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



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                       FEDERAL BORROWING AND DEBT

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ANALYTICAL PERSPECTIVES
13.  FEDERAL BORROWING AND DEBT

[[Page 299]]

 
                     13.  FEDERAL BORROWING AND DEBT

  Debt is the largest legally binding obligation of the Federal 
Government. At the end of 2002, the Government owed $3,540 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 $179 
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........................................    1,507.3     2,050.9        36.4       22.3       16.2        3.7
1986........................................    1,740.6     2,312.9        39.5       22.6       16.1        3.6
1987........................................    1,889.8     2,443.9        40.7       22.3       16.0        3.5
1988........................................    2,051.6     2,569.0        40.9       22.2       16.2        3.4
1989........................................    2,190.7     2,641.6        40.5       22.0       16.5        3.5

1990........................................    2,411.6     2,802.6        42.0       22.6       16.1        3.5
1991........................................    2,689.0     3,008.0        45.3       24.1       16.2        3.6
1992........................................    2,999.7     3,269.7        48.2       25.7       15.5        3.4
1993........................................    3,248.4     3,458.4        49.5       26.6       14.9        3.2
1994........................................    3,433.1     3,577.5        49.4       26.8       14.4        3.0

1995........................................    3,604.4     3,676.4        49.2       26.7       15.8        3.3
1996........................................    3,734.1     3,734.1        48.5       26.2       15.8        3.2
1997........................................    3,772.3     3,700.1        46.1       25.2       15.7        3.1
1998........................................    3,721.1     3,599.2        42.9       23.3       15.1        2.9
1999........................................    3,632.4     3,467.1        39.8       21.3       13.8        2.6

2000........................................    3,409.8     3,193.1        35.1       19.0       13.0        2.4
2001........................................    3,319.6     3,034.4        33.1       17.5       11.6        2.1
2002........................................    3,540.4     3,195.3        34.3       17.5        8.9        1.7
2003 estimate...............................    3,878.4     3,456.4        36.1        N/A        8.0        1.6
2004 estimate...............................    4,166.1     3,659.3        36.9        N/A        8.4        1.7

2005 estimate...............................    4,386.5     3,795.0        36.9        N/A        9.3        1.8
2006 estimate...............................    4,602.6     3,918.1        36.9        N/A        9.7        1.9
2007 estimate...............................    4,796.6     4,014.7        36.6        N/A       10.0        2.0
2008 estimate...............................    5,002.9     4,114.3        36.4        N/A       10.1        2.0
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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.
\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).
Source: Federal Reserve Board flow of funds accounts. Projections are not available.

  The budget surplus declined in 2001 and shifted to a deficit in 2002, 
primarily because of the recession coupled with a slow recovery, the 
three-year decline in the stock market, and the increased spending in 
response to the terrorist attacks. As a result of these factors and the 
President's tax proposals to raise long-term growth and strengthen the 
economy against potential risks, the deficit is estimated to rise to a 
higher level in 2003 and 2004 before declining. Debt held by the public 
as a percentage of GDP is temporarily increasing through 2004.

                    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 2008. (It 
is supplemented for earlier years by tables 7.1-7.3 in Historical 
Tables, which is published as a separate volume of the budget.)

[[Page 300]]

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 declined markedly relative to both GDP 
and total credit market debt. It fell steadily from 49.5 percent of GDP 
in 1993 to 33.1 percent in 2001; and it fell more unevenly from 26.6 
percent of total credit market debt in 1993 to 17.5 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 fell in a similar proportion.
  The current economic conditions and response to the terrorist attacks 
have stopped the downward trend in debt relative to GDP for the next few 
years. The recession, slow recovery, and three-year decline in the stock 
market reduced tax receipts; and spending increased for war and homeland 
security. The budget had a deficit in 2002, and the President has 
proposed tax cuts to stimulate jobs and economic growth and higher 
spending for security needs. As a result of the ensuing deficits, table 
13-1 shows a rise in debt held by the public throughout the projection 
period. Even during this period, however, debt rises slightly as a 
percentage of GDP in 2003 and 2004 and then levels off. By 2008, debt as 
a percentage of GDP is estimated to be 36.4 percent. Interest as a 
percentage of outlays is estimated to be 10.1 percent that year.

                               Table 13-2.  FEDERAL GOVERNMENT FINANCING AND DEBT
                                            (In billions of dollars)
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                                                                               Estimate
                                              Actual -----------------------------------------------------------
                                               2002     2003      2004      2005      2006      2007      2008
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Financing:
   Unified budget deficit (-)/ surplus (+).   -157.8    -304.2    -307.4    -208.2    -200.5    -178.1    -189.6
   Financing other than the change in debt
   held by the public:
     Premiums paid (-) on buybacks of           -3.8  ........  ........  ........  ........  ........  ........
     Treasury securities...................
     Net purchases (-) of non-Federal           -1.5     -16.5      -0.1       1.1       1.3       1.3       1.4
     securities by the National Railroad
     Retirement Investment Trust...........
     Changes in: \1\
       Treasury operating cash balance.....    -16.7      10.9  ........  ........  ........  ........  ........
       Compensating balances \2\...........    -14.0      -9.6      37.0  ........  ........  ........  ........
       Checks outstanding, etc. \3\........    -11.7      -4.5  ........  ........  ........  ........  ........
     Seigniorage on coins..................      1.0       1.1       1.1       1.1       1.1       1.1       1.1
     Less: Net financing disbursements:
       Direct loan financing accounts......    -14.8     -16.4     -19.4     -14.6     -19.8     -20.2     -21.1
       Guaranteed loan financing accounts..     -1.5       1.3       1.2       0.2       1.7       1.9       1.9
                                            --------------------------------------------------------------------
         Total, financing other than the       -63.0     -33.9      19.8     -12.2     -15.6     -15.9     -16.7
         change in debt held by the public.
                                            --------------------------------------------------------------------
           Total, requirement to borrow       -220.8    -338.0    -287.6    -220.5    -216.1    -194.0    -206.3
           from the public.................

