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

      Debt is the largest legally binding obligation of the Federal
    Government. At the end of 2004, the Government owed $4,296 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 $168
    billion of interest on this debt.

                                 Table 16-1.  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        57.4       43.2        7.6        1.3
    1960........................................      236.8     1,127.8        45.7       33.8        8.5        1.5

    1965........................................      260.8     1,161.6        38.0       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        36.4       22.3       16.2        3.7
    1986........................................    1,740.6     2,443.0        39.4       22.6       16.1        3.6
    1987........................................    1,889.8     2,584.8        40.7       22.3       16.0        3.5
    1988........................................    2,051.6     2,720.6        41.0       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       16.2        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       23.5       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     3,243.1        33.0       17.6       11.6        2.1
    2002........................................    3,540.4     3,395.8        34.1       17.6        8.9        1.7
    2003........................................    3,913.4     3,687.1        36.1       18.0        7.5        1.5
    2004........................................    4,295.5     3,968.2        37.2       18.3        7.3        1.5

    2005 estimate...............................    4,721.2     4,274.5        38.6        N/A        7.4        1.5
    2006 estimate...............................    5,120.8     4,547.4        39.7        N/A        8.6        1.7
    2007 estimate...............................    5,454.0     4,745.5        40.1        N/A        9.7        1.9
    2008 estimate...............................    5,726.7     4,880.0        39.9        N/A       10.4        2.0
    2009 estimate...............................    5,981.8     4,992.7        39.6        N/A       10.8        2.1

    2010 estimate...............................    6,211.5     5,078.1        39.1        N/A       11.0        2.1
    ----------------------------------------------------------------------------------------------------------------
    N/A = Not available.
    \1\ Debt in current dollars deflated by the GDP chain-type price index with fiscal year 2000 equal to 100.
    \2\ Total credit market debt owed by domestic nonfinancial sectors, modified in some years to be consistent with
      budget concepts for the measurement of Federal debt. Financial sectors are omitted to avoid double counting,
      since financial intermediaries borrow in the credit market primarily in order to finance lending in the credit
      market. Source: Federal Reserve Board flow of funds accounts. Projections are not available.
    \3\ Interest on debt held by the public is estimated as the interest on Treasury debt securities less the
      ``interest received by trust funds'' (subfunction 901 less subfunctions 902 and 903). The estimate of interest
      on debt held by the public does not include the comparatively small amount of interest paid on agency debt or
      the offsets for interest on Treasury debt received by other Government accounts (revolving funds and special
      funds).

    [[Page 246]]

      The budget shifted from surplus to deficit in 2002, and the deficit
    then grew sharply in 2003 and edged up a little more in 2004. The shift
    from a surplus to a large deficit in these years was primarily because
    of several shocks to the economy--which included the bursting of the
    stock market bubble, the terrorist attack of September 11th, and the
    recession--together with the additional spending in response to
    terrorism and several measures of tax relief that were designed to
    stimulate the economy in the near-term and increase long-term growth. As
    a result, the deficit is estimated to rise slightly more in 2005 before
    declining. Debt held by the public as a percentage of GDP has risen
    since 2001 and is estimated to peak at 40.1 percent in 2007 before
    starting to decline gradually.

                        Trends in Debt Since World War II

      Table 16-1 depicts trends in Federal debt held by the public from
    World War II to the present and estimates from the present through 2010.
    (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 spending surged,
    but at a slower pace than earlier decades, and 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 at the beginning of the 1980s, due in large
    part to a deep recession, and the ratio of Federal debt to GDP grew very
    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 33.0 percent in 2001; and it fell more unevenly from 26.8
    percent of total credit market debt in 1994 to 17.6 percent in 2001 and
    2002. 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 downward trend in debt relative to GDP ceased as economic
    conditions changed and the terrorist attacks occurred. The decline in
    the stock market, the recession, and the initially slow recovery all
    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 16-1 shows a rise in debt held by the public throughout
    the projection period. The increase in debt, however, is estimated to
    slow down. Debt continues to rise by small amounts as a percentage of
    GDP in 2004 and 2005 and then is essentially stable, declining a little
    in the later years of the decade.

