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

    [[Page 223]]

                         15.  FEDERAL BORROWING AND DEBT

      Debt is the largest legally binding obligation of the Federal
    Government. At the end of 2003, the Government owed $3,914 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 $162
    billion of interest on this debt.
      The budget shifted from surplus to deficit in 2002, and the deficit
    then grew sharply in 2003. This was primarily because of the recession,
    the prolonged decline in the stock market, increased spending in
    response to terrorism, and several measures of tax relief that were
    intended to stimulate the economy during the recession and provide an
    impetus for growth well into the future. As a result, the deficit is
    estimated to rise to a higher level in 2004 before declining. Debt held
    by the public as a percentage of GDP increases by small amounts through
    2005 and then changes little through 2009.

                                 Table 15-1.  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 2000                 Credit
                                                   Dollars   dollars \1\     GDP       market     Total       GDP
                                                                                      debt \2\   outlays
    ----------------------------------------------------------------------------------------------------------------
    1946........................................      241.9     1,821.2       108.6        n.a        7.4        1.8
    1950........................................      219.0     1,339.6        80.2       53.3       11.4        1.8
    1955........................................      226.6     1,217.1        57.2       43.2        7.6        1.3
    1960........................................      236.8     1,127.8        45.6       33.8        8.5        1.5

    1965........................................      260.8     1,161.6        37.9       26.9        8.1        1.4
    1970........................................      283.2     1,047.7        28.0       20.8        7.9        1.5
    1975........................................      394.7     1,074.6        25.3       18.4        7.5        1.6
    1980........................................      711.9     1,340.7        26.1       18.5       10.6        2.3

    1985........................................    1,507.3     2,164.7        36.3       22.3       16.2        3.7
    1986........................................    1,740.6     2,443.0        39.5       22.6       16.1        3.6
    1987........................................    1,889.8     2,584.8        40.6       22.3       16.0        3.4
    1988........................................    2,051.6     2,720.6        40.9       22.2       16.2        3.4
    1989........................................    2,190.7     2,796.4        40.6       22.0       16.5        3.5

    1990........................................    2,411.6     2,968.1        42.0       22.6       16.1        3.5
    1991........................................    2,689.0     3,189.8        45.3       24.1       16.2        3.6
    1992........................................    2,999.7     3,471.1        48.1       25.7       15.5        3.4
    1993........................................    3,248.4     3,675.5        49.4       26.6       14.9        3.2
    1994........................................    3,433.1     3,802.7        49.3       26.8       14.4        3.0

    1995........................................    3,604.4     3,910.2        49.2       26.7       15.8        3.3
    1996........................................    3,734.1     3,974.5        48.5       26.3       15.8        3.2
    1997........................................    3,772.3     3,946.4        46.1       25.3       15.7        3.1
    1998........................................    3,721.1     3,846.1        43.1       23.4       15.1        2.9
    1999........................................    3,632.4     3,705.7        39.8       21.4       13.8        2.6

    2000........................................    3,409.8     3,409.8        35.1       19.1       13.0        2.4
    2001........................................    3,319.6     3,243.7        33.1       17.5       11.6        2.1
    2002........................................    3,540.4     3,399.3        34.1       17.5        8.9        1.7
    2003........................................    3,913.6     3,697.3        36.1       17.8        7.5        1.5
    2004 estimate...............................    4,420.8     4,122.3        38.6        n.a        7.1        1.4

    2005 estimate...............................    4,791.9     4,413.2        39.8        n.a        7.9        1.6
    2006 estimate...............................    5,074.1     4,604.0        40.1        n.a        9.1        1.8
    2007 estimate...............................    5,333.0     4,759.9        40.2        n.a       10.1        2.0
    2008 estimate...............................    5,589.4     4,894.9        40.0        n.a       10.7        2.1
    2009 estimate...............................    5,844.4     5,016.3        39.8        n.a       11.2        2.2
    ----------------------------------------------------------------------------------------------------------------
    n.a. = not available
    \1\ Debt in current dollars deflated by the GDP chain-type price index with fiscal year 2000 equal to 100.
    \2\ Total credit market debt owed by domestic nonfinancial sectors, modified in some years to be consistent with
      budget concepts for the measurement of Federal debt. Financial sectors are omitted to avoid double counting,
      since financial intermediaries borrow in the credit market primarily in order to finance lending in the credit
      market. Source: Federal Reserve Board flow of funds accounts. Projections are not available.
    \3\ Interest on debt held by the public is estimated as the interest on Treasury debt securities less the
      ``interest received by trust funds'' (subfunction 901 less subfunctions 902 and 903). The estimate of interest
      on debt held by the public does not include the comparatively small amount of interest paid on agency debt or
      the offsets for interest on Treasury debt received by other Government accounts (revolving funds and special
      funds).

    [[Page 224]]

                        Trends in Debt Since World War II

      Table 15-1 depicts trends in Federal debt held by the public from
    World War II to the present and estimates from the present through 2009.
    (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.) 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 80.2 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 49.4 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, declined 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 recent economic conditions and response to terrorism have stopped
    the downward trend in debt relative to GDP. The recession, the initially
    slow recovery, and the decline in the stock market reduced tax receipts;
    tax relief had the same effect; and spending increased for war and
    homeland security. As a result of the ensuing deficits, table 15-1 shows
    a rise in debt held by the public throughout the projection period. Even
    during this period, however, the increase in debt is estimated to slow
    down. Debt continues to rise by small amounts as a percentage of GDP in
    2004 and 2005 and then changes little through 2009. By that year, debt
    is estimated to equal 39.8 percent of GDP.