   Change in debt held by the public.......    220.8     338.0     287.6     220.5     216.1     194.0     206.3

Change in Debt Subject to Statutory
 Limitation:
   Change in debt held by the public.......    220.8     338.0     287.6     220.5     216.1     194.0     206.3
   Change in debt held by Government           207.7     215.6     281.1     296.3     299.7     310.1     323.9
   accounts................................
   Change in other factors.................      0.1      15.7       0.2       0.4       0.1       0.5       0.6
                                            --------------------------------------------------------------------
     Total, change in debt subject to          428.6     569.3     569.0     517.2     516.0     504.6     530.7
     statutory limitation..................

Debt Subject to Statutory Limitation, End
 of Year:
   Debt issued by Treasury.................  6,171.0   6,725.2   7,294.2   7,811.4   8,327.4   8,832.0   9,362.8
   Adjustment for Treasury debt not subject    -15.2      -0.2      -0.2      -0.2      -0.2      -0.2      -0.2
   to limitation and agency debt subject to
   limitation \4\..........................
   Adjustment for discount and premium \5\.      5.7       5.7       5.7       5.7       5.7       5.7       5.7
                                            --------------------------------------------------------------------
     Total, debt subject to statutory        6,161.4   6,730.7   7,299.7   7,816.9   8,332.9   8,837.5   9,368.2
     limitation \6\........................

Debt Outstanding, End of Year:
   Gross Federal debt \7\:
     Debt issued by Treasury...............  6,171.0   6,725.2   7,294.2   7,811.4   8,327.4   8,832.0   9,362.8
     Debt issued by other agencies.........     27.4      26.8      26.6      26.1      26.0      25.5      24.9
                                            --------------------------------------------------------------------
       Total, gross Federal debt...........  6,198.4   6,752.0   7,320.8   7,837.5   8,353.4   8,857.5   9,387.7
   Held by:
     Debt held by Government accounts......  2,658.0   2,873.6   3,154.7   3,451.0   3,750.7   4,060.9   4,384.7
     Debt held by the public \8\...........  3,540.4   3,878.4   4,166.1   4,386.5   4,602.6   4,796.6   5,002.9
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\1\ A decrease in the Treasury operating cash balance or compensating balances (which are assets) would be a
  means of financing a deficit and therefore has a positive sign. An increase in checks outstanding (which is a
  liability) would also be a means of financing a deficit and therefore also has a positive sign.
\2\ Compensating balances are non-interest bearing Treasury bank deposits that Treasury mainly uses to
  compensate banks for collecting tax and non-tax receipts under financial agency agreements. The Administration
  is proposing legislation to replace them with an appropriation in 2004.
\3\ Besides checks outstanding, 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 and compensating balances), miscellaneous asset accounts, and profit on sale
  of gold.
\4\ Consists primarily of Federal Financing Bank debt in 2002.
\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 $6,400 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 2002, the Federal Reserve Banks held $604.2 billion of Federal securities and the rest of the
  public held $2,936.2 billion. Debt held by the Federal Reserve Bank 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 book value equals the sales price. Subsequently, 
it equals the sales price plus the amount of the discount that has been 
amortized up to that time. In equivalent terms, the book 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 book 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 credit market sectors for financial 
resources in the credit market. 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 that is credited to these 
funds accounts for the fact that some earmarked taxes and user fees will 
be spent at a later time when the funds receive the monies. The debt 
securities are a liability of the general fund to the fund that holds 
the securities and are a

[[Page 301]]

mechanism for that fund to accumulate interest on its balances. These 
accounting 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 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 is not financed by private saving and 
does not 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; and its current interest does not have to be 
financed by taxes or other means.
  Furthermore, the debt held by Government accounts does not represent 
the estimated amount of the ac

[[Page 302]]