                                   Table 16-2.  Federal Government Financing and Debt
                                                (In billions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                Estimate
                                           Actual  -----------------------------------------------------------------
                                            2004       2005       2006       2007       2008       2009       2010
    ----------------------------------------------------------------------------------------------------------------
    Financing:
      Unified budget deficit (-).......     -412.1     -426.6     -390.1     -312.1     -250.8     -232.9     -207.3

      Financing other than the change
       in debt held by the public:
        Net purchases (-) of non-
         Federal securities by
          the National Railroad               -2.5       -0.9        0.7        0.5        0.3        0.5        0.5
           Retirement Investment Trust.
        Changes in: \1\
          Treasury operating cash             -1.4        1.3  .........  .........  .........  .........  .........
           balance.....................
          Compensating balances \2\....       22.2  .........  .........  .........  .........  .........  .........
          Checks outstanding, etc. \3\.        6.5  .........  .........  .........  .........  .........  .........
        Seigniorage on coins...........        0.7        0.6        0.7        0.7        0.7        0.7        0.7
        Less: Net financing
         disbursements:
          Direct loan financing               -4.9       -9.1      -12.8      -20.0      -20.7      -20.1      -20.7
           accounts....................
          Guaranteed loan financing            9.4        8.9        1.8       -2.3       -2.1       -3.2       -2.9
           accounts....................
                                        ----------------------------------------------------------------------------
            Total, financing other than       30.0        0.9       -9.5      -21.1      -21.8      -22.2      -22.5
             the change in debt held by
             the public
                                        ----------------------------------------------------------------------------
                Total, requirement to       -382.1     -425.7     -399.6     -333.2     -272.6     -255.1     -229.8
                 borrow from the public

      Change in debt held by the public      382.1      425.7      399.6      333.2      272.6      255.1      229.8

    Changes in Debt Subject to
     Limitation:
      Change in debt held by the public      382.1      425.7      399.6      333.2      272.6      255.1      229.8
      Change in debt held by Government      212.6      251.0      276.6      309.2      325.9      339.8      364.0
       accounts........................
      Change in other factors..........        1.1      -13.4        0.2        0.5        0.7        2.8        2.4
                                        ----------------------------------------------------------------------------
        Total, change in debt subject        595.8      663.3      676.4      643.0      599.2      597.7      596.1
         to statutory limitation.......

    Debt Subject to Statutory
     Limitation, End of Year:
      Debt issued by Treasury..........    7,327.8    8,005.1    8,681.5    9,324.5    9,923.7   10,519.4   11,113.8
      Less: Treasury debt not subject         -0.5      -14.5      -14.5      -14.5      -14.5      -12.4      -10.8
       to limitation (-) \4\...........
      Agency debt subject to limitation        0.2        0.2        0.2        0.2        0.2        0.2        0.2
      Adjustment for discount and              5.8        5.8        5.8        5.8        5.8        5.8        5.8
       premium \5\.....................
                                        ----------------------------------------------------------------------------
          Total, debt subject to           7,333.4    7,996.6    8,673.0    9,316.0    9,915.3   10,512.9   11,109.1
           statutory limitation \6\....

    Debt Outstanding, End of Year:
      Gross Federal debt: \7\
        Debt issued by Treasury........    7,327.8    8,005.1    8,681.5    9,324.5    9,923.7   10,519.4   11,113.8
        Debt issued by other agencies..       26.8       26.3       26.1       25.6       24.9       24.2       23.5
                                        ----------------------------------------------------------------------------
          Total, gross Federal debt....    7,354.7    8,031.4    8,707.6    9,350.1    9,948.6   10,543.5   11,137.3
      Held by:
        Debt held by Government            3,059.1    3,310.2    3,586.8    3,896.1    4,222.0    4,561.8    4,925.8
         accounts......................
        Debt held by the public \8\....    4,295.5    4,721.2    5,120.8    5,454.0    5,726.7    5,981.8    6,211.5
    ----------------------------------------------------------------------------------------------------------------
    \1\ A decrease in the Treasury operating cash balance or compensating balances (which are assets) is a means of
      financing a deficit and therefore has a positive sign. An increase in checks outstanding (which is a
      liability) is also a means of financing a deficit and therefore also has a positive sign.
    \2\ Compensating balances were non-interest bearing Treasury bank deposits that Treasury mainly used 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 decided. The use of compensating balances was discontinued in 2004, and the amounts were
      drawn down to zero.
    \3\ Besides checks outstanding, includes accrued interest payable on Treasury debt, uninvested deposit fund
      balances, allocations of special drawing rights, and other liability accounts; and, as an offset, cash and
      monetary assets (other than the Treasury operating cash balance and compensating balances), other asset
      accounts, and profit on sale of gold.
    \4\ Consists primarily of Federal Financing Bank debt after 2004.
    \5\ Consists mainly of unamortized discount (less premium) on public issues of Treasury notes and bonds (other
      than zero-coupon bonds) and unrealized discount on Government account series securities.
    \6\ The statutory debt limit is $8,184 billion.
    \7\ Treasury securities held by the public and zero-coupon bonds held by Government accounts are almost all
      measured at sales price plus amortized discount or less amortized premium. Agency debt securities are almost
      all measured at face value. Treasury securities in the Government account series are otherwise measured at
      face value less unrealized discount (if any).
    \8\ At the end of 2004, the Federal Reserve Banks held $700.3 billion of Federal securities and the rest of the
      public held $3,595.2 billion. Debt held by the Federal Reserve Banks is not estimated for future years.

