[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)
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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
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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
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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
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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
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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.
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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
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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
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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
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* $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.
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\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.
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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.
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\5\ For further explanation of the off-budget Federal entities, see
chapter 20, ``Off-Budget Federal Entities and Non-Budgetary
Activities.''
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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
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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\
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\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.
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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.
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\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.
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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
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\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.
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\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.
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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.
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\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.
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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.