================================================================

    [[Page 267]]

                         13.  FEDERAL BORROWING AND DEBT

      Debt is the largest legally binding obligation of the Federal
    Government. At the end of 2001, the Government owed $3,320 billion of
    principal to the people who had loaned it the money to pay for past
    deficits. During that year, the Government paid the public around $215
    billion of interest on this debt.

                                 Table 13-1.  TRENDS IN FEDERAL DEBT HELD BY THE PUBLIC
                                              (Dollar amounts in billions)
    ----------------------------------------------------------------------------------------------------------------
                                                     Debt held by the       Debt held by the    Interest on the debt
                                                          public           public as a percent   held by the public
                                                 ------------------------          of:          as a percent of: \3\
                     Fiscal year                                         -------------------------------------------
                                                   Current     FY 1996                 Credit
                                                   dollars   dollars \1\     GDP       market     Total       GDP
                                                                                      debt \2\   outlays
    ----------------------------------------------------------------------------------------------------------------
    1946........................................      241.9     1,728.3       108.6        N/A        7.4        1.8
    1950........................................      219.0     1,270.7        80.1       53.3       11.4        1.8
    1955........................................      226.6     1,154.9        57.3       43.2        7.6        1.3
    1960........................................
                                                      236.8     1,070.7        45.6       33.8        8.5        1.5
    1965........................................      260.8     1,102.4        37.9       26.9        8.1        1.4
    1970........................................      283.2       994.2        28.0       20.8        7.9        1.5
    1975........................................      394.7     1,020.6        25.3       18.4        7.5        1.6
    1980........................................
                                                      711.9     1,271.6        26.1       18.5       10.6        2.3
    1985........................................    1,507.4     2,051.0        36.4       22.3       16.2        3.7
    1986........................................    1,740.8     2,313.1        39.5       22.6       16.1        3.6
    1987........................................    1,889.9     2,444.1        40.7       22.3       16.0        3.5
    1988........................................    2,051.8     2,569.3        40.9       22.2       16.2        3.4
    1989........................................    2,191.0     2,641.9        40.5       22.0       16.5        3.5

    1990........................................    2,411.8     2,803.0        42.1       22.6       16.2        3.5
    1991........................................    2,689.3     3,008.3        45.3       24.1       16.2        3.6
    1992........................................    3,000.1     3,270.0        48.2       25.7       15.5        3.4
    1993........................................    3,248.8     3,458.8        49.5       26.6       14.9        3.2
    1994........................................
                                                    3,433.4     3,577.9        49.4       26.8       14.4        3.0
    1995........................................    3,604.8     3,676.8        49.2       26.7       15.8        3.3
    1996........................................    3,734.5     3,734.5        48.5       26.2       15.8        3.2
    1997........................................    3,772.8     3,700.6        46.1       25.2       15.7        3.1
    1998........................................    3,721.6     3,599.6        43.0       23.3       15.1        2.9
    1999........................................
                                                    3,632.9     3,468.5        39.8       21.3       13.8        2.6
    2000........................................    3,410.1     3,190.0        35.0       18.9       13.0        2.4
    2001........................................    3,320.0     3,035.6        32.7       17.4       11.6        2.1
    2002 estimate...............................    3,477.5     3,111.3        33.6        N/A        9.1        1.8
    2003 estimate...............................    3,570.3     3,137.9        32.7        N/A        9.0        1.8
    2004 estimate...............................
                                                    3,599.6     3,110.6        31.2        N/A        9.3        1.8
    2005 estimate...............................    3,547.7     3,011.6        29.2        N/A        9.1        1.7
    2006 estimate...............................    3,470.0     2,890.7        27.1        N/A        8.8        1.6
    2007 estimate...............................    3,378.9     2,762.3        25.1        N/A        8.4        1.5
    ----------------------------------------------------------------------------------------------------------------
    N/A = Not Available.

    \1\ Debt in current dollars deflated by the GDP chain-type price index with fiscal year 1996 equal to 100.

    \2\ Total credit market debt owed by domestic nonfinancial sectors, modified in some years to be consistent with
      budget concepts for the measurement of Federal debt. Financial sectors are omitted to avoid double counting,
      since financial intermediaries borrow in the credit market primarily in order to finance lending in the credit
      market. Source: Federal Reserve Board flow of funds accounts. Projections are not available

    \3\ Interest on debt held by the public is estimated as the interest on Treasury debt securities less the
      ``interest received by trust funds'' (subfunction 901 less subfunctions 902 and 903). The estimate of interest
      on debt held by the public does not include the comparatively small amount of interest paid on agency debt or
      the offsets for interest on Treasury debt received by other Government accounts (revolving funds and special
      funds).

      After many years of deficits financed mainly by borrowing from the
    public, the Government had unified budget surpluses in the past four
    years. As a result, it reversed the long period of debt accumulation and
    repaid $453 billion of publicly held debt, $90 billion of it in 2001.
    During 2001 and 2002, however, the recession and the response to the
    terrorist attacks have decreased receipts and increased outlays. The
    budget therefore estimates a deficit in 2002 and 2003, with a return to
    surplus in 2004 or 2005. Even though debt held by the public will
    temporarily increase, it is estimated to continue falling as a
    percentage of the gross domestic product (GDP) after 2002.

                        Trends in Debt Since World War II

      Table 13-1 depicts trends in Federal debt held by the public from
    World War II to the present and estimates from the present to 2007. (It
    is supplemented for earlier years by tables 7.1-7.3 in Historical
    Tables,

    [[Page 268]]

    which is published as a separate volume of the budget.) As this table
    shows, Federal debt peaked at 108.6 percent of GDP in 1946, just after
    the end of the war. From then until the 1970s, Federal debt grew
    gradually, but, due to inflation, it declined in real terms. Because of
    an expanding economy as well as inflation, Federal debt as a percentage
    of GDP decreased almost every year. With households borrowing large
    amounts to buy homes and consumer durables, and with businesses
    borrowing large amounts to buy plant and equipment, Federal debt also
    decreased almost every year as a percentage of the total credit market
    debt outstanding. The cumulative effect was impressive. From 1950 to
    1975, debt held by the public declined from 80.1 percent of GDP to 25.3
    percent, and from 53.3 percent of credit market debt to 18.4 percent.
    Despite rising interest rates, interest outlays became a smaller share
    of the budget and were roughly stable as a percentage of GDP.
      During the 1970s, large budget deficits emerged as the economy was
    disrupted by oil shocks and inflation. The nominal amount of Federal
    debt more than doubled, and Federal debt relative to GDP and credit
    market debt stopped declining after the middle of the decade. The growth
    of Federal debt accelerated in the 1980s, and the ratio of Federal debt
    to GDP grew sharply. The ratio of Federal debt to credit market debt
    also rose, though to a much lesser extent. Interest outlays on debt held
    by the public, calculated as a percentage of either total Federal
    outlays or GDP, increased as well.
      The growth of Federal debt held by the public was decelerating by the
    mid-1990s, however, and the debt has declined markedly relative to both
    GDP and total credit market debt. It fell from 49.5 percent of GDP in
    1993 to 32.7 percent in 2001; and it fell more unevenly from 26.6
    percent of total credit market debt in 1993 to 17.4 percent in 2001.
    Interest on this debt, relative to total outlays and GDP, has been
    declining as well. Interest as a share of outlays peaked at 16.5 percent
    in 1989 and then fell to 11.6 percent by 2001. Interest as a percentage
    of GDP has fallen in a similar proportion.
      The current recession and response to the terrorist attacks have
    temporarily interrupted the downward trend in debt. The recession
    reduced tax receipts, and spending increased for war and homeland needs.
    The Government is estimated to have a deficit in 2002 but to return to
    surplus by 2005. As a result, table 13-1 shows a rise in publicly held
    debt for three years. Even during this period, however, debt as a
    percentage of GDP is estimated to increase only in 2002. By 2007, debt
    as a percentage of GDP is estimated to fall to 25.1 percent,
    significantly below the level in 2001 and the lowest level since the
    mid-1970s. Interest as a percentage of outlays is estimated to fall to
    8.4 percent, also well below the level in 2001.