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

      The Federal Government issues debt securities for two principal
    purposes. First, it borrows from the public to finance the Federal
    deficit.\1\ Second, it issues debt to Government accounts, primarily
    trust funds, that accumulate surpluses. By law, trust fund surpluses
    must generally be invested in Federal securities. The gross Federal debt
    is defined to consist of both the debt held by the public and the debt
    held by Government accounts. Nearly all the Federal debt has been issued
    by the Treasury and is sometimes called ``public debt,'' but a small
    portion has been issued by other Government agencies and is called
    ``agency debt.''\2\
    ---------------------------------------------------------------------------
      \1\ Debt held by the public was measured until 1988 as the par value
    (or face value) of the security, which is the principal amount due at
    maturity. (The only exception was savings bonds.) However, most Treasury
    securities are sold at a discount from par, and some are sold at a
    premium. Treasury debt held by the public is now measured as the sales
    price plus the amortized discount (or less the amortized premium). At
    the time of sale, the book value equals the sales price. Subsequently,
    it equals the sales price plus the amount of the discount that has been
    amortized up to that time. In equivalent terms, the book value of the
    debt equals par less the unamortized discount. (For a security sold at a
    premium, the definition is symmetrical.) When the measurement was
    changed, the data in Historical Tables were revised as far back as
    feasible, which was 1956. Agency debt, except for zero-coupon
    certificates, is recorded at par. For further analysis of these
    concepts, see Special Analysis E, ``Borrowing and Debt,'' in Special
    Analyses, Budget of the United States Government, Fiscal Year 1990,
    pages E-5 to E-8, although some of the practices it describes have been
    revised. In 1997 Treasury began to sell inflation-indexed notes and
    bonds. The book value of these securities includes a periodic adjustment
    for inflation.
      \2\ The term ``agency debt'' is defined more narrowly in the budget
    than customarily in the securities market, where it includes not only
    the debt of the Federal agencies listed in table 16-3 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

    [[Page 247]]

    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 future 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 14 of this volume, ``National Income and Product Accounts.''

    ---------------------------------------------------------------------------

    [[Page 248]]

      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 general fund to the fund that
    holds the securities and are a mechanism for crediting interest to that
    fund on its recorded 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 current interest does not have to be
    financed by taxes or other means.
      Furthermore, the debt held by Government accounts does not represent
    the estimated amount of the 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 13 of the present volume,
    ``Stewardship,'' projects Social Security and Medicare outlays to 2080
    relative to GDP. It also discusses in some detail the actuarial
    projections prepared for the Social Security and Medicare trustees
    reports to evaluate the long-run actuarial deficiency or shortfall in
    these programs. A chapter in the main volume of the budget, ``The
    Nation's Fiscal Outlook,'' 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 13 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 16-2 summarizes Federal borrowing and debt from 2004 through
    2010. In 2004 the Government borrowed $382 billion, so the debt held by
    the public increased to $4,296 billion. The debt held by Government
    accounts increased $213 billion, and gross Federal debt increased by
    $595 billion to $7,355 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 16-2 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 12 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 ex