count's obligations or responsibilities to make future payments to 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 estimated future benefits (or future benefits 
less taxes) for the current participants in the program; nor does it 
represent the actuarial present value of estimated future benefits (or 
future benefits less taxes) for the current participants plus the 
estimated future participants over some stated time period. The future 
transactions of Federal social insurance and employee retirement 
programs, which now own 88 percent of the debt held by Government 
accounts, are important in their own right and need to be analyzed 
separately. This can be done through information published in the 
actuarial and financial reports for these programs.\4\
---------------------------------------------------------------------------
  \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 major 
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.
---------------------------------------------------------------------------
  This budget uses a variety of information sources to analyze the 
condition of Social Security and Medicare. Chapter 3 of the present 
volume, ``Stewardship,'' projects Social Security and Medicare outlays 
to 2080 relative to GDP. It also discusses in some detail the actuarial 
projections prepared for the Social Security and Medicare trustees 
reports to evaluate the long-run actuarial deficiency or shortfall in 
these programs. A chapter in the main volume of the Budget, ``The Real 
Fiscal Danger,'' uses the same data in less detail to explain the long-
run challenges to Social Security and Medicare revealed by these 
projections.. The actuarial shortfalls are very different in concept and 
much larger in size than the amount of Treasury debt that these programs 
hold.
  For all these reasons, debt held by the public is a better concept 
than gross Federal debt for analyzing the effect of the budget on the 
economy.
  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.'' 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.
  Technical note on retroactive revision to the discount or premium on 
Treasury debt securities.--Treasury securities held by the public are 
measured as the par value less the unamortized discount or premium, as 
explained in footnote 1. The Bureau of Public Debt changed its method of 
amortizing discounts and premiums on many Treasury debt securities 
effective October 1, 2002. The Bureau converted from the straight-line 
method to the scientific level yield method on public issues of notes 
and bonds. The scientific level yield method is similar to the effective 
interest method and produces an effective interest rate on the security 
that is nearly constant over the life of the security.
  Because the new method amortizes discounts and premiums more slowly 
than the straight-line method, the change increased the unamortized 
premiums and discounts on debt held by the public as of September 30, 
2002, by $671 million. The debt held by the public decreased by an 
identical $671 million. Debt held by the public and interest outlays for 
1978 through 2002 were revised by altering the historical amortization 
schedule of all public issues of Treasury notes and bonds outstanding at 
the end of 2002. Debt held by the public was reduced by amounts ranging 
from less than $1 million in 1978 to $671 million in 2002. Interest 
outlays were reduced by amounts that cumulate to an identical $671 
million. It was not practicable to make any adjustment for notes and 
bonds that had matured. The revised data on Federal debt are included in 
this chapter and published in full in Historical Tables, table 7.1.

         Government Surpluses or Deficits and the Change in Debt

  Table 13-2 summarizes Federal borrowing and debt from 2002 through 
2008. In 2002 the Government borrowed $221 billion, so the debt held by 
the public increased to $3,540 billion. The debt held by Government 
accounts increased $208 billion, and gross Federal debt increased by 
$429 billion to a level of $6,198 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 deficit or surplus 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

[[Page 303]]

off-budget totals are virtually the same as Social Security, which had a 
large surplus in 2002 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. (An increase in its need to borrow is represented by a 
negative sign, like a deficit.) In 2002 the deficit was $158 billion and 
the ``financing other than the change in debt held by the public'' was 
minus $63 billion. As a result, the Government borrowed $221 billion 
from the public. 
  Over the long-run, it is a good approximation to say that ``the 
deficit is financed by borrowing from the public'' or ``the surplus is 
used to repay debt held by the public.'' Over the last 20 years, the 
cumulative deficit was $2,414 billion and the increase in debt held by 
the public was $2,616 billion. The other factors added a total of $202 
billion of borrowing, an average of $10 billion per year. The variation 
was wide, ranging from additional borrowing (or lower repayment) of $63 
billion to reduced borrowing of $19 billion.
  In individual years it is also generally a good approximation to say 
that the deficit and borrowing (or the surplus and debt repayment) are 
about the same. However, as shown in table 13-2, a combination of events 
may produce a relatively large total for the other factors in a 
particular year. In 2002, several of the other factors were large and 
all added to the need for borrowing. In combination, they accounted for 
$63 billion of the $221 billion increase in debt held by the public, 
which was an exceptionally large total amount and an unusually large 
proportion. Three specific factors were especially important in 2002 and 
one more will be very important in 2003.
  The first factor is the change in Treasury operating cash balance. The 
operating cash balance rose $17 billion during 2002, partly because it 
had been lower than planned at the end of the previous year. It is 
estimated to decrease $11 billion during 2003. Changes in the operating 
cash balance, while they may occasionally be large, are inherently 
limited. Decreases in cash--a means of financing the Government--are 
limited by the amount of past accumulations, which themselves required 
financing when they were built up. Increases are limited because it is 
more efficient to repay debt.
  Second is the change in compensating balances, which Treasury mainly 
uses to compensate banks for collecting tax and non-tax receipts under 
financial agency agreements. Under these agreements, Treasury deposits a 
non-interest bearing compensating balance with a bank. The imputed 
earnings value of the compensating balance, typically calculated at the 
91-day Treasury bill rate, is the source of the bank's compensation for 
performing the required services related to these collections. Treasury 
determines the size of the compensating balance on deposit by balancing 
the value of the services provided with the imputed earnings value of 
the compensating balance. Banks can use the compensating balances on 
deposit to make loans or buy investments, and all compensating balances 
are fully collateralized. Any decrease in the interest rate applied to 
compensating balances requires Treasury to increase the size of 
compensating balances on deposit. Because interest rates decreased so 
much during 2002, Treasury had to increase its compensating balances by 
$14 billion to pay for the services.
  It is estimated that Treasury will have to increase its compensating 
balances by another $10 billion this year. To some extent, this is 
because of lower interest rates. However, the main reason is to make up 
for events that occurred during 2002, including the temporary withdrawal 
of balances when the Federal debt was pressing up against the debt 
limit. Treasury finances an increase in compensating balances by 
borrowing from the public or other means of financing.
  This budget proposes legislation to replace compensating balances in 
2004 by a permanent indefinite appropriation for Treasury to pay banks 
directly for their services as depositories and financial agents. As a 
result, as table 13-2 shows, the budget estimates that compensating 
balances will be drawn down from $37 billion to zero in 2004. This is 
expected to simplify Treasury's cash and debt management, making it more 
efficient, especially when interest rates change sharply. This is also 
expected to reduce the deficit, with the interest saved on lower 
borrowing being more than the outlays to pay for the services. The 
budget estimates savings of $637 million for the five years 2004-08.
  Third is the 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 
the Act, most of the assets in the Railroad Retirement Board trust funds 
are transferred to the new trust fund, which is expected to invest 
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 $17 billion in 2003. Net 
purchases or sales in subsequent years are estimated to be relatively 
small. \6\
---------------------------------------------------------------------------
  \6\ The budget treatment of this fund is further discussed in chapter 
24, ``Budget System and Concepts and Glossary.''
---------------------------------------------------------------------------
  The fourth and final major factor is the net financing disbursements 
for the direct loan and guaranteed loan