                                   Table 13-2.  FEDERAL GOVERNMENT FINANCING AND DEBT
                                                (In billions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                   Estimate
                                                  Actual -----------------------------------------------------------
                                                   2001     2002      2003      2004      2005      2006      2007
    ----------------------------------------------------------------------------------------------------------------
    Financing:
      Unified budget surplus (+)/ deficit (-)..    127.1    -106.2     -80.2     -13.7      61.1      86.2     104.0
      Financing other than the change in debt
       held by the public:
        Premiums paid (-) on buybacks of           -10.7      -2.8  ........  ........  ........  ........  ........
         Treasury securities \1\...............
        Net purchases (-) of non-Federal         .......     -15.4      -0.9        -*         *       0.2       0.3
         securities by the National Railroad
         Retirement Investment Trust...........
        Changes in: \2\
          Treasury operating cash balance......      8.4     -15.8  ........      -5.0  ........  ........      -5.0
          Checks outstanding, deposit funds,       -12.7      -1.4      -0.5  ........  ........  ........  ........
           etc. \3\............................
        Seigniorage on coins...................      1.3       0.9       1.1       1.2       1.2       1.2       1.2
        Less: Net financing disbursements:
          Direct loan financing accounts.......    -19.1     -15.3     -15.4     -14.5     -14.7     -14.9     -14.7
          Guaranteed loan financing accounts...     -4.2      -1.6       3.0       2.8       4.3       5.0       5.4
                                                --------------------------------------------------------------------
             Total, financing other than the       -37.0     -51.3     -12.6     -15.6      -9.2      -8.5     -12.9
             change in debt held by the public.
                                                --------------------------------------------------------------------
              Total, amount available to repay      90.1    -157.5     -92.8     -29.4      52.0      77.7      91.1
               debt held by the public.........

      Change in debt held by the public........    -90.1     157.5      92.8      29.4     -52.0     -77.7     -91.1

    Debt Subject to Statutory Limitation, End
     of Year:
      Debt issued by Treasury..................  5,743.2   6,109.9   6,499.4   6,866.8   7,182.3   7,481.9   7,780.2
      Adjustment for Treasury debt not subject     -15.3     -15.3     -15.3     -15.3     -15.3     -15.3     -15.3
       to limitation and agency debt subject to
       limitation \4\..........................
      Adjustment for discount and premium \5\..      4.9       4.9       4.9       4.9       4.9       4.9       4.9
                                                --------------------------------------------------------------------
         Total, debt subject to statutory        5,732.8   6,099.5   6,489.0   6,856.4   7,171.9   7,471.5   7,769.8
         limitation \6\........................

    Debt Outstanding, End of Year:
      Gross Federal debt: \7\
        Debt issued by Treasury................  5,743.2   6,109.9   6,499.4   6,866.8   7,182.3   7,481.9   7,780.2
        Debt issued by other agencies..........     27.0      27.2      26.5      25.7      24.6      23.9      23.1
                                                --------------------------------------------------------------------
          Total, gross Federal debt............  5,770.3   6,137.1   6,525.9   6,892.5   7,206.9   7,505.8   7,803.3
      Held by:
        Debt securities held by Government       2,450.3   2,659.6   2,955.6   3,292.9   3,659.2   4,035.8   4,424.4
         accounts..............................
        Debt securities held by the public \8\.  3,320.0   3,477.5   3,570.3   3,599.6   3,547.7   3,470.0   3,378.9
    ----------------------------------------------------------------------------------------------------------------
    * $50 million or less.
    \1\ Includes only premiums paid on buybacks through December 2001. Estimates are not made for subsequent
      buybacks.
    \2\ A decrease in the Treasury operating cash balance (which is an asset) would be a means of financing a
      deficit and therefore has a positive sign. An increase in checks outstanding or deposit fund balances (which
      are liabilities) would also be a means of financing a deficit and therefore would also have a positive sign.
    \3\ Besides checks outstanding and deposit funds, includes accrued interest payable on Treasury debt,
      miscellaneous liability accounts, allocations of special drawing rights, and, as an offset, cash and monetary
      assets other than the Treasury operating cash balance, miscellaneous asset accounts, and profit on sale of
      gold.
    \4\ Consists primarily of Federal Financing Bank debt.
    \5\ Consists of unamortized discount (less premium) on public issues of Treasury notes and bonds (other than
      zero-coupon bonds) and unrealized discount on Government account series securities.
    \6\ The statutory debt limit is $5,950 billion.
    \7\ Treasury securities held by the public and zero-coupon bonds held by Government accounts are almost all
      measured at sales price plus amortized discount or less amortized premium. Agency debt securities are almost
      all measured at face value. Treasury securities in the Government account series are measured at face value
      less unrealized discount (if any).
    \8\ At the end of 2001, the Federal Reserve Banks held $534.1 billion of Federal securities and the rest of the
      public held $2,785.9 billion. Debt held by the Federal Reserve Banks is not estimated for future years.

    Debt Held by the Public, Gross Federal Debt, and Liabilities Other Than
                                      Debt

      The Federal Government issues debt securities for two principal
    purposes. First, it borrows from the public to finance the Federal
    deficit. \1\ Second, it issues debt to Government accounts, primarily
    trust funds, that accumulate surpluses. By law, trust fund surpluses
    must generally be invested in Federal securities. The gross Federal debt
    is defined to consist of both the debt held by the public and the debt
    held by Government accounts. Nearly all the Federal debt has been issued
    by the Treasury and is sometimes called ``public debt,'' but a small
    portion has been issued by other Government agencies and is called
    ``agency debt.'' \2\
    ---------------------------------------------------------------------------
      \1\ Debt held by the public was measured until 1988 as the par value
    (or face value) of the security, which is the principal amount due at
    maturity. (The only exception was savings bonds.) However, most Treasury
    securities are sold at a discount from par, and some are sold at a
    premium. Treasury debt held by the public is now measured as the sales
    price plus the amortized discount (or less the amortized premium). At
    the time of sale, the value equals the sales price. Subsequently, the
    value equals the sales price plus the amount of the discount that has
    been amortized up to that time. In equivalent terms, the measured value
    of the debt equals par less the unamortized discount. (For a security
    sold at a premium, the definition is symmetrical.) When the measurement
    was changed, the data in Historical Tables were revised as far back as
    feasible, which was 1956. Agency debt, except for zero-coupon
    certificates, is recorded at par. For further analysis of these
    concepts, see Special Analysis E, ``Borrowing and Debt,'' in Special
    Analyses, Budget of the United States Government, Fiscal Year 1990,
    pages E-5 to E-8, although some of the practices it describes have been
    revised. In 1997 Treasury began to sell inflation-indexed notes and
    bonds. The recorded value of these securities includes a periodic
    adjustment for inflation.
      \2\ The term ``agency debt'' is defined more narrowly in the budget
    than customarily in the securities market, where it includes not only
    the debt of the Federal agencies listed in table 13-3 but also the debt
    of the Government-sponsored enterprises listed in table 9-11 at the end
    of chapter 9 and certain Government-guaranteed securities.
    ---------------------------------------------------------------------------
      Borrowing from the public, whether by the Treasury or by some other
    Federal agency, has a significant impact on the economy. Borrowing from
    the public is normally a good approximation of the Federal demand on
    credit markets. Even if the proceeds are used productively for tangible
    or intangible investment, the Federal demand on credit markets has to be
    financed out of the saving of households and businesses, the State and
    local sector, or the rest of the world. Federal borrowing thereby
    competes with the borrowing of other sectors for financial resources in
    the credit market, and tends to increase interest rates and reduce
    private capital accumulation. Borrowing from the public thus affects the
    size and composition of assets held by the private sector and the
    perceived wealth of the public. It also increases the amount of taxes
    required to pay interest to the public on Federal debt. Borrowing from
    the public is therefore an important concern of Federal fiscal policy.
    \3\
    ---------------------------------------------------------------------------
      \3\ The Federal sector of the national income and product accounts
    provides a measure of the current surplus or deficit that can be used to
    analyze the effect of Federal fiscal policy on national saving within
    the framework of an integrated set of measures of aggregate U.S.
    economic activity. The Federal sector and its differences from the
    budget are discussed in chapter 17 of this volume, ``National Income and
    Product Accounts.'' Also see chapter 7 of this volume, Part III, the
    section on the analysis of saving and investment.
    ---------------------------------------------------------------------------
      Issuing debt securities to Government accounts performs an essential
    function in accounting for the operation of these funds. The balances of
    debt represent the cumulative surpluses of these funds due to the excess
    of their tax receipts, interest receipts, and other collections compared
    to their spending. The interest on the debt compensates these funds--and
    the members of the public who pay earmarked taxes or user fees into
    these funds--for spending some of the funds' collec