    [[Page 249]]

    cluded 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 2004 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 23, ``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 16-2, 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 2004 the deficit was $412
    billion and the ``financing other than the change in debt held by the
    public'' was $30 billion. As a result, the Government borrowed $382
    billion from the public.
      Over the long-run, it is a good approximation to say that ``the
    deficit is financed by borrowing from the public'' or ``the surplus is
    used to repay debt held by the public.'' Over the last 20 years, the
    cumulative deficit was $2,812 billion and the increase in debt held by
    the public was $2,989 billion. The other factors added a total of $177
    billion of borrowing, an average of $9 billion per year.
      In individual years it is also often a good approximation to say that
    the deficit and borrowing (or the surplus and debt repayment) are about
    the same. The variation, however, can be wide, ranging over the last 20
    years from additional borrowing (or lower repayment) of $63 billion in
    2002 to reduced borrowing of $30 billion in 2004. In 2004, as shown in
    table 16-2, $22 billion of the $30 billion difference was attributable
    to a one-time change in compensating balances. In 2003, on the other
    hand, the difference was only $5 billion, whereas in 2002 several
    factors were large and in combination accounted for $63 billion of the
    $221 billion increase in debt held by the public. 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. During 2004, however, the
    initial cash balance was at about the level that had been planned. The
    operating cash balance then ended at essentially the same amount--only
    $1 billion more. It is estimated to again be essentially the same at the
    end of 2005. 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 used compensating balances
    for many years 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 held DCS instead
    of other acceptable investments, and the Treasury balances were secured
    by the DCS. The cost of the services provided to Treasury was 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 paid 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

    [[Page 250]]

    Check Clearing for the 21st Century Act (P.L. 108-100). A permanent
    indefinite appropriation was then included in the Consolidated
    Appropriation Act of 2004 (P.L. 108-199). Treasury replaced the DCS by
    direct payments in March 2004. The total compensating balances at the
    end of 2003 under both systems were $22 billion, so table 16-2 shows
    that they were 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 were relatively small in 2004 and are estimated to remain
    relatively small in future years.\6\
    ---------------------------------------------------------------------------
      \6\ The budget treatment of this fund is further discussed in chapter
    26, ``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. Under this Act, budget outlays for direct
    loans and loan guarantees consist of the estimated subsidy cost of the
    loans or guarantees at the time when the direct loans or guaranteed
    loans are disbursed. The cash flows to and from the public resulting
    from these loans and guarantees--the disbursement and repayment of
    loans, the default payments 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 23,
    ``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 26 of this volume,
    ``The Budget System and Concepts,'' and the other references cited in
    chapter 23.
    ---------------------------------------------------------------------------
      The financing accounts also include several types of intra-
    governmental transactions. In particular, they receive payment from the
    credit program accounts for the costs of new direct loans and loan
    guarantees; they also receive payment for any upward reestimate of the
    costs of direct loans and loan guarantees outstanding. 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. In 2004, on the other hand, a large upward reestimate was
    made in the cost of outstanding Federal Housing Administration (FHA)
    housing mortgages. The credit program account in the budget made a large
    outlay to the guaranteed loan financing account, which in turn had an
    equal offsetting collection and therefore a large negative net financing
    disbursement. The result is shown as a positive amount in table 16-2,
    canceling out the effect of a higher budget deficit on the Government's
    borrowing requirement. Large upward reestimates of guarantees are also
    estimated for 2005, after which the pattern is expected to be more
    normal. The financing accounts are estimated to require additional
    financing of $11 billion in 2006 and from $17 billion to $18 billion in
    each of the following four years. A major part of this financing 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 94 percent of the
    total Federal debt held by Government accounts at the end of 2004. In
    2004, for example, the total trust fund surplus was $193 billion, and
    Government accounts invested $213 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.
    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 16-4.

                                   Agency Debt

      Several Federal agencies, shown in table 16-3, sell debt securities to
    the public and at times in the past

    [[Page 251]]

    have sold securities to other Government accounts. During 2004, agencies
    repaid $0.4 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 2005 and 2006.
      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 2004, or 97 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 16-3.  AGENCY DEBT
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                           Borrowing or repayment (-) of
                                                                                        debt                Debt end
                                                                         ---------------------------------  of  2006
                                                                             2004       2005       2006     estimate
                                                                            actual    estimate   estimate
    ----------------------------------------------------------------------------------------------------------------
    Borrowing from the public:
      Housing and Urban Development:
        Federal Housing Administration..................................        -79          *  .........        200
      Small Business Administration:
        Participation certificates: Section 505 development company.....  .........         -*  .........          7
      Architect of the Capitol..........................................         -3         -3         -4        156
      Farm Credit System Financial Assistance Corporation...............  .........       -325  .........  .........
      Federal Communications Commission.................................        -56          *  .........  .........
      National Archives.................................................         -8         -8        -10        225
      Tennessee Valley Authority:
        Bonds and Notes.................................................     -1,623        -88        -10     23,155
        Lease/leaseback obligations.....................................        -60        -35        -33      1,110
        Prepayment obligations..........................................      1,424       -105       -106      1,260
                                                                         -------------------------------------------
          Total, borrowing from the public..............................       -405       -563       -163     26,113
    ----------------------------------------------------------------------------------------------------------------
    * $500 thousand or less.