[[Page 304]]

financing accounts. The financing accounts were 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--the disbursement and repayment of loans, the 
default payments, the collections of interest and fees, and so forth--
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.\7\
---------------------------------------------------------------------------
  \7\ 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 24 of this volume, 
``Budget System and Concepts and Glossary,'' and the other references 
cited in chapter 20.
---------------------------------------------------------------------------
  The financing accounts also include intra-governmental transactions. 
In particular, they receive payment from the credit program accounts for 
the costs of new direct loans and loan guarantees. These collections are 
offset against the gross disbursements of the financing accounts in 
determining the accounts' total net cash flows. The total net cash flows 
of the financing accounts, consisting of transactions with both the 
public and budgetary accounts, are called ``net financing 
disbursements.'' They are defined in the same way as the ``outlays'' of 
a budgetary account and therefore affect the requirement for borrowing 
from the public in the same way as the deficit.
  The result is that the intragovernmental transactions of the financing 
accounts do not affect Federal borrowing from the public. Although the 
deficit changes because of the budget's outlay or receipt, the net 
financing disbursement changes in an equal amount with the opposite 
sign, so the effects cancel out. 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 mid-1990s. In 
2002 they required $16 billion of financing, which increased borrowing 
by this amount. They are estimated to require additional financing of 
$15 billion in 2003 and from $14 billion to $19 billion in the following 
four 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 2002. In 
2002, for example, the total trust fund surplus was $202 billion, and 
Government accounts invested $208 billion in Federal securities. The 
difference is mainly because some revolving funds and special funds also 
invest in Federal debt. In addition, the trust funds may change the 
amount of their cash assets not currently invested. A new reason, 
starting in 2003, is that the National Railroad Retirement Investment 
Trust will invest mostly in private securities. The 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. During 2002, agencies borrowed $0.2 billion from 
the public. Agency debt is barely one percent of Federal debt held by 
the public. Agencies are estimated to repay small amounts of debt in 
2003 and 2004.
  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 $26 billion from the public as of 
the end of 2002, or 94 percent of the total debt of all agencies. TVA 
sells debt primarily to finance capital expenditures.

[[Page 305]]



                                             Table 13-3 AGENCY DEBT
                                            (In millions of dollars)
----------------------------------------------------------------------------------------------------------------
                                                                       Borrowing or repayment (-) of
                                                                                    debt                Debt end
                                                                     ---------------------------------  of 2004
                                                                         2002       2003       2004     estimate
                                                                        Actual    Estimate   Estimate
----------------------------------------------------------------------------------------------------------------
Borrowing from the public:
   Housing and Urban Development:
     Federal Housing Administration.................................         66          0          0        298
   Small Business Administration:...................................
     Participation certificates: Section 505 development company....          0          0          0          7
   Architect of the Capitol.........................................         -2         -2         -3        163
   Farm Credit System Financial Assistance Corporation..............          0       -450          0        325
   Federal Communications Commission................................        -11       -114          0          0
   Federal Deposit Insurance Corporation:
     FSLIC Resolution Fund..........................................        -63          0          0          0
   National Archives................................................         -7         -7         -8        243
   Tennessee Valley Authority:
     Bonds and Notes................................................       -120       -381       -191     24,689
     Lease obligations \1\..........................................        289        304        -40        825
                                                                     -------------------------------------------
 Total, borrowing from the public...................................        152       -651       -242     26,550
                                                                     ===========================================
 Total, agency borrowing............................................        152       -651       -242     26,550
----------------------------------------------------------------------------------------------------------------
\1\ Lease obligations revised retroactively for 2000-02 as explained in the accompanying text.

  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 selling 
securities to 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. \8\
---------------------------------------------------------------------------
  \8\ 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. 
\9\ 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.
---------------------------------------------------------------------------
  \9\ 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 requires that budget authority be recorded up front 
for the present value of the lease payments. See OMB Circular No. A-11, 
Part 2, Appendix B. Also see the section on ``outlays'' in chapter 24, 
``Budget System and Concepts and Glossary.''
---------------------------------------------------------------------------
  The Tennessee Valley Authority has primarily financed its capital 
construction by selling bonds and notes to the public. Starting in 2000, 
it has also signed contracts to lease some recently constructed power 
generators to private investors and simultaneously lease them back. TVA 
receives a lump sum for leasing out its assets, and then leases them 
back at fixed annual payments for a set number of years. TVA retains 
substantially all of the economic benefits and risks related to 
ownership of the assets, and the lease/leasebacks are reported as 
liabilities on TVA's balance sheet under generally accepted accounting 
principles.