    [[Page 269]]

    tions at a later time than when they receive the money. The debt
    securities are a liability of the general fund to the fund that holds
    the securities and are a mechanism for that fund to accumulate interest
    on its balances. These invested balances provide the fund with authority
    to draw upon the U.S. Treasury in later years to make future payments on
    its behalf to the public. Public policy may deliberately run surpluses
    and accumulate debt in trust funds and other Government accounts in
    anticipation of future spending.
      However, issuing debt to Government accounts does not have any of the
    economic effects of borrowing from the public. It is an internal
    transaction of the Government, made between two accounts that are both
    within the Government itself. It is not a current transaction of the
    Government with the public; it does not draw upon private saving and
    compete with the private sector for available funds in the credit
    market; it does not provide the account with resources other than a
    legal claim on the U.S. Treasury, which itself obtains real resources by
    taxation and borrowing; its interest does not have to be financed by
    taxes or other means; and it does not represent the estimated amount of
    the account's future transactions with the public. For example, if the
    account records the transactions of a social insurance program, the debt
    that it holds does not represent the actuarial present value of expected
    future benefits for either the current participants in the program or
    the larger group of current participants plus the expected future
    participants over some stated time period. The future transactions of
    Federal social insurance and employee retirement programs, which own 91
    percent of the debt held by Government accounts, are important in their
    own right and need to be consid

    [[Page 270]]

    ered separately. This can be done through information published in
    actuarial and financial reports for these programs. \4\ Debt held by the
    public is therefore a better concept than gross Federal debt for
    analyzing the effect of the budget on the economy.
    ---------------------------------------------------------------------------
      \4\ Extensive actuarial analyses of the social security and medicare
    programs are published in the annual reports of the boards of trustees
    of these funds. Annual actuarial reports are also prepared for Federal
    employee retirement funds. A summary of actuarial estimates for these
    and other programs is included annually in the Financial Report of the
    United States Government, prepared by the Treasury Department.
    ---------------------------------------------------------------------------
      Debt securities do not encompass all the liabilities of the Federal
    Government. For example, accounts payable occur in the normal course of
    buying goods and services; social security benefits are due and payable
    as of the end of the month but, according to statute, are paid during
    the next month; loan guarantee liabilities are incurred when the
    Government guarantees the payment of interest and principal on private
    loans; and liabilities for future pension payments are incurred as part
    of the current compensation for the services performed by Federal
    civilian and military employees in producing Government outputs. Like
    debt securities sold in the credit market, these liabilities have their
    own distinctive effects on the economy. Federal liabilities are analyzed
    within the broader conceptual framework of Federal resources and
    responsibilities in chapter 3 of this volume, ``Stewardship: Toward a
    Federal Balance Sheet.'' The different types of liabilities are reported
    annually in the financial statements of the major Federal agencies and
    in the Financial Report of the United States Government, prepared by the
    Treasury Department.

             Government Surpluses or Deficits and the Change in Debt

      Table 13-2 summarizes Federal borrowing and debt from 2001 through
    2007. In 2001 the Government repaid $90 billion of debt held by the
    public, so that the debt outstanding decreased to $3,320 billion. The
    debt held by Government accounts increased $231 billion, and gross
    Federal debt increased by $141 billion to a level of $5,770 billion.

      Debt held by the public.--The Federal Government primarily finances
    deficits by borrowing from the public, and it primarily uses surpluses
    to repay debt held by the public. Table 13-2 shows the relationship
    between the Federal surplus or deficit and the change in debt held by
    the public. The borrowing or debt repayment depends on the Federal
    Government's expenditure programs and tax laws, on the economic
    conditions that influence tax receipts and outlays, and on debt
    management policy. The sensitivity of the budget to economic conditions
    is analyzed in chapter 2 of this volume.
      The total or unified budget surplus consists of two parts: the on-
    budget surplus or deficit; and the surplus of the off-budget Federal
    entities, which have been excluded from the budget by law. Under present
    law, the off-budget Federal entities are the social security trust funds
    (old-age and survivors insurance and disability insurance) and the
    Postal Service fund. \5\ The off-budget totals are virtually the same as
    social security, which had a large surplus in 2001 and is estimated to
    have large and growing surpluses throughout the projection period. The
    on-budget and off-budget surpluses or deficits are added together to
    determine the Government's financing needs.
    ---------------------------------------------------------------------------
      \5\ For further explanation of the off-budget Federal entities, see
    chapter 20, ``Off-Budget Federal Entities and Non-Budgetary
    Activities.''
    ---------------------------------------------------------------------------
      The Government's need to borrow, or its ability to repay debt held by
    the public, has always depended on several other factors besides the
    unified budget surplus or deficit, such as the change in the Treasury
    operating cash balance. As shown in table 13-2, these other factors--
    which in this table are called ``financing other than the change in debt
    held by the public''--can either increase or decrease the Government's
    need to borrow or its ability to repay debt. (An increase in its ability
    to repay debt is represented by a positive sign, like a surplus; a
    decrease is represented by a negative sign, like a deficit.) In 2001 the
    total surplus was $127 billion and the ``financing other than the change
    in debt held by the public'' was -$37 billion. As a result, the
    Government was able to repay $90 billion of publicly held debt.
      When the surplus or deficit is large, it is usually a good
    approximation to say that ``the surplus is used to repay debt held by
    the public'' or ``the deficit is financed by borrowing from the
    public.'' Over the last 15 years, the cumulative deficit was $1,432
    billion and the increase in debt held by the public was $1,579 billion.
    The other factors added a total of $147 billion of borrowing, an average
    of $10 billion per year. The variation was wide, ranging from additional
    borrowing (or lower repayment) of $37 billion to reduced borrowing of
    $19 billion. The other factors that affect borrowing do not depend on
    the size of the surplus or deficit. Thus, when a surplus or deficit is
    moderate in size, the other factors that affect borrowing may account
    for a large proportion of the change in Federal debt held by the public.
      Some of these other factors are small in most years compared to
    borrowing from the public, even when the surplus or deficit is
    relatively small. This is because they are limited by their own nature.
    Decreases in cash balances, for example, while they may occasionally be
    large, are inherently limited by past accumulations, which themselves
    required financing when they were built up. Increases in cash balances
    are limited because it is more efficient to pay off debt.
      However, a special factor in the financing will have a large one-time
    effect in 2002, and two other factors may be significant for extended
    periods.
      The first of these factors will be net purchases of non-Federal
    securities by the National Railroad Retirement Investment Trust. This
    trust fund was established by the Railroad Retirement and Survivors'
    Improvement Act of 2001. Under this Act, most of the assets in the
    Railroad Retirement Board trust funds are transferred to the new trust
    fund, which is expected to invest