      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 26 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 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 26, ``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

    [[Page 252]]

    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 16-3 separately from TVA bonds and notes to
    distinguish between the types of borrowing. The obligations for lease/
    leasebacks were $1.2 billion at the end of 2004 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 also entered into a contract with Memphis
    Light, Gas, and Water (MLGW), under which that distributor prepaid $1.5
    billion in 2004 for a large portion of its power needs over the next 15
    years in return for a discount on that power. MLGW, in turn, financed
    its prepayment by selling tax-exempt bonds.
      The Office of Management and Budget 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 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 16-3 separately from
    bonds and notes and lease/leaseback obligations to distinguish among the
    types of borrowing. The prepayment obligations increased from zero to
    $47 million during 2003 and to $1,471 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 TVA provides
    electric power under the contracts.
      The amount of agency securities sold to the public has been reduced by
    borrowing from the Federal Financing Bank (FFB). The FFB is an entity
    within the Treasury Department, one of whose purposes is to substitute
    Treasury borrowing for agency borrowing from the public. It has the
    authority to purchase agency debt and finance these purchases by
    borrowing from the Treasury. Agency borrowing from the FFB is not
    included in gross Federal debt. It would be double counting to add
    together (a) the agency borrowing from the FFB and (b) the Treasury
    borrowing from the public that was needed to provide the FFB with the
    funds to lend to the agencies.

                        Debt Held by Government Accounts

      Trust funds, and some special funds and public enterprise revolving
    funds, accumulate cash in excess of current needs in order to meet
    future obligations. These cash surpluses are generally invested in
    Treasury debt.
      Investment by trust funds and other Government accounts has risen
    greatly for many years. It was $213 billion in 2004, as shown in table
    16-4, and is estimated to rise to $277 billion in 2006. The holdings of
    Federal securities by Government accounts are estimated to grow to
    $3,587 billion by the end of 2006, or 41 percent of the gross Federal
    debt. The percentage is estimated to rise gradually in the following
    years, as the trust funds and several major revolving funds and special
    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 $486 billion during 2004-06, which is 66 percent of
    the total estimated investment by Government accounts. The two Medicare
    trust funds--Hospital Insurance and Supplementary Medical Insurance--
    account for another 7 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 2004-06. The military
    retirement trust fund and the special fund for uniformed services
    retiree health care account for another 12 percent. Altogether, the
    investment by Social Security, Medicare, and these three Federal
    employee retirement funds is almost as much as the total investment by
    Government accounts during this period. At the end of 2006, 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.
      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 re

    [[Page 253]]

    corded 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 16-4 at par value less
    unamortized discount. The only two Government accounts that held zero-
    coupon bonds during the period of this table are the Nuclear Waste
    Disposal fund in the Department of Energy and the Pension Benefit
    Guaranty Corporation (PBGC). The total unamortized discount on zero-
    coupon bonds was $15.1 billion at the end of 2004.
      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 16-4 it is
    shown as a separate item at the end of the table and not distributed by
    account. The amount was $1.4 billion at the end of 2004.

