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


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                     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).


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                    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\
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  \1\ Debt held by the public was measured until 1988 as the par value 
(or face value) of the security, which is the principal amount due at 
maturity. (The only exception was savings bonds.) However, most Treasury 
securities are sold at a discount from par, and some are sold at a 
premium. Treasury debt held by the public is now measured as the sales 
price plus the amortized discount (or less the amortized premium). At 
the time of sale, the book value equals the sales price. Subsequently, 
it equals the sales price plus the amount of the discount that has been 
amortized up to that time. In equivalent terms, the book value of the 
debt equals par less the unamortized discount. (For a security sold at a 
premium, the definition is symmetrical.) When the measurement was 
changed, the data in Historical Tables were revised as far back as 
feasible, which was 1956. Agency debt, except for zero-coupon 
certificates, is recorded at par. For further analysis of these 
concepts, see Special Analysis E, ``Borrowing and Debt,'' in Special 
Analyses, Budget of the United States Government, Fiscal Year 1990, 
pages E-5 to E-8, although some of the practices it describes have been 
revised. In 1997 Treasury began to sell inflation-indexed notes and 
bonds. The book value of these securities includes a periodic adjustment 
for inflation.
  \2\ The term ``agency debt'' is defined more narrowly in the budget 
than customarily in the securities market, where it includes not only 
the debt of the Federal agencies listed in table 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

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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

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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

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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,

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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

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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.

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                    FEDERAL RECEIPTS AND COLLECTIONS

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