    [[Page 271]]

    primarily in private stocks and bonds. The Act ordered special treatment
    of the purchase or sale of non-Federal assets by this trust fund,
    treating such purchases as a means of financing rather than an outlay.
    Therefore, the increased need to borrow from the public to finance the
    purchase of non-Federal assets is masked as part of the ``financing
    other than the change in debt held by the public'' rather than included
    as an increase in the deficit. The budget estimates that this will
    increase borrowing and publicly held debt by $15 billion in 2002. Net
    purchases or sales in subsequent years are estimated to be relatively
    small. \6\
    ---------------------------------------------------------------------------
      \6\ The budget treatment of this fund is further discussed in chapter
    25, ``Budget System and Concepts and Glossary.''
    ---------------------------------------------------------------------------
      The second factor is premiums on debt buybacks--the excess of the
    price paid over the book value. The Treasury Department is buying back
    some outstanding bonds as part of its management of the publicly held
    debt. The premiums at present are the result of interest rates having
    fallen since the bonds were sold, as a result of which the market value
    of the bonds is much higher than their book value. The premiums are
    recorded outside the budget totals as a separate entry in the
    ``financing other than the change in debt held by the public.'' It is
    important to note, however, that the volume of buybacks to date has been
    small relative to the outstanding stock of debt. The premiums were $5.5
    billion in 2000 on bonds with a book value of $21.2 billion and were
    $10.7 billion in 2001 on bonds with a book value of $33.8 billion.
      Estimates for 2002 include only premiums paid on buybacks through
    December 2001. Treasury has announced that future decisions about
    buyback operations will be part of the regular quarterly refunding
    announcements. Treasury has also said that there are likely to be
    periods in which they do not conduct buyback operations and other
    periods in which they do conduct such operations. The reason for
    classification as a means of financing is discussed in a section of
    chapter 25, ``Budget System and Concepts and Glossary.'' (Discounts
    would be recorded in the same way, if interest rates were to rise above
    the rates at the time of sale.) \7\
    ---------------------------------------------------------------------------
      \7\ For a detailed explanation, see ``Budget System and Concepts and
    Glossary,'' chapter 24 in Analytical Perspectives, Budget of the United
    States Government, Fiscal Year 2001, pages 457-58.
    ---------------------------------------------------------------------------
      The third major factor was created by the Federal Credit Reform Act of
    1990. Budget outlays for direct loans and loan guarantees consist of the
    estimated subsidy cost of the loans or guarantees at the time when the
    direct loans or guaranteed loans are disbursed. The cash flows to and
    from the public resulting from these loans and guarantees are not costs
    to the Government except for those costs already included in budget
    outlays. Therefore, they are non-budgetary in nature and are recorded as
    transactions of the non-budgetary financing account for each credit
    program. \8\ The net cash flows of the financing accounts, including
    intragovernmental transactions as well as transactions with the public,
    are called ``net financing disbursements.'' They are defined in the same
    way as the ``outlays'' of a budgetary account and therefore affect the
    ability to repay debt held by the public, or the requirement for
    borrowing from the public, in the same way as the surplus or deficit.
    ---------------------------------------------------------------------------
      \8\ The Federal Credit Reform Act of 1990 (sec. 505(b)) requires that
    the financing accounts be non-budgetary. As explained in chapter 20,
    ``Off-Budget Federal Entities and Non-Budgetary Activities,'' they are
    non-budgetary in concept because they do not measure cost. For
    additional discussion of credit reform, see chapter 25 of this volume,
    ``Budget System and Concepts and Glossary,'' and the other references
    cited in chapter 20.
    ---------------------------------------------------------------------------
      The net financing disbursements are partly due to intragovernmental
    transactions with budgetary accounts (the receipt of subsidy payment and
    the receipt or payment of interest), and partly due to transactions with
    the public (disbursement and repayment of loans, receipt of interest and
    fees, payment of default claims, and so forth). The intragovernmental
    transactions do not affect Federal borrowing from the public. Although
    the surplus or deficit changes, the net financing disbursement changes
    in an equal amount with the opposite sign, so the effects cancel out on
    a net basis. On the other hand, financing account disbursements to the
    public increase the requirement for borrowing from the public in the
    same way as an increase in budget outlays that are disbursed to the
    public in cash. Financing account receipts from the public can be used
    to finance the payment of the Government's obligations, and therefore
    reduce the requirement for Federal borrowing from the public in the same
    way as an increase in budget receipts.
      The impact of the financing accounts became large in the middle 1990s.
    By 2001 they required $23 billion of financing, and thus reduced the
    repayment of debt by this amount. They are estimated to require
    additional financing of $17 billion in 2002 and around $10 billion in
    each of the following few years. A major part is normally due to the
    direct student loan program. Since direct loans require cash
    disbursements equal to the full amount of the loans when the loans are
    made, Federal borrowing requirements are initially increased. Later,
    when the loans are repaid, Federal borrowing requirements will decrease.

      Debt held by Government accounts.--The amount of Federal debt issued
    to Government accounts depends largely on the surpluses of the trust
    funds, both on-budget and off-budget, which owned 95 percent of the
    total Federal debt held by Government accounts at the end of 2001. In
    2001, for example, the total trust fund surplus was $228 billion, and
    Government accounts invested $231 billion in Federal securities. The
    difference is mainly because some revolving funds and special funds also
    hold Federal debt. In addition, the trust funds may change the amount of
    their cash assets not currently invested. A new reason, starting in
    2002, is that the National Railroad Retirement Investment Trust will be
    invested largely in private securities. The amounts of debt held in
    major accounts and the annual investments are shown in table 13-4.

                                   Agency Debt

      Several Federal agencies, shown in table 13-3, sell debt securities to
    the public and at times in the past have sold securities to other
    Government accounts. Dur

    [[Page 272]]

    ing 2001, agencies repaid $0.6 billion to the public. Agency debt is
    only one percent of Federal debt held by the public. Agency borrowing
    and repayment of debt is estimated to remain small in 2002 and 2003.

                                                 Table 13-3. AGENCY DEBT
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                           Borrowing or repayment (-) of
                                                                                        debt                Debt end
                                                                         ---------------------------------  of 2003
                                                                             2001       2002       2003     estimate
                                                                            Actual    Estimate   Estimate
    ----------------------------------------------------------------------------------------------------------------
    Borrowing from the public:
      Housing and Urban Development:
        Federal Housing Administration..................................          5  .........  .........        231
      Small Business Administration:
        Participation certificates: Section 505 development company.....  .........  .........  .........          7
      Architect of the Capitol..........................................         -2         -3         -2        166
      Farm Credit System Financial Assistance Corporation...............  .........  .........       -450        325
      Federal Communications Commission.................................  .........  .........  .........        125
      Federal Deposit Insurance Corporation:
        FSLIC Resolution Fund...........................................  .........        -63  .........  .........
      National Archives.................................................         -6         -7         -7        251
      Tennessee Valley Authority:
        Bonds and Notes.................................................       -607        -56       -252     25,073
        Lease obligations...............................................  .........        296         -9        287
                                                                         -------------------------------------------
          Total, borrowing from the public..............................       -610        167       -720     26,465
                                                                         ===========================================
    Borrowing from other funds:
      Postal Service Fund \1\...........................................        -51  .........  .........  .........
                                                                         -------------------------------------------
        Total, borrowing from other funds...............................        -51  .........  .........  .........
                                                                         ===========================================
        Total, agency borrowing.........................................       -661        167       -720     26,465
    ----------------------------------------------------------------------------------------------------------------
    \1\ The Postal Service debt held by other funds is the result of the FFB swapping Postal Service securities with
      the Civil Service Retirement and Disability trust fund during 1996 in exchange for Treasury securities having
      an equal present value. See the narrative for further explanation.