                           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 16-2 compares total Treasury debt with the
    amount of Federal debt that is subject to the limit. Nearly all Treasury
    debt is subject to the debt limit. Most of the Treasury debt not subject
    to the general statutory limit was issued by the Federal Financing Bank
    (FFB). The FFB, which is within the Treasury Department, is authorized
    to have outstanding up to $15 billion of publicly issued debt. It issued
    $14 billion of securities to the Civil Service Retirement and Disability
    fund on November 15, 2004, in exchange for an equal amount of regular
    Treasury securities, as explained below in the section on changes in the
    debt limit. The FFB securities have the same interest rates and
    maturities as the regular Treasury securities for which they were
    exchanged. The first maturity date is June 30, 2009, nearly five year
    after issuance; the final maturity date is June 30, 2019. The securities
    are expected to remain outstanding until they mature, and this
    assumption is reflected in tables 16-2 and 16-5. The other Treasury debt
    not subject to the general limit consists almost entirely of silver
    certificates and other currencies no longer being issued. It was $513
    million at the end of 2004 and gradually declines over time.
      The sole type of agency debt currently subject to the general limit is
    the debentures issued by the Federal Housing Administration, which were
    $200 million at the end of 2004.\10\ 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 bonds and notes
    outstanding.
    ---------------------------------------------------------------------------
      \10\ For purposes of the debt limit, the FHA debt was calculated to be
    $184 million.
    ---------------------------------------------------------------------------
      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 7 to table 16-2 (and footnote 4 of table 16-5). The amount is
    relatively small: $5.8 billion at the end of 2004 compared to the total
    unamortized discount (less premium) of $51.2 billion on all Treasury
    securities.

    [[Page 254]]

                                    Table 16-4.  DEBT HELD BY GOVERNMENT ACCOUNTS \1\
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                     Investment or Disinvestment (-)       Holdings
                                                                 ---------------------------------------   end  of
                           Description                                2004         2005         2006         2006
                                                                     actual      estimate     estimate     estimate
    ----------------------------------------------------------------------------------------------------------------
    Investment in Treasury debt:

      Energy:

        Nuclear waste disposal fund \1\.........................        1,894          957  ...........       17,043
        Uranium enrichment decontamination fund.................          247          453          270        4,380
      Health and Human Services:

        Federal hospital insurance trust fund...................       13,068        9,809       17,583      291,767
        Federal supplementary medical insurance trust fund......       -7,410        1,164       14,868       33,471
        Vaccine Injury compensation fund........................          118          148          166        2,329
      Housing and Urban Development:

        Federal Housing Administration mutual mortgage fund.....         -499        4,400        2,603       30,324
        Other HUD...............................................          321          345          308        8,219
      Interior:.................................................
                                                                   Abandoned             3  ...........        2,048
      Labor:

        Unemployment trust fund.................................       -2,949          827  ...........       46,066
        Pension Benefit Guaranty Corporation \1\................          264          514          299       13,293
      State:....................................................
                                                                   Foreign Se          582           96       13,506
      Transportation:

        Highway trust fund......................................       -3,366        2,980          450       13,642
        Airport and airway trust fund...........................         -626          -35         -629        9,228
      Homeland Security:

        Oil spill liability trust fund..........................         -126         -132         -187          510
        Aquatic resources trust fund............................           34         -144  ...........        1,306
      Treasury:.................................................
                                                                     Exchange          394  ...........       10,713
      Veterans Affairs:

        National service life insurance trust fund..............         -298         -395         -476       10,078
        Other trust funds.......................................           37           16           12        2,033
        Federal funds...........................................          -24          -25          -33          415
      Other Defense-Civil:

        Uniformed Services Retiree Health Care Fund.............       17,418       22,209       23,626       81,699
        Military retirement trust fund..........................        4,918       10,319        8,370      195,969
        Harbor maintenance trust fund...........................          295         -404  ...........        1,833
      Environmental Protection Agency:

        Hazardous substance trust fund..........................         -281          143          150        2,520
        Leaking underground storage tank trust fund.............          195          203  ...........        2,436
      International Assistance Programs:

        Overseas Private Investment Corporation.................          137          166  ...........        3,961
      Office of Personnel Management:

        Civil Service retirement and disability trust fund......       30,151       31,941       31,290      695,091
        Employees life insurance fund...........................        1,329        1,280        1,319       30,706
        Employees health benefits fund..........................        1,737        1,316        1,344       13,434
      Social Security Administration:

        Federal old-age and survivors insurance trust fund \2\..      139,172      151,016      164,948    1,768,563
        Federal disability insurance trust fund \2\.............       12,007        9,982        8,979      201,760
      Farm Credit System Insurance Corporation:

        Farm Credit System Insurance fund.......................          205          -92  ...........        1,924
      Federal Deposit Insurance Corporation:

        Bank Insurance fund.....................................        1,035        1,276           37       33,402
        FSLIC Resolution fund...................................           50          297  ...........        3,310
        Savings Association Insurance fund......................          430          625          340       12,817
      National Credit Union Administration:.....................
                                                                   Share insu          441          409        6,909
      Postal Service fund \2\...................................       -1,368           -1  ...........        1,282
      Railroad Retirement Board trust funds \1\.................         -555         -212          490        2,042
      Other Federal funds \3\...................................        4,584          454           11       13,874
      Other trust funds \3\.....................................         -384       -1,790            2        4,381
      Unrealized discount, \3\..................................          -28            *  ...........       -1,477
                                                                 ---------------------------------------------------
          Total, investment in Treasury debt \1\................      212,559      251,032      276,645    3,586,806
                                                                 ===================================================

    [[Page 255]]

                Total, investment in Federal debt \1\                 212,559      251,032      276,645    3,586,806
                                                                 ===================================================
                             MEMORANDUM

    Investment by Federal funds (on-budget).....................       26,350       32,417       27,870      244,331
    Investment by Federal funds (off-budget)....................       -1,368           -*  ...........        1,282
    Investment by trust funds (on-budget).......................       36,426       57,617       74,848    1,372,348
    Investment by trust funds (off-budget)......................      151,178      160,998      173,927    1,970,323
    Unrealized discount \1\.....................................          -28            *  ...........       -1,477
    ----------------------------------------------------------------------------------------------------------------
    * $500 thousand or less.

    \1\ Debt held by Government accounts is measured at face value except for the Treasury zero-coupon bonds held by
      the Nuclear Waste Disposal fund and the Pension Benefit Guaranty Corporation (PBGC), 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 $14.4 billion higher than recorded in this table at the end of 2004;
      the debt held by PBGC would be $0.7 billion higher.

    \2\ Off-budget Federal entity.

    \3\ Retroactive adjustments were made as of the end of 2003. The debt held by the Telecommunications Development
      Fund is not recorded as Federal debt ($32 million); the debt held by the Railroad Retirement Board trust funds
      is increased by $2 million; and the absolute value of the unrealized discount is decreased by $193 million.

      Changes in the debt limit.--The statutory debt limit has been changed
    many times. Since 1960, Congress has passed 71 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. During the 1990s, however, the debt limit was
    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.\11\\11
    \ The Acts and the statutory limits since 1940 are listed in Historical
    Tables, Budget of the United States Government, table 7.3.
    ---------------------------------------------------------------------------
      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 process was repeated within less
    than one year. The debt reached the limit in February 2003, the Treasury
    Department again responded with various administrative actions, and on
    May 27, 2003, the President signed a bill that raised the limit to
    $7,384 billion.
      This limit did not last much longer than the previous limit. By August
    2004, the Secretary of Treasury wrote Congress that the debt subject to
    limit might reach the ceiling in September or October 2004. It did reach
    the limit on October 14 and stayed there until the limit was increased.
      Treasury took a number of administrative steps to meet the
    Government's obligation to pay its bills and invest its trust funds
    while keeping debt under the statutory limit. On October 14, 2004, the
    Secretary of Treasury declared that he would not be able to fully invest
    the Government Securities Investment Fund (G-fund) as of that day. 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 forgone interest and investing the fund
    fully. Starting on October 14, 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. That amount was invested, and
    no more. The balances not invested varied throughout the period. In
    addition to this step, Treasury discontinued the acceptance of
    subscriptions to the state and local government series of securities.
      As the need for financing grew, Treasury took further steps. On
    November 15, the Federal Financing Bank (FFB) issued $14 billion of FFB
    securities to the Civil Service Retirement and Disability fund in
    exchange for an equal amount of regular Treasury securities, which FFB
    then exchanged with Treasury at market value in return for the
    extinguishment of an equal market value of FFB debt owed to Treasury.
    The FFB securities are not subject to the debt limit, as explained
    above, whereas the regular Treasury securities are subject to the limit.
    The Secretary also declared a debt issuance suspension period from
    November 17 to December 2. This allowed him to redeem a limited amount
    of securities held by the Civil Service Retirement and Disability fund
    and stop investing its receipts. Treasury disinvested part of the
    Exchange Stabilization fund for one day. Treasury also delayed the
    announcement of auctions of marketable securities.

    [[Page 256]]

      All the steps taken during October and November had also been taken on
    previous occasions when the debt had reached the statutory limit,
    including 2002 or 2003. When the debt limit was reached in those years,
    Treasury also reduced its compensating balances held in banks to pay for
    services under financial agency agreements. However, compensating
    balances were discontinued in 2004, as explained in a previous section.