                                   Table 15-2.  FEDERAL GOVERNMENT FINANCING AND DEBT
                                                (In billions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                   Estimate
                                                   2003  -----------------------------------------------------------
                                                  Actual    2004      2005      2006      2007      2008      2009
    ----------------------------------------------------------------------------------------------------------------
    Financing:
      Unified budget deficit (-)...............   -375.3    -520.7    -363.6    -267.6    -241.3    -239.0    -237.1

      Financing other than the change in debt
       held by the public:
        Net purchases (-) of non-Federal
         securities by
          the National Railroad Retirement         -20.2      -0.7       0.1       0.1       0.3       0.3       0.5
           Investment Trust....................
        Changes in: \1\
          Treasury operating cash balance......     25.9        -*  ........  ........  ........  ........  ........
          Compensating balances \2\............     -5.2      22.2  ........  ........  ........  ........  ........
          Checks outstanding, etc. \3\.........      8.2  ........  ........  ........  ........  ........  ........
        Seigniorage on coins...................      0.6       0.6       0.7       0.7       0.7       0.7       0.7
        Less: Net financing disbursements:
          Direct loan financing accounts.......     -6.5     -11.8     -11.5     -18.8     -20.1     -20.3     -20.7
          Guaranteed loan financing accounts...     -0.7       3.3       3.2       3.4       1.5       1.8       1.6
            Total, financing other than the          2.1      13.6      -7.5     -14.6     -17.6     -17.4     -17.9
             change in debt held by the public
                                                --------------------------------------------------------------------
                Total, requirement to borrow      -373.2    -507.2    -371.1    -282.3    -258.9    -256.4    -255.0
                 from the public...............

      Change in debt held by the public........    373.2     507.2     371.1     282.3     258.9     256.4     255.0

    Change in Debt Subject to Statutory
     Limitation:
      Change in debt held by the public........    373.2     507.2     371.1     282.3     258.9     256.4     255.0
      Change in debt held by Government            188.4     219.3     275.4     311.2     332.6     356.8     378.0
       accounts................................
      Change in other factors..................     14.6       0.3       0.5       0.2       0.5       0.7       0.7
                                                --------------------------------------------------------------------
        Total, change in debt subject to           576.2     726.7     647.0     593.6     592.1     613.8     633.7
         statutory limitation..................

    Debt Subject to Statutory Limitation, End
     of Year:
      Debt issued by Treasury..................  6,732.8   7,459.5   8,106.5   8,700.1   9,292.2   9,906.0  10,539.7
      Adjustment for Treasury debt not subject
       to limitation
        and agency debt subject to limitation..     -0.3      -0.3      -0.3      -0.3      -0.3      -0.3      -0.3
      Adjustment for discount and premium \4\..      5.1       5.1       5.1       5.1       5.1       5.1       5.1
                                                --------------------------------------------------------------------
          Total, debt subject to statutory       6,737.6   7,464.4   8,111.4   8,705.0   9,297.0   9,910.9  10,544.6
           limitation \5\......................

    Debt Outstanding, End of Year:
      Gross Federal debt: \6\
        Debt issued by Treasury................  6,732.8   7,459.5   8,106.5   8,700.1   9,292.2   9,906.0  10,539.7
        Debt issued by other agencies..........     27.2      27.0      26.5      26.3      25.7      25.1      24.4
                                                --------------------------------------------------------------------
          Total, gross Federal debt............  6,760.0   7,486.4   8,132.9   8,726.4   9,317.9   9,931.1  10,564.1
      Held by:
        Debt held by Government accounts.......  2,846.4   3,065.7   3,341.1   3,652.2   3,984.8   4,341.6   4,719.7
        Debt held by the public \7\............  3,913.6   4,420.8   4,791.9   5,074.1   5,333.0   5,589.4   5,844.4
    ----------------------------------------------------------------------------------------------------------------
    * $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 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. Most of the
      balances at the end of 2003 were required to be invested in nonmarketable Depositary Compensation Securities
      issued by the Treasury; the rest of the balances, and the entire amount in previous years, was invested in the
      way that the banks decide.
    \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 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 $7,384 billion.
    \6\ 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 otherwise measured at
      face value less unrealized discount (if any).
    \7\ At the end of 2003, the Federal Reserve Banks held $656.1 billion of Federal securities and the rest of the
      public held $3,257.5 billion. Debt held by the Federal Reserve Banks is not estimated for future years.

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

      The Federal Government issues debt securities for two principal
    purposes. First, it borrows from the public to finance the Federal
    deficit.\1\ Second, it issues debt to Government accounts, primarily
    trust funds, that accumulate surpluses. By law, trust fund surpluses
    must generally be invested in Federal securities. The gross Federal debt
    is defined to consist of both the debt held by the public and the debt
    held by Government accounts. Nearly all the Federal debt has been issued
    by the Treasury and is sometimes called ``public debt,'' but a small
    portion has been issued by other Government agencies and is called
    ``agency debt.''\2\
    ---------------------------------------------------------------------------
      \1\ Debt held by the public was measured until 1988 as the par value
    (or face value) of the security, which is the principal amount due at
    maturity. (The only exception was savings bonds.) However, most Treasury
    securities are sold at a discount from par, and some are sold at a
    premium. Treasury debt held by the public is now measured as the sales
    price plus the amortized discount (or less the amortized premium). At
    the time of sale, the 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 15-3 but also the debt
    of the Government-sponsored enterprises listed in table 7-9 at the end
    of chapter 7 and certain Government-guaranteed securities.
    ---------------------------------------------------------------------------
      Borrowing from the public, whether by the Treasury or by some other
    Federal agency, has a significant impact on the economy. Borrowing from
    the public is normally a good approximation of the Federal demand on
    credit markets. Regardless of whether 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\
    ---------------------------------------------------------------------------
      \3\ The Federal subsector of the national income and product accounts
    provides a measure of ``net government saving'' (based on current
    expenditures and current receipts) 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 subsector and its differences from the budget are discussed
    in chapter 13 of this volume, ``National Income and Product Accounts.''
    ---------------------------------------------------------------------------
      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 than when the funds receive the monies. The
    debt securities are a liability of the