      The reasons for issuing agency debt differ considerably from one
    agency to another. The predominant agency borrower is the Tennessee
    Valley Authority, which had borrowed $25 billion from the public as of
    the end of 2001, or 94 percent of the total debt of all agencies. TVA
    sells debt primarily to finance capital expenditures.
      The Federal Housing Administration, on the other hand, has for many
    years issued both checks and debentures as means of paying claims to the
    public that arise from defaults on FHA-insured mortgages. Issuing
    debentures to pay the Government's bills is equivalent to borrowing from
    the public and then paying the bills by disbursing the cash borrowed, so
    the transaction is recorded as being simultaneously an outlay and a
    borrowing. The debentures are therefore classified as agency debt. The
    borrowing by FHA and a few other agencies that have engaged in similar
    transactions is thus inherent in the way that their programs operate.
    \9\
    ---------------------------------------------------------------------------
      \9\ The debt securities of the FSLIC Resolution fund were also issued
    as a means of paying specified bills. The budgetary treatment of these
    and similar securities is further explained in Special Analysis E of the
    1989 Budget, pp. E-25 to E-26; and Special Analysis E of the 1988
    Budget, pp. E-27 to E-28.
    ---------------------------------------------------------------------------
      Some types of lease-purchase contracts are equivalent to direct
    Federal construction financed by Federal borrowing. A number of years
    ago, the Federal Government guaranteed the debt used to finance the
    construction of buildings for the National Archives and the Architect of
    the Capitol, and has subsequently exercised full control over the
    design, construction, and operation of the buildings. The construction
    expenditures and interest were therefore classified as Federal outlays,
    and the borrowing was classified as Federal agency borrowing from the
    public.
      The proper budgetary treatment of lease-purchases was further examined
    in connection with the Budget Enforcement Act of 1990. Several changes
    were made. Among other decisions, it was determined that outlays for a
    lease-purchase without substantial private risk will be recorded in an
    amount equal to the asset cost over the period during which the
    contractor constructs, manufactures, or purchases the asset; if the
    asset already exists, the outlays will be recorded when the contract is
    signed. Agency borrowing will be recorded each year to the extent of
    these outlays. The agency debt will subsequently be redeemed over the
    lease payment period according to an amortization schedule by a portion
    of the annual lease payments. This rule was effective starting in 1991.
    \10\ The new budgetary treatment was reviewed in connection with the
    Balanced Budget Act of 1997. Some clarifications were made, but there
    were no substantive changes from previous practice.
    ---------------------------------------------------------------------------
      \10\ The rule addressed all lease-purchases and capital leases from
    the public, not just those without substantial private risk. For all
    such contracts, the rule required that budget authority be recorded up
    front for the present value of the lease payments. See OMB Circular No.
    A-11, Appendix B. Also see the section on ``outlays'' in chapter 25,
    ``Budget System and Concepts and Glossary.''
    ---------------------------------------------------------------------------
      The Tennessee Valley Authority recently signed a contract to outlease
    and lease-back some newly constructed power plants from private
    investors. The Office of Management and Budget has determined that the
    arrangement is a ``lease-purchase without substantial

    [[Page 273]]

    private risk,'' and therefore the budget records outlays and budget
    authority in 2002. Agency debt in the form of a lease obligation is
    recorded as the means of financing this outlay. The amount of the lease
    obligation is shown in table 13-3 separately from TVA bonds and notes.
    The obligation is $296 million at the end of 2002 and declines steadily
    as it is amortized.
      The amount of agency securities sold to the public has been reduced by
    borrowing from the Federal Financing Bank (FFB). The FFB is an entity
    within the Treasury Department, one of whose purposes is to substitute
    Treasury borrowing for agency borrowing from the public. It has the
    authority to purchase agency debt and finance these purchases by
    borrowing from the Treasury. Agency borrowing from the FFB is not
    included in gross Federal debt. It would be double counting to add
    together (a) the agency borrowing from the FFB and (b) the Treasury
    borrowing from the public that was needed to provide the FFB with the
    funds to lend to the agencies.
      The debt of the agencies that borrow from the FFB is not subject to
    the statutory debt limitation. This enabled Treasury to raise additional
    cash to avoid default during the dispute with Congress over the budget
    and the debt limit six years ago. In February 1996, FFB swapped most of
    its holdings of TVA and Postal Service debt to the Civil Service
    Retirement and Disability trust fund (CSRDF) in exchange for Treasury
    securities. These securities have been redeemed, the last amount--$51
    million of Postal Service securities--in 2001. The securities are shown
    in table 13-3 as amounts that agencies borrowed from other funds and in
    table 13-4 as agency debt held by Government accounts. \11\
    ---------------------------------------------------------------------------
      \11\ For further discussion of the debt limit dispute and the swap of
    securities between the FFB and CSRDF, see Analytical Perspectives,
    Budget of the United States Government, Fiscal Year 1998, pages 222 and
    225.
    ---------------------------------------------------------------------------

                        Debt Held by Government Accounts

      Trust funds, and some special funds and public enterprise revolving
    funds, accumulate cash in excess of current requirements in order to
    meet future obligations. These cash surpluses are invested in Treasury
    debt.
      Investment by trust funds and other Government accounts has risen
    greatly over the past two decades. It was $231 billion in 2001, as shown
    in table 13-4, and is estimated to be $296 billion in 2003. The holdings
    of Federal securities by Government accounts are estimated to grow to
    $2,956 billion by the end of 2003, or 45 percent of the gross Federal
    debt. This percentage is estimated to rise further in the following
    years, as the budget surpluses reduce the debt held by the public and as
    the trust funds and several major Federal funds continue to accumulate
    surpluses. By 2007, debt held by Government accounts is estimated to be
    57 percent of the gross Federal debt.
      The large investment by Government accounts is concentrated among a
    few trust funds. The two social security trust funds--old-age and
    survivors insurance and disability insurance--have a large combined
    surplus and invest $497 billion during 2001-03, which is 68 percent of
    the total estimated investment by Government accounts. The two medicare
    trust funds hospital insurance and supplementary medical insurance--
    account for another 13 percent of the total estimated investment.
      Apart from these four large funds, the largest investment is by the
    Federal employee retirement and disability trust funds. The principal
    trust fund for Federal civilian employees is the civil service
    retirement and disability trust fund, which accounts for 14 percent of
    the total investment by Government accounts during 2001-03. The military
    retirement trust fund accounts for 2 percent. Altogether, social
    security, medicare, and these two retirement funds account for 97
    percent of the investment by all Government accounts during this period.
    At the end of 2003, they are estimated to own 88 percent of the total
    debt held by Government accounts.

    [[Page 274]]

                                    Table 13-4. DEBT HELD BY GOVERNMENT ACCOUNTS \1\
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                         Investment or disinvestment (-)   Holdings
                                                                        ---------------------------------   end of
                                Description                                 2001       2002       2003       2003
                                                                           Actual    Estimate   Estimate   estimate
    ----------------------------------------------------------------------------------------------------------------
    Investment in Treasury debt:
      Defense-Military:
        Uniformed Services Retiree Health Care Fund....................  .........  .........     18,982      18,982
      Energy:
        Nuclear waste disposal fund....................................      1,737        448  .........      11,420
        Uranium enrichment decontamination fund........................        393        486        573       3,615
      Health and Human Services:
        Federal hospital insurance trust fund..........................     28,278     35,355     38,825     271,317
        Federal supplementary medical insurance trust fund.............     -3,097     -2,036     -1,077      38,865
        Vaccine Injury compensation fund...............................         51         65        100       1,793
      Housing and Urban Development:
        Federal Housing Administration mutual mortgage fund............         23      7,000      4,500      28,782
        Other HUD......................................................        386        262        273       7,117
      Interior: Abandoned Mine Reclamation fund........................         19        117        146       2,129
      Labor:
        Unemployment trust fund........................................      2,239    -12,109     -3,313      73,216
        Pension Benefit Guaranty Corporation...........................      1,076      1,318      1,370      14,263
      State: Foreign Service retirement and disability trust fund......        534        542        551      12,285
      Transportation:
        Highway trust fund.............................................     -6,908        132     -2,012      22,235
        Airport and airway trust fund..................................        563       -893        274      13,041
        Oil spill liability trust fund.................................        -71        -88       -115         925
        Aquatic resources trust fund...................................        112        -24         26       1,306
      Treasury: Exchange stabilization fund............................     -1,015         17  .........      10,031
      Veterans Affairs:
        National service life insurance trust fund.....................       -166       -233       -307      11,099
        Other trust funds..............................................         40         29         16       1,925
        Federal funds..................................................        -18        -17        -19         490
      Defense-Civil:
        Military retirement trust fund.................................      7,630      3,162      6,767     166,907
        Harbor maintenance trust fund..................................        134         66        -38       1,833
      Environmental Protection Agency:
        Hazardous substance trust fund.................................       -496       -375       -420       2,835
        Leaking underground storage tank trust fund....................         35        279        223       2,206
      International Assistance Programs:
        Overseas Private Investment Corporation........................        223        251        228       3,829
      Office of Personnel Management:
        Civil Service retirement and disability trust fund \3\.........     30,622     30,354     40,871     613,833
        Employees life insurance fund..................................      1,317      2,546      1,056      27,292
        Employees health benefits fund \4\.............................        662        642     11,798      19,091
      Social Security Administration:
        Federal old-age and survivors insurance trust fund \2\.........    140,594    140,336    157,507   1,331,957
        Federal disability insurance trust fund \2\....................     22,134     17,211     19,628     172,681
      Farm Credit System Insurance Corporation:
        Farm Credit System Insurance fund..............................         79        102        111       1,813
      Federal Deposit Insurance Corporation:
        Bank Insurance fund............................................      1,352     -1,363  .........      29,314
        FSLIC Resolution fund..........................................        142        320  .........       2,970
        Savings Association Insurance fund.............................        -93        333  .........      10,987
      National Credit Union Administration: Share insurance fund.......        197        373        405       5,321
      Postal Service fund \2\..........................................        172       -415  .........         843
      Railroad Retirement Board trust funds \1\........................      1,818    -14,746       -615       4,959
      Other Federal funds..............................................        315        362        -90       7,388
      Other trust funds................................................         35       -473       -224       6,565
      Unrealized discount \1\..........................................        372  .........  .........      -1,858
                                                                        --------------------------------------------
        Total, investment in Treasury debt \1\.........................    231,421    209,336    296,000   2,955,602
                                                                        ============================================
    Investment in agency debt:
      Office of Personnel Management:
        Civil Service retirement and disability trust fund \3\.........        -51  .........  .........  ..........
                                                                        --------------------------------------------
          Total, investment in agency debt.............................        -51  .........  .........  ..........
                                                                        ============================================
          Total, investment in Federal debt \1\........................    231,370    209,336    296,000   2,955,602
                                                                        ============================================