[[Page 306]]



                                Table 13-4. DEBT HELD BY GOVERNMENT ACCOUNTS \1\
                                            (In millions of dollars)
----------------------------------------------------------------------------------------------------------------
                                                                     Investment or disinvestment (-)   Holdings
                                                                    ---------------------------------   end of
                            Description                                 2002       2003       2004       2004
                                                                       Actual    Estimate   Estimate   estimate
----------------------------------------------------------------------------------------------------------------
Investment in Treasury debt:
   Defense-Military:
     Uniformed Services Retiree Health Care Fund...................  .........     18,222     20,026      38,248
   Energy:
     Nuclear waste disposal fund...................................      2,179      1,247      1,282      15,680
     Uranium enrichment decontamination fund.......................        431        504        393       3,884
   Health and Human Services:
     Federal hospital insurance trust fund.........................     31,769     27,015     27,102     283,023
     Federal supplementary medical insurance trust fund............     -3,174    -10,179      4,227      32,852
     Vaccine Injury compensation fund..............................        130        222         80       2,060
   Housing and Urban Development:
     Federal Housing Administration mutual mortgage fund...........      3,966      7,200      5,000      33,449
     Other HUD.....................................................        378        226        272       7,458
     Interior: Abandoned Mine Reclamation fund.....................         29        142        139       2,176
   Labor:
     Unemployment trust fund.......................................    -20,374    -18,444        818      50,639
     Pension Benefit Guaranty Corporation \1\......................        919        544         98      13,137
   State: Foreign Service retirement and disability trust fund             543        560        562      12,856
   Transportation:
     Highway trust fund............................................     -5,275        632      3,786      23,258
     Airport and airway trust fund.................................     -2,663      1,343     -1,762      10,578
     Oil spill liability trust fund................................       -125        -18        -69         916
     Aquatic resources trust fund..................................         65        -63  .........       1,306
   Treasury: Exchange stabilization fund                                  -297        485        511      10,713
   Veterans Affairs:
     National service life insurance trust fund....................       -174       -236       -306      10,923
     Other trust funds.............................................         36         10         -7       1,919
     Federal funds.................................................        -15        -25         -2         484
   Defense-Civil:
     Military retirement trust fund................................      5,418     12,458     13,717     188,571
     Harbor maintenance trust fund.................................         -1         29  .........       1,833
   Environmental Protection Agency:
     Hazardous substance trust fund................................       -396       -396       -213       2,625
     Leaking underground storage tank trust fund...................        189        231        203       2,327
   International Assistance Programs:
     Overseas Private Investment Corporation.......................        114        159        152       3,775
   Office of Personnel Management:
     Civil Service retirement and disability trust fund............     31,105     28,878     30,748     633,339
     Employees life insurance fund.................................      1,660        642      1,393      27,385
     Employees health benefits fund................................        903        648        742       8,944
   Social Security Administration:
     Federal old-age and survivors insurance trust fund \2\........    139,646    145,738    158,716   1,478,213
     Federal disability insurance trust fund.......................     19,445     13,329     12,906     181,522
   Farm Credit System Insurance Corporation:
     Farm Credit System Insurance fund.............................         87        132        160       1,978
   Federal Deposit Insurance Corporation:
     Bank Insurance fund...........................................       -136        414        401      31,357
     FSLIC Resolution fund.........................................        151        489         21       3,310
     Savings Association Insurance fund............................        499        634        220      12,007
   National Credit Union Administration: Share insurance fund......        606        515        396       6,060
   Postal Service fund.............................................        172        -30  .........       1,400
   Railroad Retirement Board trust funds \1\.......................       -263    -16,994     -1,080       1,984
   Other Federal funds.............................................        476        200        694       8,486
   Other trust funds...............................................       -312       -843       -213       5,894
   Unrealized discount \1\.........................................         -3  .........  .........      -1,861
                                                                    --------------------------------------------
     Total, investment in Treasury debt \1\........................    207,708    215,621    281,113   3,154,708
                                                                    ============================================
Investment in agency debt:
  Total, investment in agency debt.................................  .........  .........  .........  ..........
                                                                    ============================================
Total, investment in Federal debt \1\..............................    207,708    215,621    281,113   3,154,708
                                                                    ============================================
                             MEMORANDUM
Investment by Federal funds (on-budget)............................      9,386     31,089     29,763     192,202
Investment by Federal funds (off-budget)...........................        172        -30  .........       1,400
Investment by trust funds (on-budget)..............................     39,063     25,494     79,728   1,303,232

[[Page 307]]


Investment by trust funds (off-budget).............................    159,091    159,067    171,622   1,659,735
Unrealized discount \1\............................................         -3  .........  .........      -1,861
----------------------------------------------------------------------------------------------------------------
\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, the Pension Benefit Guaranty Corporation (PBGC), 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
  $10.3 billion higher than recorded in this table at the end of 2002; the debt held by PBGC would be $0.3
  billion higher; and the debt held by the Railroad Retirement Board would be $5.2 billion higher.
\2\ Off-budget Federal entity.