    [[Page 225]]

    general fund to the fund that holds the securities and are a mechanism
    for that fund to accumulate interest on its balances. These accounting
    balances generally 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 cur

    [[Page 226]]

    rent 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 account'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 own 92 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. The actuarial estimates for these and
    other programs are summarized in the Financial Report of the United
    States Government, prepared annually by the Treasury Department.
    ---------------------------------------------------------------------------
      This budget uses a variety of information sources to analyze the
    condition of Social Security and Medicare, the Government's two largest
    social insurance programs. Chapter 12 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, ``Ensuring
    Fiscal Responsibility,'' uses the same data in less detail to explain
    the long-run fiscal problems of 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 and retiree health 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 12 of this volume,
    ``Stewardship.'' The different types of liabilities are reported
    annually in the financial statements of Federal agencies and in the
    Financial Report of the United States Government, prepared by the
    Treasury Department.

             Government Surpluses or Deficits and the Change in Debt

      Table 13-2 summarizes Federal borrowing and debt from 2003 through
    2009. In 2003 the Government borrowed $373 billion, so the debt held by
    the public increased to $3,914 billion. The debt held by Government
    accounts increased $188 billion, and gross Federal debt increased by
    $562 billion to $6,760 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 11 of this volume, ``Economic Assumptions.''
      The total or unified budget surplus consists of two parts: the on-
    budget surplus or deficit; and the surplus of the off-budget Federal
    entities, which have been excluded from the budget by law. Under present
    law, the off-budget Federal entities are the Social Security trust funds
    (Old-Age and Survivors Insurance and Disability Insurance) and the
    Postal Service fund.\5\ The off-budget totals are virtually the same as
    Social Security, which had a large surplus in 2003 and is estimated to
    have large and growing surpluses throughout the projection period. The
    on-budget and off-budget surpluses or deficits are added together to
    determine the Government's financing needs.
    ---------------------------------------------------------------------------
      \5\ For further explanation of the off-budget Federal entities, see
    chapter 22, ``Off-Budget Federal Entities and Non-Budgetary
    Activities.''
    ---------------------------------------------------------------------------
      The Government's need to borrow, or its ability to repay debt held by
    the public, has always depended on several other factors besides the
    unified budget surplus or deficit, such as the change in the Treasury
    operating cash balance. As shown in table 15-2, 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 the deficit.) Some of these individual factors
    themselves may be either positive or negative, and some of them vary
    considerably in size from year to year. In 2003 the deficit was $375
    billion and the ``financing other than the change in debt held by the
    public'' was $2 billion. As a result, the Government borrowed $373
    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

    [[Page 227]]

    public.'' Over the last 20 years, the cumulative deficit was $2,584
    billion and the increase in debt held by the public was $2,776 billion.
    The other factors added a total of $192 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 often a good approximation to say that the
    deficit and borrowing (or the surplus and debt repayment) are about the
    same. In 2003, as shown in table 15-2, the difference was only $2
    billion. However, a combination of events may produce a relatively large
    total for the other factors in a particular year. In 2002, for example,
    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 proportion. Four specific factors have recently been especially
    important.
      Change in Treasury operating cash balance.--The operating cash balance
    decreased $26 billion during 2003, partly because it was higher than
    planned at the end of the previous year. It is estimated to be
    essentially the same at the end of 2004. Changes in the operating cash
    balance, while occasionally 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.
      Change in compensating balances.--Treasury has long used compensating
    balances to compensate banks for collecting tax and non-tax receipts and
    providing other services under financial agency agreements. Under these
    agreements, Treasury deposited a non-interest bearing compensating
    balance with a bank. The imputed earnings from the compensating balance,
    calculated at the 91-day Treasury bill rate, were the source of the
    bank's compensation for performing the required services. Treasury
    determined the size of the deposit by balancing the value of the
    services provided with the imputed earnings of the compensating balance.
    Banks could use the compensating balances on deposit to make loans or
    buy investments, and all compensating balances were fully
    collateralized.
      The traditional compensating balances presented difficulties for cash
    and debt management in recent years. First, any decrease in the interest
    rate that was applied to compensating balances required Treasury to
    increase the size of compensating balances on deposit to pay for the
    services it needed. For example, because interest rates decreased so
    much during 2002, Treasury had to increase its compensating balances by
    $14 billion in that year. Second, when the debt outstanding reached the
    statutory debt limit, Treasury had to draw down the compensating
    balances and then make up for this action afterwards by increasing the
    balances to unusually high levels. These actions were inefficient and
    disruptive, and they created financial uncertainty for Treasury and the
    banks.
      In large part because of these difficulties, the 2004 budget proposed
    legislation that would allow Treasury to replace compensating balances
    by a permanent indefinite appropriation to pay banks directly for their
    services as depositaries and financial agents. This also would simplify
    Treasury's cash and debt management, would ensure that payments to
    financial institutions for services were made in a more predictable
    manner, and could result in budget savings.
      As an interim step, before the legislation could be enacted, Treasury
    began to replace its traditional compensating balances with depositary
    compensation securities (DCS) in July 2003. The banks hold DCS instead
    of other acceptable investments, and the Treasury balances are secured
    by the DCS. The cost of the services provided to Treasury is part of the
    interest on the debt under either system. Under the traditional system,
    Treasury paid interest to the general public on the marketable
    securities sold to acquire the compensating balances; under the interim
    system, Treasury pays interest to banks on the DCS. By the end of
    December 2003, the traditional compensating balances had been replaced
    by DCS.
      Congress authorized a permanent indefinite appropriation to pay for
    the services in October 2003 in the Check Clearing for the 21st Century
    Act (P.L. 108-100). An appropriation is included in the conference
    version of the Omnibus Appropriation bill for 2004. At such time as this
    bill is enacted, Treasury plans to replace the DCS by direct payments as
    soon as practicable. The total compensating balances at the end of 2003
    under both systems were $22 billion, and table 15-2 estimates that they
    will be drawn down to zero during 2004.
      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. Most of the
    assets in the Railroad Retirement Board trust funds were transferred to
    the new trust fund in 2003, which invests its assets 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 part of the ``financing other than the change in debt
    held by the public'' rather than included as an increase in the deficit.
    This increased borrowing and publicly held debt by $20 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
    25, ``The Budget System and Concepts.''
    ---------------------------------------------------------------------------
      Net financing disbursements of the direct loan and guaranteed loan
    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