    [[Page 275]]

                                 MEMORANDUM

    Investment by Federal funds (on-budget) \4\........................      4,815     10,007     38,277     177,542
    Investment by Federal funds (off-budget)...........................        172       -415  .........         843
    Investment by trust funds (on-budget) \4\..........................     63,282     42,195     80,588   1,274,437
    Investment by trust funds (off-budget).............................    162,729    157,548    177,135   1,504,638
    Unrealized discount \1\............................................        372  .........  .........      -1,858
    ----------------------------------------------------------------------------------------------------------------
    \1\ Debt held by Government accounts is measured at face value except for the Treasury zero-coupon bonds held by
      the Nuclear Waste Disposal fund and the Railroad Retirement Board (Rail Industry Pension Fund), which are
      recorded at market or redemption price; and the unrealized discount on Government account series, which is not
      distributed by account. Changes are not estimated in the unrealized discount. If recorded at face value, the
      debt held by the Nuclear Waste Disposal fund would be $11.0 billion higher than recorded in this table at the
      end of 2001 and the debt held by the Railroad Retirement Board would be $6.5 billion higher.
    \2\ Off-budget Federal entity.
    \3\ The FFB swapped Treasury securities with the Civil Service retirement and disability trust fund (CSRDF) in
      1996 in exchange for agency securities having an equal present value.The result is shown in this table as an
      ``investment in agency debt'' by CSRDF.
    \4\ The Employees Health Benefits Fund is proposed to be reclassified from a trust fund to a special fund as of
      2003 The transfer of Federal securities from one group of funds to another group is not treated as a
      disinvestment by the trust fund group or an investment by the Federal funds group.

      Technical note on measurement.--The Treasury securities held by
    Government accounts consist almost entirely of the Government account
    series. Most were issued at par value (face value), and the securities
    issued at a discount or premium were traditionally recorded at par in
    the OMB and Treasury reports on Federal debt. However, there are two
    kinds of exceptions. First, in 1991, Treasury began to issue zero-coupon
    bonds to a very few Government accounts. Because the purchase price is a
    small fraction of par value and the amounts are large, the holdings are
    recorded in table 13-4 at par value less unamortized discount. The only
    two Government accounts that currently hold zero-coupon bonds are the
    Nuclear Waste Disposal fund in the Department of Energy and the Rail
    Industry Pension fund under the Railroad Retirement Board. The total
    unamortized discount of these zero-coupon bonds was -$16.6 billion at
    the end of 2001.
      Second, in September 1993 Treasury began to subtract the unrealized
    discount on other Government account series securities in calculating
    ``net federal securities held as investments of government accounts.''
    Unlike the discount recorded for zero-coupon bonds or for any debt held
    by the public, the unrealized discount is the discount at the time of
    issue and is not amortized over the term of the security. In table 13-4
    it is shown as a separate item at the end of the table and not
    distributed by account. The amount was -$1.9 billion at the end of 2001.

                           Limitations on Federal Debt

      Definition of debt subject to limit.--Statutory limitations have
    usually been placed on Federal debt. Until World War I, the Congress
    ordinarily authorized a specific amount of debt for each separate issue.
    Beginning with the Second Liberty Bond Act of 1917, however, the nature
    of the limitation was modified in several steps until it developed into
    a ceiling on the total amount of most Federal debt outstanding. This
    last type of limitation has been in effect since 1941. The limit
    currently applies to most debt issued by the Treasury since September
    1917, whether held by the public or by Government accounts; and other
    debt issued by Federal agencies that, according to explicit statute, is
    guaranteed as to principal and interest by the United States Government.
      The middle part of table 13-2 compares total Treasury debt with the
    amount of Federal debt that is subject to the limit. Most of the
    Treasury debt not subject to limit was issued by the FFB (Federal
    Financing Bank). The FFB is authorized to have outstanding up to $15
    billion of publicly issued debt, and this amount was issued several
    years ago to the Civil Service Retirement and Disability trust fund. The
    remaining Treasury debt not subject to limit consists almost entirely of
    silver certificates and other currencies no longer being issued.
      The sole type of agency debt currently subject to the general limit is
    the debentures issued by the Federal Housing Administration, which were
    only $231 million at the end of 2001. Some of the other agency debt,
    however, is subject to its own statutory limit. For example, the
    Tennessee Valley Authority is limited to $30 billion of securities
    outstanding.
      The comparison between Treasury debt and debt subject to limit also
    includes an adjustment for measurement differences in the treatment of
    discounts and premiums. As explained elsewhere in this chapter, debt
    securities may be sold at a discount or premium, and the measurement of
    debt may take this into account rather than recording the face value of
    the securities. However, the measurement differs between gross Federal
    debt (and its components) and the statutory definition of debt subject
    to limit. An adjustment is needed to derive debt subject to limit (as
    defined by law) from Treasury debt, and this adjustment is defined in
    footnote 9 to table 13-2. The amount is relatively small: $4.9 billion
    at the end of 2001 compared to the total unamortized discount (less
    premium) of $64.2 billion on all Treasury securities.

      Changes in the debt limit.--The statutory debt limit has been changed
    many times. Since 1960, Congress has passed 68 separate acts to raise
    the limit,

    [[Page 276]]

    extend the duration of a temporary increase, or revise the definition.
    For a long period up to mid-1990, the debt limit was also changed
    frequently. Since then, however, the debt limit has been increased three
    times by amounts large enough to last for two years or more. These large
    increases were all part of major deficit reduction packages. \12\
    ---------------------------------------------------------------------------
      \12\ The Acts and the statutory limits since 1940 are enumerated in
    Historical Tables, Budget of the United States Government, table 7.3.
    ---------------------------------------------------------------------------
      Major increases in the debt limit were enacted as part of the deficit
    reduction packages in the Omnibus Budget Reconciliation Acts of 1990 and
    1993. Both changes in law were preceded by one or more temporary
    increases in the limit before agreement was reached on the debt and the
    deficit reduction measures together. Both increases in the debt limit
    were large enough to last over two years without a further change in
    law, the longest times without an increase since the period from 1946 to
    1954.
      The debt again approached the limit in 1995, and the limit again
    became part of the larger issue of deficit reduction. During an extended
    period of dispute between the President and the Congress, the Treasury
    Department took a number of administrative actions to keep within the
    limit and the Congress passed two acts providing temporary exemptions
    from the limit. In March 1996, although agreement had not been reached
    on deficit reduction, Congress passed an act that increased the debt
    limit from $4,900 billion to $5,500 billion.

