[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)
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Debt held by the Debt held by the Interest on the debt
public public as a percent held by the public
------------------------ of: as a percent of: \3\
Fiscal year -------------------------------------------
Current FY 1996 Credit
dollars dollars \1\ GDP market Total GDP
debt \2\ outlays
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1946........................................ 241.9 1,728.3 108.6 N/A 7.4 1.8
1950........................................ 219.0 1,270.7 80.1 53.3 11.4 1.8
1955........................................ 226.6 1,154.9 57.3 43.2 7.6 1.3
1960........................................ 236.8 1,070.7 45.6 33.8 8.5 1.5
1965........................................ 260.8 1,102.4 37.9 26.9 8.1 1.4
1970........................................ 283.2 994.2 28.0 20.8 7.9 1.5
1975........................................ 394.7 1,020.6 25.3 18.4 7.5 1.6
1980........................................ 711.9 1,271.6 26.1 18.5 10.6 2.3
1985........................................ 1,507.3 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
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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.
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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
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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
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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
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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\
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\4\ Extensive actuarial analyses of the Social Security and Medicare
programs are published in the annual reports of the boards of trustees
of these funds. Annual actuarial reports are also prepared for 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.
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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\
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\6\ The budget treatment of this fund is further discussed in chapter
24, ``Budget System and Concepts and Glossary.''
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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
[[Page 310]]
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\
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\12\ For further discussion of the trust funds and Federal funds
groups, see chapter 16, ``Trust Funds and Federal Funds.''
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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.
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Table 13-6. FOREIGN HOLDINGS OF FEDERAL DEBT
(Dollar amounts in billions)
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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.
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\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.
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Although the amount of Federal debt held by foreign residents grew
greatly over this period, the proportion that foreign residents own,
after growing abruptly in the very early 1970s, did not change much
again until the mid-1990s. During 1995-97, however, foreign holdings
increased on average by around $200 billion each year, considerably more
than total Federal borrowing
[[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.
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\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.
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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.