    [[Page 228]]

    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 on loan guarantees, 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 22,
    ``Off-Budget Federal Entities and Non-Budgetary Activities,'' they are
    non-budgetary in concept because they do not measure cost. For
    additional discussion of credit reform, see chapter 25 of this volume,
    ``The Budget System and Concepts,'' and the other references cited in
    chapter 22.
    ---------------------------------------------------------------------------
      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 the 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. Likewise, financing account receipts
    from the public can be used to finance the payment of the Government's
    obligations, and therefore they 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
    2003 they required $7 billion of financing, which increased borrowing by
    this amount. They are estimated to require additional financing of $8
    billion in 2005 and from $15 billion to $19 billion in each of 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 2003. In
    2003, for example, the total trust fund surplus was $178 billion, and
    Government accounts invested $188 billion in Federal securities. A major
    reason for the larger investment is that some special funds and
    revolving funds, as well as the trust funds, invest in Federal debt.
    This was partially offset because, as explained above, the National
    Railroad Retirement Investment Trust invested $20 billion in non-Federal
    assets. This offset is expected to be relatively minor in the future.
    Another factor is that the trust funds may change the amount of their
    cash assets not currently invested. The debt held in major accounts and
    the annual investments are shown in table 15-4.

                                   Agency Debt

      Several Federal agencies, shown in table 15-3, sell debt securities to
    the public and at times in the past have sold securities to other
    Government accounts. During 2003, agencies repaid $0.2 billion of debt
    held by the public. Agency debt is less than one percent of Federal debt
    held by the public. Agencies are estimated to repay small amounts of
    debt in 2004 and 2005.
      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 2003, or 96 percent of the total debt of all agencies. In
    some earlier periods, other agencies accounted for a much higher
    proportion of agency debt than they do now. TVA sells debt primarily to
    finance capital expenditures.

                                                Table 15-3.  AGENCY DEBT
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                           Borrowing or repayment (-) of
                                                                                        debt                Debt end
                                                                         ---------------------------------  of 2005
                                                                             2003       2004       2005     estimate
                                                                            actual    estimate   estimate
    ----------------------------------------------------------------------------------------------------------------
    Borrowing from the public:
      Housing and Urban Development:
        Federal Housing Administration..................................        -19  .........  .........        279
      Small Business Administration:
        Participation certificates: Section 505 development company.....  .........  .........  .........          7
      Architect of the Capitol..........................................         -3         -3         -3        160
      Farm Credit System Financial Assistance Corporation...............       -450  .........       -325  .........
      Federal Communications Commission.................................        -59        -56  .........  .........
      National Archives.................................................         -7         -8         -8        235
      Tennessee Valley Authority:
        Bonds and Notes.................................................       -385     -1,621        -65     23,190
        Lease/leaseback obligations.....................................        677        -69        -35      1,134
        Prepayment obligations..........................................         47      1,469        -66      1,450

          Total, borrowing from the public..............................       -198       -288       -502     26,455

          Total, agency borrowing.......................................       -198       -288       -502     26,455
    ----------------------------------------------------------------------------------------------------------------

      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\ For an explanation of the monetary credits issued by the Federal
    Communications Commission (FCC), see chapter 25 of this volume, ``The
    Budget System and Concepts.'' The budgetary treatment of some of these
    securities and other securities inherent in the way programs operate 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 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

    [[Page 229]]