                   Table 13-5.  FEDERAL FUNDS FINANCING AND CHANGE IN DEBT SUBJECT TO STATUTORY LIMIT
                                                (In billions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                      Estimate
             Description          2000 -----------------------------------------------------
                                             Actual               2002     2003     2004     2005     2006     2007
    ----------------------------------------------------------------------------------------------------------------
    Federal funds surplus or                  -101.3             -318.8   -337.5   -303.3   -253.5   -234.8   -224.9
     deficit (-)................
    Means of financing other
     then borrowing:
      Premiums paid (-) on                     -10.7               -2.8  .......  .......  .......  .......  .......
       buybacks of Treasury
       securities \1\...........
      Net purchases (-) of non-   ............................    -15.4     -0.9       -*        *      0.2      0.3
       Federal securities by the
       National Railroad
       Retirement Investment
       Trust....................
      Change in: \2\
        Treasury operating cash                  8.4              -15.8  .......     -5.0  .......  .......     -5.0
         balances...............
        Checks outstanding,                    -10.3               11.5     -0.9  .......  .......  .......  .......
         deposit funds, etc \3\.
      Seignorage on coins.......                 1.3                0.9      1.1      1.2      1.2      1.2      1.2
      Less: Net financing
       disbursements:
        Direct loan financing                  -19.1              -15.3    -15.4    -14.5    -14.7    -14.9    -14.7
         accounts...............
        Guaranteed loan                         -4.2               -1.6      3.0      2.8      4.3      5.0      5.4
         financing accounts.....
                                 -----------------------------------------------------------------------------------
          Total, means of                      -34.6              -38.5    -13.0    -15.6     -9.2     -8.5    -12.9
           financing other than
           borrowing............
                                 ===================================================================================
    Decrease or increase (-) in                 -5.0               -9.6    -38.3    -47.7    -51.7    -55.6    -59.8
     Federal debt held by
     Federal funds..............
    Increase or decrease (-) in                 -0.7                0.2     -0.7     -0.8     -1.1     -0.7     -0.8
     Federal debt not subject to
     limit......................
                                 ===================================================================================
        Total, requirement for                 141.5              366.7    389.5    367.4    315.5    299.6    298.3
         Federal funds borrowing
         subject to debt limit..
                                 ===================================================================================
    Adjustment for change in                    -0.4            .......  .......  .......  .......  .......  .......
     discount and premium \4\...
    Increase in debt subject to                141.2              366.7    389.5    367.4    315.5    299.6    298.3
     limit......................

              ADDENDUM

    Debt subject to statutory                5,732.8            6,099.5  6,489.0  6,856.4  7,171.9  7,471.5  7,769.8
     limit \5\..................
    ----------------------------------------------------------------------------------------------------------------
    * $50 million or less.
    \1\ Includes only premiums paid on buybacks through December 2001. Estimates are not made for subsequent
      buybacks.
    \2\ A decrease in the Treasury operating cash balances (which is an asset) would be a means of financing the
      deficit and therefore has a positive sign. An Increase in checks outstanding or deposit fund balances (which
      are liabilities) would also be a means of financing the deficit and would therefore also have a positive sign.
    \3\ Besides checks outstanding and deposit funds, includes accrued interest payable on Treasury debt,
      miscellaneous liability accounts, allocations of special drawing rights, and as an offset, cash and monetary
      assets other than the Treasury operating cash balance, miscellaneous asset accounts, and profit on the sale of
      gold.
    \4\ Consists of unamortized discount (less premium) on public issues of Treasury notes and bonds (other than
      zero-coupon bonds) and unrealized discount on Government account series securities.
    \5\ The statutory debt limit is $5,950 billion.

      During 1997, unlike 1996, the President and the Congress reached
    agreement on a plan to balance the budget. This included a sufficient
    increase in the debt limit to accommodate Government finances for longer
    than possible under the limit enacted in the previous year, even though
    the amount of debt at that time was considerably under the limit. As a
    result, the Balanced Budget Act of 1997, which the President signed into
    law on August 5, 1997, increased the debt limit to $5,950 billion.
      This limit has now been in effect for over four years. As tables 13-2
    and 13-5 show, however, the estimated debt subject to limit at the end
    of this year will be $6,099, much higher than allowed by current law. An
    increase in the debt limit will be needed during this fiscal year to
    permit the Federal Government to meet its obligations--to borrow the
    additional cash that is needed to pay bills as they come due, and to
    invest the surpluses of trust funds and other Government accounts in
    Treasury securities as generally required by law.

    [[Page 277]]

      Federal funds financing and the change in debt subject to limit.--The
    change in debt held by the public, as shown in table 13-2, is determined
    primarily by the total Government deficit or surplus. The debt subject
    to limit, however, includes not only debt held by the public but also
    debt held by Government accounts. The change in debt subject to limit is
    therefore determined both by the factors that determine the total
    Government deficit or surplus and by the factors that determine the
    change in debt held by Government accounts.
      The budget is composed of two groups of funds, Federal funds and trust
    funds. The Federal funds, in the main, are derived from tax receipts and
    borrowing and are used for the general purposes of the Government. The
    trust funds, on the other hand, are financed by taxes or other
    collections earmarked by law for specified purposes, such as paying
    social security benefits or making grants to State governments for
    highway construction. \13\
    ---------------------------------------------------------------------------
      \13\ For further discussion of the trust funds and Federal funds
    groups, see chapter 16, ``Trust Funds and Federal Funds.''
    ---------------------------------------------------------------------------
      A Federal funds deficit must generally be financed by borrowing, which
    can be done either by selling securities to the public or by issuing
    securities to Government accounts that are not within the Federal funds
    group. Federal funds borrowing consists almost entirely of Treasury
    securities that are subject to the statutory debt limit. Very little
    debt subject to statutory limit has been issued in past years for
    reasons other than financing the Federal funds deficit. The change in
    debt subject to limit is therefore determined primarily by the Federal
    funds deficit, which is equal to the difference between the total
    Government surplus and the trust fund surplus. Trust fund surpluses are
    almost entirely invested in securities subject to the debt limit, and
    trust funds hold most of the debt held by Government accounts.
      Table 13-5 derives the change in debt subject to limit. In 2001 the
    Federal funds deficit was $101 billion, and other factors increased the
    requirement to borrow subject to limit by $40 billion. The largest of
    these other factors ($19 billion) was the net financing disbursements of
    the direct loan financing accounts. As explained in an earlier section,
    they are excluded from the budget by law because they are not a cost to
    the Government, but they have to be financed and in most years they are
    sizable. The next largest single factor was the premiums paid on
    buybacks of Treasury securities ($11 billion). As a net result of all
    these factors, debt subject to limit increased by $141 billion, while
    debt held by the public decreased by $90 billion.
      The debt subject to limit is estimated to increase to $6,099 billion
    by the end of 2002, which is much more than the present statutory limit
    of $5,950 billion. This is led by a sharp rise in the Federal funds
    deficit, supplemented by the other factors shown in table 13-5 including
    especially the net financing disbursements of the direct loan financing
    accounts, an increase in the end-of-year operating cash balance to the
    desired level, and the purchase of non-Federal securities by the
    National Railroad Retirement Investment Trust. During subsequent years
    the Federal funds continue to have large deficits, even after the budget
    returns to surplus, and other factors add to the requirement to borrow
    subject to the debt limit. Investment by special funds and revolving
    funds, especially the new special funds for retirement benefits, is the
    largest one of the other factors, although it has a much smaller effect
    than the Federal funds deficit. As a result, while debt held by the
    public increases by $59 billion during 2002-07, debt subject to limit
    increases by $2,037 billion.