  The Office of Management and Budget determined a year ago that the TVA 
lease/leaseback in 2002 was a means of financing the acquisition of an 
asset owned and used by the Government. The arrangement was at least as 
governmental as a ``lease-purchase without substantial private risk.'' 
The budget therefore recorded the upfront cash proceeds from the lease 
as borrowing from the public, not offsetting collections. Agency debt in 
the form of a lease obligation was recorded as a type of borrowing. In 
this year's budget, the same treatment is used for the lease/leaseback 
estimated for 2003. For consistent treatment with budget concepts, 
agency debt is retroactively recorded for the lease/leaseback in 
2000.\10\ The total amount of the lease obligations is shown in table 
13-3 separately from TVA bonds and notes to distinguish between the 
types of borrowing. The obligation for lease/leasebacks increases to 
$865 million at the end of 2003 and then declines steadily as it is 
amortized.
---------------------------------------------------------------------------
  \10\ The retroactive revision adds $300 million to TVA debt at the end 
of 2000, $272 million at the end of 2001, and $265 million at the end of 
2002.
---------------------------------------------------------------------------
  TVA borrowing is limited by a statutory cap of $30 billion on the 
amount of debt that may be outstanding. Because current authorizations 
are unclear on the point, the budget proposes legislation to ensure that 
lease/leasebacks and other arrangements that are equivalent to 
traditional debt financing are included under TVA's debt cap.
  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.

                    Debt Held by Government Accounts

  Trust funds, and some special funds and public enterprise revolving 
funds, accumulate cash in excess of current needs in order to meet 
future obligations. These cash surpluses are generally invested in 
Treasury debt.
  Investment by trust funds and other Government accounts has risen 
greatly for many years. It was $208 billion in 2002, as shown in table 
13-4, and is estimated to be $281 billion in 2004. The holdings of 
Federal securities by Government accounts are estimated to grow to 
$3,155 billion by the end of 2004, or 43 percent of the gross Federal 
debt. This percentage is estimated to rise gradually in the following 
years, as the trust funds and several major Federal funds continue to 
accumulate surpluses. By 2008, debt held by Government accounts is 
estimated to be 47 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 $490 billion during 2002-04, which is 70 percent of 
the total estimated investment by Government accounts. The two Medicare 
trust funds--Hospital Insurance and Supplementary Medical Insurance--
account for another 11 percent of the total estimated investment.
  Apart from these four social insurance funds, the largest investment 
is by the funds for Federal employee retirement. The principal trust 
fund for Federal civilian employees is the civil service retirement and 
disability trust fund, which accounts for 13 percent of the total 
investment by Government accounts during 2002-04. The military 
retirement trust fund and the special fund for uniformed service retiree 
medical care account for 10 percent. Altogether, the investment of 
Social Security, Medicare, and these three retirement funds is more than 
the total investment by all Government accounts during this period. At 
the end of 2004, they are estimated to own 90 percent of the total debt 
held by Government accounts.
  Many of the other Government accounts also increased their holdings of 
Federal securities during this period, but two of them record major 
decreases. The unemployment trust fund disinvests a total of $39 billion 
last year and this year due to the effect of the recession and slow 
recovery on unemployment. The Railroad Retirement Board trust funds 
disinvest $17 billion this year and small amounts in 2002 and 2004. This 
is because their assets are being transferred to the National Railroad 
Retirement Investment Trust, as explained previously, which is expected 
to invest mostly in private stocks and bonds.

[[Page 308]]

  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 
three Government accounts that held zero-coupon bonds during the period 
of this table are the Nuclear Waste Disposal fund in the Department of 
Energy, the Pension Benefit Guaranty Corporation (PBGC), and the Rail 
Industry Pension fund under the Railroad Retirement Board. The PBGC no 
longer holds zero-coupon bonds, and the Rail Industry Pension fund is 
expected to disinvest them this year as it transfers assets to the 
National Railroad Retirement Investment Trust as discussed above. The 
total unamortized discount of these zero-coupon bonds was $15.8 billion 
at the end of 2002.
  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 2002.

                       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 third part of table 13-2 compares total Treasury debt with the 
amount of Federal debt that is subject to the limit. Nearly all Treasury 
debt is subject to the debt limit. Most of the Treasury debt not subject 
to limit was issued by the FFB (Federal Financing Bank), whose debt is 
not included under the limit. 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. However, it was redeemed in early 2003 and is estimated to remain 
zero. The remaining Treasury debt not subject to limit consists almost 
entirely of sliver 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 added 
only $283 million at the end of 2002. 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 debt 
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: $5.7 billion 
at the end of 2002 compared to the total unamortized discount (less 
premium) of $57.3 billion on all Treasury securities.
  Changes in the debt limit.--The statutory debt limit has been changed 
many times. Since 1960, Congress has passed 69 separate acts to raise 
the limit, 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. The increase in 2002, however, was intended to last a much shorter 
period.\11\
---------------------------------------------------------------------------
  \11\ 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

[[Page 309]]