    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 by a
    portion of the annual lease payments according to an amortization
    schedule. 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 no substantive changes.
    ---------------------------------------------------------------------------
      \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,
    Appendix B. Also see the section on outlays in chapter 25, ``The Budget
    System and Concepts.''
    ---------------------------------------------------------------------------
      The Tennessee Valley Authority has traditionally financed its capital
    construction by selling bonds and notes to the public. Starting in 2000,
    it has also employed two types of alternative financing methods. The
    first type of alternative financing method was lease/leasebacks. TVA
    signed contracts to lease some recently constructed power generators to
    private investors and simultaneously lease them back. It received a lump
    sum for leasing out its assets, and then leased 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.
      The Office of Management and Budget determined that the TVA lease/
    leasebacks are a means of financing the acquisition of assets owned and
    used by the Government. The arrangement is at least as governmental as a
    ``lease-purchase without substantial private risk.'' The budget
    therefore records the upfront cash proceeds from the lease as borrowing
    from the public, not offsetting collections. Agency debt in the form of
    a lease obligation is recorded as a type of borrowing. The same budget
    treatment was applied to the lease/leaseback of qualified technological
    equipment in 2003. The total amount of the lease obligations beginning
    in 2000 is shown in table 15-3 separately from TVA bonds and notes to
    distinguish between the types of borrowing. The obligations for lease/
    leasebacks increased to $1.2 billion at the end of 2003 and are
    estimated to decline steadily in the following years as they are
    amortized.
      The second type of alternative financing method is prepayments for
    power that TVA sells to its power distributors. Under the Discounted
    Energy Units program, which began in 2003, distributors may prepay a
    portion of the price of the power they plan to purchase in the future.
    In return, they obtain a discount on a specific quantity of the future
    power they buy from TVA. The quantity varies, depending on TVA's
    estimated cost of borrowing. Most of the prepayments have been
    relatively small. However, TVA has entered into a contract with Memphis
    Light, Gas, and Water, under which that distributor will prepay $1.5
    billion for a large portion of its power needs over the next 15 years in
    return for a discount on that power. The distributor, in turn, will
    finance its prepayment by selling tax-exempt bonds.
      The Office of Management and Budget has determined that these
    prepayments are also a means of financing the acquisition of assets
    owned and used by the Federal Government, or, in effect, are used to
    refinance debt previously incurred to finance such assets. They are
    equivalent in concept to other forms of borrowing from the public,
    although at different terms and conditions. The prepayment obligations
    are recorded as liabilities, called ``unearned revenue,'' on TVA's
    balance sheet under generally accepted accounting principles. The budget
    therefore records the upfront cash proceeds from the prepayment as
    borrowing from the public, not

    [[Page 230]]

    offsetting collections. Agency debt in the form of a prepayment
    obligation is recorded as a type of borrowing. The total amount of
    prepayment obligations is shown in table 15-3 separately from bonds and
    notes and lease/leaseback obligations to distinguish between these types
    of borrowing. The prepayment obligations increased from zero to $47
    million during 2003 and are estimated to be $1.5 billion at the end of
    2004 because of the contract with Memphis Light, Gas, and Water. The
    obligations are estimated to decline steadily in the following years as
    they are amortized.
      The amount of agency securities sold to the public has been reduced by
    borrowing from the Federal Financing Bank (FFB). The FFB is an entity
    within the Treasury Department, one of whose purposes is to substitute
    Treasury borrowing for agency borrowing from the public. It has the
    authority to purchase agency debt and finance these purchases by
    borrowing from the Treasury. Agency borrowing from the FFB is not
    included in gross Federal debt. It would be double counting to add
    together (a) the agency borrowing from the FFB and (b) the Treasury
    borrowing from the public that was needed to provide the FFB with the
    funds to lend to the agencies.

                        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.

                                    Table 15-4.  DEBT HELD BY GOVERNMENT ACCOUNTS \1\
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                         Investment or Disinvestment (-)    Holdings
                                                                        ---------------------------------   end of
                                 Description                                2003       2004       2005       2005
                                                                           actual    estimate   estimate   estimate
    ----------------------------------------------------------------------------------------------------------------
    Investment in Treasury debt:
      Energy:
        Nuclear waste disposal fund \1\................................      1,041      1,786      1,752      17,729
        Uranium enrichment decontamination fund........................        423        380        406       4,196
      Health and Human Services:
        Federal hospital insurance trust fund..........................     22,401      9,381     10,633     271,321
        Federal supplementary medical insurance trust fund.............    -13,956     -3,557      7,748      29,040
        Vaccine Injury compensation fund...............................        138        398        166       2,460
      Housing and Urban Development:
        Federal Housing Administration mutual mortgage fund............      2,571  .........      4,000      27,819
        Other HUD......................................................        285        257        283       7,785
      Interior: Abandoned Mine Reclamation fund........................         32        114          7       2,048
      Labor:
        Unemployment trust fund........................................    -20,076     -6,377      4,255      46,066
        Pension Benefit Guaranty Corporation \1\.......................       -279        776       -636      12,356
      State: Foreign Service retirement and disability trust fund......        555        567        650      13,506
      Transportation:
        Highway trust fund.............................................     -5,263      1,712      1,385      16,675
        Airport and airway trust fund..................................       -479        864     -1,426       9,956
      Homeland Security
        Oil spill liability trust fund.................................        -48       -122        -71         762
        Aquatic resources trust fund...................................         46       -110  .........       1,306
      Treasury: Exchange stabilization fund............................        785        211  .........      10,713
      Veterans Affairs:
        National service life insurance trust fund.....................       -219       -299       -359      10,588
        Other trust funds..............................................         53         24         17       2,009
        Federal funds..................................................        -13        -23        -20         454
      Defense-Civil:
        Uniformed Services Retiree Health Care Fund....................     18,445     20,059     23,833      62,337
        Military retirement trust fund.................................      9,966      9,661      7,950     189,973
        Harbor maintenance trust fund..................................        139       -110  .........       1,833
      Environmental Protection Agency:
        Hazardous substance trust fund.................................       -726        292        -81       2,719
        Leaking underground storage tank trust fund....................        145        197        201       2,436
      International Assistance Programs:
        Overseas Private Investment Corporation........................        194        103        200       3,961
      Office of Personnel Management:
        Civil Service retirement and disability trust fund.............     27,996     29,838     31,121     662,668
        Employees life insurance fund..................................      1,428        971      1,573      29,322
        Employees health benefits fund.................................      1,482      1,044      1,022      11,103
      Social Security Administration:
        Federal old-age and survivors insurance trust fund \2\.........    139,668    138,044    166,977   1,618,448
        Federal disability insurance trust fund \2\....................     15,506     11,352     12,133     194,278
      Farm Credit System Insurance Corporation:
        Farm Credit System Insurance fund..............................        124        185        -71       1,924
      Federal Deposit Insurance Corporation:
        Bank Insurance fund............................................        513      2,163        404      33,621
        FSLIC Resolution fund..........................................        163        347  .........       3,310