                         Debt Held by Foreign Residents

      During most of American history, the Federal debt was held almost
    entirely by individuals and institutions within the United States. In
    the late 1960s, as shown in table 13-6, foreign holdings were just over
    $10.0 billion, less than 5 percent of the total Federal debt held by the
    public.

                                      Table 13-6.  FOREIGN HOLDINGS OF FEDERAL DEBT
                                              (Dollar amounts in billions)
    ----------------------------------------------------------------------------------------------------------------
                                                                Debt held by the public         Borrowing from the
                                                          ----------------------------------          public
                         Fiscal year                                             Percentage ------------------------
                                                            Total   Foreign \1\    foreign   Total \2\   Foreign \1\
    ----------------------------------------------------------------------------------------------------------------
    1965.................................................    260.8       12.3          4.7         3.9         0.3
    1966.................................................    263.7       11.6          4.4         2.9        -0.7
    1967.................................................    266.6       11.4          4.3         2.9        -0.2
    1968.................................................    289.5       10.7          3.7        22.9        -0.7
    1969.................................................    278.1       10.3          3.7       -11.4        -0.4

    1970.................................................    283.2       14.0          5.0         5.1         3.8
    1971.................................................    303.0       31.8         10.5        19.8        17.8
    1972.................................................    322.4       49.2         15.2        19.3        17.3
    1973.................................................    340.9       59.4         17.4        18.5        10.3
    1974.................................................    343.7       56.8         16.5         2.8        -2.6

    1975.................................................    394.7       66.0         16.7        51.0         9.2
    1976.................................................    477.4       69.8         14.6        82.7         3.8
    TQ...................................................    495.5       74.6         15.1        18.1         4.9
    1977.................................................    549.1       95.5         17.4        53.6        20.9
    1978.................................................    607.1      121.0         19.9        58.0        25.4
    1979 \3\.............................................    640.3      120.3         18.8        33.2        -0.7

    1980.................................................    711.9      121.7         17.1        71.6         1.4
    1981.................................................    789.4      130.7         16.6        77.5         9.0
    1982.................................................    924.6      140.6         15.2       135.2         9.9
    1983.................................................  1,137.3      160.1         14.1       212.7        19.5
    1984.................................................  1,307.0      175.5         13.4       169.7        15.4

    1985 \3\.............................................  1,507.4      222.9         14.8       200.3        47.4
    1986.................................................  1,740.8      265.5         15.3       233.4        42.7
    1987.................................................  1,889.9      279.5         14.8       149.2        14.0
    1988.................................................  2,051.8      345.9         16.9       161.9        66.4
    1989.................................................  2,191.0      394.9         18.0       139.1        49.0

    1990 \3\.............................................  2,411.8      440.3         18.3       220.9        45.4
    1991.................................................  2,689.3      477.3         17.7       277.5        37.0
    1992.................................................  3,000.1      535.2         17.8       310.8        57.9
    1993.................................................  3,248.8      591.3         18.2       248.7        56.1
    1994.................................................  3,433.4      655.8         19.1       184.7        64.5

    1995 \3\.............................................  3,604.8      800.4         22.2       171.3       144.6
    1996.................................................  3,734.5      978.1         26.2       129.7       177.7
    1997.................................................  3,772.8    1,218.2         32.3        38.3       240.0
    1998.................................................  3,721.6    1,216.9         32.7       -51.2        -1.2
    1999 \3\.............................................  3,632.9    1,281.4         35.3       -88.7        64.5

    2000.................................................  3,410.1    1,224.9         35.9      -222.8       -56.5
    2001.................................................  3,320.0    1,170.0         35.2       -90.1       -55.0
    ----------------------------------------------------------------------------------------------------------------
    \1\ Estimated by Treasury Department. These estimates exclude agency debt, the holdings of which are believed to
      be small. The data on foreign holdings are recorded by methods that are not fully comparable with the data on
      debt held by the public. Projections of foreign holdings are not available.
    \2\ Borrowing from the public is defined as equal to the change in debt held by the public from the beginning of
      the year to the end, except to the extent that the amount of debt is changed by reclassification.
    \3\ Benchmark revisions reduced the estimated foreign holdings of the Federal debt as of December 1978;
      increased the estimated foreign holdings as of December 1984 and December 1989; and reduced the estimated
      holdings as of December 1994. As a result, the data on foreign holdings in different time periods are not
      strictly comparable, and the ``borrowing'' from foreign residents in 1979, 1985, 1989, and 1995 reflects the
      benchmark revision as well as the net purchase of Federal debt securities. A conceptual revision increased the
      estimated foreign holdings as of 1999, and the ``borrowing'' from foreign residents in 1999 reflects this
      revision as well as the net purchases of Federal debt securities.

      Foreign holdings began to grow significantly starting in 1970. This
    increase has been almost entirely due to decisions by foreign central
    banks, corporations, and individuals, rather than the direct marketing
    of these securities to foreign residents. At the end of fiscal year 2001
    foreign holdings of Treasury debt were $1,170 billion, which was 35
    percent of the total debt held by the public. \14\ Foreign central banks
    owned 49 percent of the Federal debt held by foreign residents; private
    investors owned nearly all the rest. All the Federal debt held by
    foreign residents is denominated in dollars.
    ---------------------------------------------------------------------------
      \14\ The amounts of debt reported by the Bureau of Economic Analysis,
    Department of Commerce, are different, but similar in size, due to a
    different method of valuing the securities.
    ---------------------------------------------------------------------------
      Although the amount of Federal debt held by foreign residents grew
    greatly over this period, the proportion that foreign residents own,
    after growing abruptly in the very early 1970s, did not change much
    again until the mid-1990s. During 1995-97, however, foreign holdings
    increased on average by around $200 billion each year, considerably more
    than total Federal borrowing from the public. \15\ As a result, the
    Federal debt held by individuals and institutions within the United
    States decreased in absolute amount during those years, despite further
    Federal borrowing, and the percentage of Federal debt held by foreign
    residents grew from 19 percent at the end of 1994 to 32 percent at the
    end of 1997. Since then, the changes in foreign debt holdings have been
    relatively moderate. Although the net effect has been to reduce foreign
    holdings, the percentage held by foreign residents has increased to 35
    percent because of the decrease in total debt held by the public.
    ---------------------------------------------------------------------------
      \15\ Table 13-6 shows foreign holdings increasing by only $144.6
    billion in 1995. However, as explained in footnote 5 to that table, a
    benchmark revision reduced the estimated holdings as of December 1994
    (by $47.9 billion). Because debt estimates were not revised
    retroactively, the increase in 1995 was more than the table shows.
    Before the benchmark revision, the increase was estimated to be $192.6
    billion.
    ---------------------------------------------------------------------------
      Foreign holdings of Federal debt are around 13-15 percent of the
    foreign-owned assets in the United States, depending on the method of
    measuring the total

    [[Page 278]]

    assets. The foreign purchases of Federal debt securities do not measure
    the full impact of the capital inflow from abroad on the market for
    Federal debt securities. The capital inflow supplies additional funds to
    the credit market generally, and thus affects the market for Federal
    debt. For example, the capital inflow includes deposits in U.S.
    financial intermediaries that themselves buy Federal debt.

      Federal, Federally Guaranteed, and Other Federally Assisted Borrowing

      The effect of the Government on borrowing in the credit market arises
    not only from its own borrowing to finance Federal operations but also
    from its assistance to certain borrowing by the public. The Government
    guarantees borrowing by private and other non-Federal lenders, which is
    another term for guaranteed lending. In addition to its guarantees, it
    has established private corporations called ``Government-sponsored
    enterprises,'' or GSEs, to provide financial intermediation for
    specified public purposes; it exempts the interest

    [[Page 279]]

    on most State and local government debt from income tax; and it insures
    the deposits of banks and thrift institutions, which themselves make
    loans.
      Federal credit programs and other forms of assistance are discussed in
    chapter 9, ``Credit and Insurance.'' Detailed data are presented in
    tables at the end of that chapter. Tables 9-11 and 9-12 summarize GSE
    borrowing and lending.