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



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                       FEDERAL BORROWING AND DEBT

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                     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,

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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)
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                                                                               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\
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  \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.
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  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\
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  \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.
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  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

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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

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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\
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  \6\ The budget treatment of this fund is further discussed in chapter 
25, ``Budget System and Concepts and Glossary.''
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  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.