    [[Page 231]]

        Savings Association Insurance fund.............................        270        963        451      12,837
      National Credit Union Administration: Share insurance fund.......        558        446        484       6,637
      Postal Service fund \2\..........................................      1,221     -1,251  .........       1,400
      Railroad Retirement Board trust funds \1\........................    -17,740        171        -17       2,471
      Other Federal funds \3\..........................................      1,232        -95        747       9,508
      Other trust funds................................................       -398     -1,108       -293       5,151
      Unrealized discount \1\..........................................        218  .........  .........      -1,643

                                                                        --------------------------------------------
          Total, investment in Treasury debt \1\.......................    188,401    219,252    275,424   3,341,083
                                                                        ============================================

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

                   Total, investment in Federal debt \1\                   188,401    219,252    275,424   3,341,083
                                                                        ============================================

                                 MEMORANDUM
    Investment by Federal funds (on-budget)............................     26,343     27,670     31,840     217,235
    Investment by Federal funds (off-budget)...........................      1,221     -1,251  .........       1,400
    Investment by trust funds (on-budget)..............................      5,445     43,436     64,474   1,311,365
    Investment by trust funds (off-budget).............................    155,174    149,397    179,110   1,812,726
    Unrealized discount \1\............................................        218  .........  .........      -1,643
    ----------------------------------------------------------------------------------------------------------------
    \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
      $11.7 billion higher than recorded in this table at the end of 2003; the debt held by PBGC would be $0.7
      billion higher.
    \2\ Off-budget Federal entity.
    \3\Retroactively includes debt held by the Telecommunications Development Fund as of the end of 2002. Debt held
      by Government accounts was increased by $32 million at the end of 2002 and 2003, and debt held by the public
      was decreased by identical amounts.

      Investment by trust funds and other Government accounts has risen
    greatly for many years. It was $188 billion in 2003, as shown in table
    15-4, and is estimated to be $275 billion in 2005. The holdings of
    Federal securities by Government accounts are estimated to grow to
    $3,341 billion by the end of 2005, or 41 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.
      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 $484 billion during 2003-05, which is 71 percent of
    the total estimated investment by Government accounts. The two Medicare
    trust funds--Hospital Insurance and Supplementary Medical Insurance--
    account for another 5 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 2003-05. The military
    retirement trust fund and the special fund for uniformed services
    retiree health care account for another 13 percent. Altogether, the
    investment by Social Security, Medicare, and these three Federal
    employee retirement funds is more than the total investment by
    Government accounts during this period. At the end of 2005, they are
    estimated to own 91 percent of the total debt held by Government
    accounts.
      Many of the other Government accounts also increase their holdings of
    Federal securities during this period, but three accounts record major
    decreases. The unemployment trust fund disinvested $20 billion last year
    and is estimated to disinvest $6 billion this year, as the result of the
    recession and the initially slow recovery. The previously existing trust
    funds under the Railroad Retirement Board, which were invested in
    Treasury securities, transferred most of their assets to the National
    Railroad Retirement Investment Trust, which invested mainly in private
    stocks and bonds (see previous discussion). The effect in 2003 was a net
    disinvestment of $18 billion for the Railroad Retirement Board as a
    whole. The Supplementary Medical Insurance trust fund is estimated to
    disinvest $18 billion in 2003-04, after which it accumulates assets
    again.
      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

    [[Page 232]]

    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 Rail Industry Pension fund disinvested them in 2003 as it
    transferred assets to the National Railroad Retirement Investment Trust
    as discussed above. The total unamortized discount on zero-coupon bonds
    was $12.4 billion at the end of 2003.
      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 and 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 15-4 it is
    shown as a separate item at the end of the table and not distributed by
    account. The amount was $1.6 billion at the end of 2003.

                           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 15-2 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. The only existing Treasury debt not
    subject to limit is mostly silver certificates and other currencies no
    longer being issued. The Federal Financing Bank (FFB), which is within
    the Treasury Department, is authorized to have outstanding up to $15
    billion of publicly issued debt, and this debt is not subject to the
    general limit. This amount was issued several years ago to the Civil
    Service Retirement and Disability fund, redeemed in early 2003, and then
    issued again for a few months later in 2003 when the debt subject to
    limit reached the statutory ceiling (for further discussion, see below).
    It was redeemed before the end of 2003 and is estimated to remain zero.
      The sole type of agency debt currently subject to the general limit is
    the debentures issued by the Federal Housing Administration, which was
    only $265 million at the end of 2003. 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 6 to table 15-2. The amount is relatively small: $5.1 billion
    at the end of 2003 compared to the total unamortized discount (less
    premium) of $50.6 billion on all Treasury securities.