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                        2002 -----------------------------------------------------------------
                                                                     Actual                2003       2004       2005       2006       2007       2008
--------------------------------------------------------------------------------------------------------------------------------------------------------
Federal funds deficit (-)...............................               -360.2              -496.5     -548.1     -472.5     -467.2     -453.4     -476.4
Means of financing other than borrowing:
   Premiums paid (-) on buybacks of Treasury securities.                 -3.8           .........  .........  .........  .........  .........  .........
   Net purchases (-) of non-Federal securities by the                    -1.5               -16.5       -0.1        1.1        1.3        1.3        1.4
   National Railroad Retirement Investment Trust........
   Change in: \1\
     Treasury operating cash balances...................                -16.7                10.9  .........  .........  .........  .........  .........
     Compensating balances \2\..........................                -14.0                -9.6       37.0  .........  .........  .........  .........
     Checks outstanding, etc \3\........................                 -7.5                 3.3      -10.6  .........  .........  .........  .........
   Seignorage on coins..................................                  1.0                 1.1        1.1        1.1        1.1        1.1        1.1
   Less: Net financing disbursements:
     Direct loan financing accounts.....................                -14.8               -16.4      -19.4      -14.6      -19.8      -20.2      -21.1
     Guaranteed loan financing accounts.................                 -1.5                 1.3        1.2        0.2        1.7        1.9        1.9
                                                         -----------------------------------------------------------------------------------------------
  Total, means of financing other than borrowing........                -58.8               -26.1        9.1      -12.2      -15.6      -15.9      -16.7
                                                         ===============================================================================================
Decrease or increase (-) in Federal debt held by Federal                 -9.6               -31.1      -29.8      -32.0      -33.0      -34.9      -37.0
 funds..................................................
Increase or decrease (-) in Federal debt not subject to                   0.1               -15.7       -0.2       -0.4       -0.1       -0.5       -0.6
 limit..................................................
                                                         ===============================================================================================
   Total, requirement for Federal funds borrowing                       428.4               569.3      569.0      517.2      516.0      504.6      530.7
   subject to debt limit................................
                                                         ===============================================================================================
Adjustment for change in discount and premium \4\.......                  0.2           .........  .........  .........  .........  .........  .........
Increase in debt subject to limit.......................                428.6               569.3      569.0      517.2      516.0      504.6      530.7

                        ADDENDUM
Debt subject to statutory limit \5\.....................              6,161.4             6,730.7    7,299.7    7,816.9    8,332.9    8,837.5    9,368.2
--------------------------------------------------------------------------------------------------------------------------------------------------------
* $50 million or less.
\1\ A decrease in the Treasury operating cash balance or compensating balances (which are assets) would be a means of financing the deficit and
  therefore has a positive sign. An Increase in checks outstanding (which is a liability) would also be a means of financing the deficit and would
  therefore also have a positive sign.
\2\ Compensating balances are non-interest bearing bank deposits that Treasury mainly uses to compensate banks for collecting tax and non-tax receipts
  under financial agency agreements. The Administration is proposing legislation to replace them with an appropriation in 2004.
\3\ Besides checks outstanding, 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 and compensating balances), 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 $6,400 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 in August 1997, increased the debt limit to $5,950 billion.
  This limit lasted more than four years. It was not until December 2001 
that the Secretary of the Treasury again requested an increase in the 
debt limit. When the limit had not been increased and the debt was about 
to run up against the limit at the beginning of April 2002, he declared 
that he would suspend new investments in the Government Securities 
Investment Fund (G-fund). This fund is one component of the Thrift 
Savings Fund, a defined contribution plan for Federal employees. The 
Secretary has statutory authority to suspend investments of the G-fund 
in Treasury securities as needed to prevent the debt from exceeding the 
debt limit, and to make the fund whole after the period has ended by 
restoring the lost interest and investing it fully. Starting on April 4, 
when the debt reached the limit, Treasury determined each day the amount 
of investments that would allow the fund to be invested as fully as 
possible without exceeding the debt limit. Treasury fully restored the 
lost interest of the G-fund and invested its principal on April 16, when 
substantial tax receipts were collected. This made the fund whole and 
protected the participants from any loss. In addition to these steps, 
Treasury called back about $7 billion of compensating balances from the 
banks for a very short time just before it began to suspend investments.
  The Secretary declared a debt issuance suspension period as of May 16, 
when the debt again approached the limit. Treasury again did not fully 
invest the G-fund, and, under similar statutory authority, it redeemed a 
relatively small amount of securities held by the Civil Service 
Retirement and Disability fund. Treasury augmented these steps by 
suspending the sales of state and local government issues to enhance 
control, by calling back about $20 billion of compensating balances for 
two weeks in June, and by post