      Changes in the debt limit.--The statutory debt limit has been changed
    many times. Since 1960, Congress has passed 70 separate acts to raise
    the limit, extend the duration of a temporary increase, or revise the
    definition. For a long period up to 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. All three of these increases were enacted as part of a deficit
    reduction package or a plan to balance the budget and were intended to
    last a relatively long time: the Omnibus Budget Reconciliation Act of
    1990, the Omnibus Budget Reconciliation Act of 1993, and the Balanced
    Budget Act of 1997.\10\
    ---------------------------------------------------------------------------
      \10\ The Acts and the statutory limits since 1940 are enumerated in
    Historical Tables, Budget of the United States Government, table 7.3.

                   Table 15-5.  FEDERAL FUNDS FINANCING AND CHANGE IN DEBT SUBJECT TO STATUTORY LIMIT
                                                (In billions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                Estimate
                 Description                2003   -----------------------------------------------------------------
                                           Actual      2004       2005       2006       2007       2008       2009
    ----------------------------------------------------------------------------------------------------------------

    Federal funds deficit (-)..........     -553.7     -708.6     -606.9     -546.6     -537.1     -559.3     -575.2

    Means of financing other than
     borrowing:
      Change in: \1\
        Treasury operating cash               25.9         -*  .........  .........  .........  .........  .........
         balances......................
        Compensating balances \2\......       -5.2       22.2  .........  .........  .........  .........  .........
        Checks outstanding, etc \3\....        5.8       -5.7       -0.1        0.1        0.3        0.3        0.5
      Seignorage on coins..............        0.6        0.6        0.7        0.7        0.7        0.7        0.7
      Less: Net financing
       disbursements:
        Direct loan financing accounts.       -6.5      -11.8      -11.5      -18.8      -20.1      -20.3      -20.7
        Guaranteed loan financing             -0.7        3.3        3.2        3.4        1.5        1.8        1.6
         accounts......................
                                        ----------------------------------------------------------------------------
          Total, means of financing           19.9        8.6       -7.8      -14.6      -17.6      -17.4      -17.9
           other than borrowing........
                                        ============================================================================

    Decrease or increase (-) in Federal      -27.6      -26.4      -31.8      -32.2      -36.8      -36.4      -39.9
     debt held by Federal funds........
    Increase or decrease (-) in Federal      -15.2       -0.3       -0.5       -0.2       -0.5       -0.7       -0.7
     debt not subject to limit.........
                                        ============================================================================

        Total, requirement for Federal       576.6      726.7      647.0      593.6      592.1      613.8      633.7
         funds borrowing subject to
         debt limit....................
                                        ============================================================================

    Change in discount and premium \4\.       -0.6  .........  .........  .........  .........  .........  .........
    Change in unrealized discount \5\..        0.2  .........  .........  .........  .........  .........  .........
    Increase in debt subject to limit..      576.2      726.7      647.0      593.6      592.1      613.8      633.7

                  ADDENDUM

    Debt subject to statutory limit \6\    6,737.6    7,464.4    8,111.4    8,705.0    9,297.0    9,910.9   10,544.6

    ----------------------------------------------------------------------------------------------------------------
    * $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 Treasury bank deposits that Treasury mainly uses to
      compensate banks for collecting tax and non-tax receipts under financial agency agreements. Most of the
      balances at the end of 2003 were frequired to be invested in nonmarketable Depositary Compensation Securities
      issued by the Treasury; the rest of the balances, and the entire amount in previous years, was invested in the
      way that the banks decide.
    \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 unrealized discount is for Government account series securities
    \6\ The statutory debt limit is $7,384 billion.

      The Balanced Budget Act of 1997 increased the debt limit to $5,950
    billion, which lasted until 2002. The debt reached the limit in April
    2002, the Treasury Department took a variety of administrative actions
    to keep within the limit, and on June 28 the President signed a bill to
    raise the limit to $6,400 billion.
      This limit did not last quite one year. By December 2002, Treasury
    wrote Congress that the debt subject to limit might reach the ceiling in
    the latter half of February 2003. It did run up against the limit on
    February 20 and stayed there until the limit was increased.
      Treasury took several steps at the start to meet the Government's
    obligation to pay its bills and invest its trust funds while keeping
    debt under the statutory limit. The Secretary of Treasury declared that
    he would not be able to fully invest the Government Securities
    Investment Fund (G-fund). This fund is one component of the Thrift
    Savings Fund, a defined contribution pension plan for Federal employees.
    The Secretary has statutory authority to suspend investment of the G-
    fund in Treasury securities as needed to prevent the debt from exceeding
    the debt limit; when he does this, he is required to make the fund whole
    after the debt limit has been raised by restoring the lost interest and
    investing the fund fully. Starting on February 20,

    [[Page 233]]