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poning normal auctions at the end of June. Congress raised the debt 
limit to $6,400 billion on June 28, the President signed the bill on the 
same day, and Treasury restored the lost interest to the G-fund and 
Civil Service fund and invested them fully.
  The debt subject to limit is now approaching the new ceiling. Treasury 
wrote Congress on December 24, 2002, that the debt subject to limit may 
reach the ceiling in the latter half of February 2003. An increase in 
the debt limit will be necessary to permit the Federal Government to 
meet its obligations to borrow the additional cash needed to pay bills 
as they come due, and to invest the surpluses of trust funds and other 
Government accounts in Treasury securities as required by law.
  Methods of changing the debt limit.--The statutory limit is usually 
changed by normal legislative procedures. Under the rules adopted by the 
House of Representatives in January 2003, it can also be changed as a 
consequence of the annual Congressional budget resolution, which is not 
itself a law. The budget resolution includes a provision specifying the 
appropriate level of the debt subject to limit at the end of each fiscal 
year. The new rule provides that, when the budget resolution is adopted 
by both Houses of the Congress, the vote in the House of Representatives 
is deemed to have been a vote in favor of a joint resolution setting the 
statutory limit at the level specified in the budget resolution. The 
joint resolution is transmitted to the Senate for further action, where 
it may be amended to change the debt limit provision or in any other 
way. If it passes both Houses of the Congress, it is sent to the 
President for his signature.
  The House of Representatives first adopted its rule for 1980 and it 
was used a number of times, but in recent years it was not included in 
the rules.
  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 effect of debt held by 
Government accounts on the total debt subject to limit is brought out 
sharply in the second part of table 13-2. The change in debt held by 
Government accounts is a large proportion of the change in total debt 
subject to limit each year and accounts for more than half of the 
estimated total increase from 2002 through 2008.
  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.\12\
---------------------------------------------------------------------------
  \12\ 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 2002 the 
Federal funds deficit was $360 billion, and other factors increased the 
requirement to borrow subject to limit by $68 billion. The largest of 
these other factors were the increase in Treasury operating cash balance 
($17 billion), the increase in compensating balances ($14 billion), and 
the net financing disbursements of the direct loan financing accounts 
($15 billion). As explained in an earlier section, financing accounts 
are excluded from the budget by law because they are not a cost to the 
Government, but they are sizable and have to be financed. As a net 
result of all these factors, debt subject to limit increased by $429 
billion, while debt held by the public increased by $221 billion.
  The debt subject to limit is estimated to increase to $6,731 billion 
by the end of 2003, which is much more than the present statutory limit 
of $6,400 billion. This is caused by a sharp rise in the Federal funds 
deficit, supplemented by the other factors shown in table 13-5. Some are 
large, especially the higher investment by Federal funds, which is 
attributable to the special fund for uniformed services retiree medical 
care. During subsequent years this fund continues to have large 
surpluses, and other factors add to the requirement to borrow subject to 
the debt limit. As a result, while debt held by the public increases by 
$1,463 billion during 2003-08, debt subject to limit increases by $3,207 
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.

[[Page 311]]



                                  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          N/A

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\............................................   1,507.3       222.9        14.8       200.3          N/A
1986................................................   1,740.6       265.5        15.3       233.4         42.7
1987................................................   1,889.8       279.5        14.8       149.1         14.0
1988................................................   2,051.6       345.9        16.9       161.9         66.4
1989................................................   2,190.7       394.9        18.0       139.1         49.0

1990 \3\............................................   2,411.6       440.3        18.3       220.8          N/A
1991................................................   2,689.0       477.3        17.7       277.4         37.0
1992................................................   2,999.7       535.2        17.8       310.7         57.9
1993................................................   3,248.4       591.3        18.2       248.7         56.1
1994................................................   3,433.1       655.8        19.1       184.7         64.5

1995 \3\............................................   3,604.4       800.4        22.2       171.3          N/A
1996................................................   3,734.1       978.1        26.2       129.7        177.7
1997................................................   3,772.3     1,218.2        32.3        38.3        240.0
1998................................................   3,721.1     1,216.9        32.7       -51.2         -1.2
1999 \3\............................................   3,632.4     1,281.4        35.3       -88.7          N/A

2000 \3\............................................   3,409.8     1,057.9        31.0      -222.6          N/A
2001................................................   3,319.6     1,005.5        30.3       -90.2        -52.3
2002................................................   3,540.4     1,134.1        32.0       220.8        128.6
----------------------------------------------------------------------------------------------------------------
N/A = Not Available.
\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 and March 2000. As a result, the data on foreign holdings in different time
  periods are not strictly comparable, and the change in debt from foreign residents in 1979, 1985, 1990, 1995
  and 2000 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. The change in debt that is recorded as held by
  foreign residents in these years reflects these revisions as well as the net purchases of Federal securities.
  Borrowing is therefore not shown in these years.

  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 2002 
foreign holdings of Treasury debt were $1,134 billion, which was 32 
percent of the total debt held by the public. \13\ Foreign central banks 
owned 60 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.
---------------------------------------------------------------------------
  \13\ 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

[[Page 312]]

from the public. \14\ 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 much smaller, and the 
proportion of Federal debt held by foreign residents was 32 percent at 
the end of 2002.
---------------------------------------------------------------------------
  \14\ Table 13-6 does not show a number for the increase in foreign 
holdings in 1995 because of a benchmark revision. As explained in 
footnote 5 to that table, a benchmark revision reduced the estimated 
holdings as of December 1994 (by $47.9 billion). Because estimates of 
foreign holdings were not revised retroactively, the increase in 1995 
was more than the difference between the beginning and end of year 
amounts as now calculated. Before the benchmark revision, the increase 
was estimated to be $192.6 billion.
---------------------------------------------------------------------------
  Foreign holdings of Federal debt are around 12 percent of the foreign-
owned assets in the United States, depending on the method of measuring 
total 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 on most State and 
local government debt from income tax; it permits mortgage interest to 
be deducted in calculating taxable income; 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.