    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. In addition to this step, Treasury also began to keep its
    operating cash balances lower than in the absence of a debt limit
    problem; reduced its compensating balances held in banks to pay for
    services under financial agency agreements; and discontinued the
    acceptance of subscriptions to the state and local government series of
    securities.
      As the need for financing grew, Treasury took further steps. In early
    March, Treasury issued $15 billion of Federal Financing Bank (FFB)
    securities to the Civil Service Retirement and Disability fund in
    exchange for an equivalent amount of regular Treasury securities, which
    it redeemed. As explained above, the FFB securities are not subject to
    the debt limit. At the end of March, Treasury began to disinvest the
    Exchange Stabilization fund to the extent needed. In April, the
    Secretary declared a debt issuance suspension period, under which he
    could redeem a limited amount of securities held by the Civil Service
    Retirement and Disability fund and stop investing its receipts. He
    declared an extension of the debt issuance suspension period in May,
    which allowed him to redeem more securities. All the steps taken during
    these months had also been taken on previous occasions when the debt had
    reached the statutory limit, and most of them had been taken in 2002.
      Congress passed a bill raising the debt limit to $7,384 billion on May
    23, when the Senate passed a House joint resolution based on the
    congressional budget resolution (see the next section). The President
    signed the bill on May 27, and Treasury promptly auctioned new
    securities in the credit market, restored the lost interest to the G-
    fund and Civil Service fund, and fully invested these funds and the
    Exchange Stabilization fund. The FFB securities held by the Civil
    Service fund were redeemed at the end of June in exchange for regular
    Treasury securities.

      Methods of changing the debt limit.--The statutory limit is usually
    changed by normal legislative procedures. Under the rules adopted by the
    House of Rep

    [[Page 234]]

    resentatives 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 this rule for 1980 and it
    was used a number of times, but it was not included in the rules for
    several years before 2003.

      Federal funds financing and the change in debt subject to limit.--The
    change in debt held by the public, as shown in table 15-2, 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 15-2. 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 half of the estimated total
    increase from 2003 through 2009.
      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 receipts
    earmarked by law for specified purposes, such as paying Social Security
    benefits or making grants to state governments for highway
    construction.\11\
    ---------------------------------------------------------------------------
      \11\ For further discussion of the trust funds and Federal funds
    groups, see chapter 21, ``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 for reasons except to
    finance 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 15-5 derives the change in debt subject to limit. In 2003 the
    Federal funds deficit was $554 billion, and other factors increased the
    requirement to borrow subject to limit by $23 billion. The largest of
    these other factors was the $28 billion investment in Treasury
    securities by special funds and revolving funds, of which the largest
    single investment was $18 billion for the uniformed services retiree
    health care fund. The next largest factor was redeeming $15 billion of
    Federal Financing Bank securities, which were not subject to the debt
    limit and were replaced by securities that were subject to the limit.
    The net financing disbursements of the direct loan financing accounts
    added $6 billion to the financing requirements. As explained in an
    earlier section, the transactions of the credit 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 an offset,
    the Treasury operating cash balance deceased $26 billion. As a net
    result of all these factors, debt subject to limit increased by $576
    billion, while debt held by the public increased by $373 billion.
      The debt subject to limit is estimated to increase to $7,464 billion
    by the end of 2004, which is more than the present statutory debt limit
    of $7,384 billion. This is caused by a rise in the Federal funds
    deficit, supplemented by the other factors shown in table 15-5. Some of
    these factors are large, especially the investment by Federal special
    and revolving funds and in particular the special fund for uniformed
    services retiree health care. As a result, while debt held by the public
    increases by $1,931 billion during 2004-09, debt subject to limit
    increases by $3,807 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 15-6, foreign holdings were just over
    $10.0 billion, less than 5 percent of the total Federal debt held by the
    public.

                                      Table 15-6.  FOREIGN HOLDINGS OF FEDERAL DEBT
                                              (Dollar amounts in billions)
    ----------------------------------------------------------------------------------------------------------------
                                                                Debt held by the public         Borrowing from the
                                                          -----------------------------------         public
                          Fiscal Year                                                        -----------------------
                                                             Total      Foreign   Percentage     Total      Foreign
                                                                         \1\        foreign      \2\         \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\.............................................   3,540.4     1,199.6        33.9       220.8         n.a
    2003.................................................   3,913.6     1,458.5        37.3       373.2       259.0
    ----------------------------------------------------------------------------------------------------------------
    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; reduced the estimated holdings
      as of December 1994 and March 2000; and increased the estimated holdings as of June 2002. 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 fiscal years reflects the benchmark or conceptual 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 2003 foreign
    holdings of Treasury debt were $1,459 billion, which was 37 percent of
    the total debt held by the public.\12\ Foreign central banks owned 56
    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.
    ---------------------------------------------------------------------------
      \12\ The amounts of debt reported by the Bureau of Economic Analysis,
    Department of Commerce, are different, though similar in size, because
    of a different method of valuing the securities.
    ---------------------------------------------------------------------------
      Although the amount of Federal debt held by foreign residents grew
    greatly over this period, the proportion

    [[Page 235]]

    that foreign residents own, after growing abruptly in the very early
    1970s, did not change much again until the mid-1990s. During 1995-97,
    however, foreign holdings increased on average by around $200 billion
    each year, considerably more than total Federal borrowing from the
    public.\13\ 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. In most
    subsequent years the change in foreign debt holdings was much smaller,
    but in 2003 the Federal debt held by foreign residents increased by $259
    billion or from 34 to 37 percent of Federal debt.
    ---------------------------------------------------------------------------
      \13\ Table 15-6 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 14 percent of the foreign-
    owned assets in the United States,

    [[Page 236]]

    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 7, ``Credit and Insurance.'' Detailed data are presented in
    tables at the end of that chapter. Table 7-9 summarizes GSE borrowing
    and lending.

    [[Page 237]]

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                        FEDERAL RECEIPTS AND COLLECTIONS

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