                   Table 16-5.  FEDERAL FUNDS FINANCING AND CHANGE IN DEBT SUBJECT TO STATUTORY LIMIT
                                                (In billions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                Estimate
                Description                Actual  -----------------------------------------------------------------
                                            2004       2005       2006       2007       2008       2009       2010
    ----------------------------------------------------------------------------------------------------------------

    Federal funds deficit (-)..........     -604.8     -653.0     -657.0     -583.5     -537.4     -530.7     -526.4

    Means of financing other than
     borrowing:
      Change in: \1\
        Treasury operating cash               -1.4        1.3  .........  .........  .........  .........  .........
         balances......................
        Compensating balances \2\......       22.2  .........  .........  .........  .........  .........  .........
        Checks outstanding, etc \3\....        9.1        6.9       18.9        0.5        0.3        0.5        0.5
      Seignorage on coins..............        0.7        0.6        0.7        0.7        0.7        0.7        0.7
      Less: Net financing
       disbursements:
        Direct loan financing accounts.       -4.9       -9.1      -12.8      -20.0      -20.7      -20.1      -20.7
        Guaranteed loan financing              9.4        8.9        1.8       -2.3       -2.1       -3.2       -2.9
         accounts......................
                                        ----------------------------------------------------------------------------
          Total, means of financing           35.1        8.7        8.6      -21.1      -21.8      -22.2      -22.5
           other than borrowing........
                                        ============================================================================

    Decrease or increase (-) in Federal      -25.0      -32.4      -27.9      -37.9      -39.3      -42.0      -44.9
     debt held by Federal funds........
    Increase or decrease (-) in Federal       -0.3       13.4       -0.2       -0.5       -0.7       -2.8       -2.4
     debt not subject to limit.........
                                        ============================================================================

        Total, requirement for Federal       595.0      663.3      676.4      643.0      599.2      597.7      596.1
         funds borrowing subject to
         debt limit....................
                                        ============================================================================

    Change in discount and premium \4\.        0.7  .........  .........  .........  .........  .........  .........
    Change in unrealized discount \5\..         -*  .........  .........  .........  .........  .........  .........
                                        ============================================================================

    Increase in debt subject to limit..      595.7      663.3      676.4      643.0      599.2      597.7      596.1

                  ADDENDUM

    Debt subject to statutory limit \6\    7,333.4    7,996.6    8,673.0    9,316.0    9,915.3   10,512.9   11,109.1

    ----------------------------------------------------------------------------------------------------------------
    * $50 million or less

    \1\ A decrease in the Treasury operating cash balance or compensating balances (which are assets) is a means of
      financing the deficit and therefore has a positive sign. An increase in checks outstanding (which is a
      liability) is also a means of financing the deficit and therefore also has a positive sign.

    \2\ Compensating balances were non-interest bearing Treasury bank deposits that Treasury mainly used 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 decided. The use of compensating balances was discontinued in 2004 and the amounts were
      drawn down to zero.

    \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. The unrealized discount is
      for Government account series securities.

    \6\ The statutory debt limit is $8,184 billion.

      These Treasury actions were used for a little more than one month.
    Congress passed a bill raising the debt limit to $8,184 billion on
    November 18, and the President signed the bill on November 19. Treasury
    promptly invested the G-fund and Civil Service Retirement and Disability
    fund fully and restored the forgone interest as prescribed by law. The
    securities whose auctions were postponed were issued on time, except for
    one issue of 4-week bills that was delayed a few days, and subscriptions
    to the state and local government series were accepted again.
      Methods of changing the debt limit.--The statutory limit is usually
    changed by normal legislative procedures. Under the rules adopted by the
    House of Representatives, 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 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.

    [[Page 257]]

      The House of Representatives first adopted this rule for 1980,
    although 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 16-2, 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 16-2. 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 2005 through 2010.
      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.\12\
    ---------------------------------------------------------------------------
      \12\ For further discussion of the trust funds and Federal funds
    groups, see chapter 22, ``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 16-5 derives the change in debt subject to limit. In 2004 the
    Federal funds deficit was $605 billion, and other factors reduced the
    requirement to borrow subject to limit by $9 billion. The largest of
    these factors was ending the use of compensating balances, which allowed
    borrowing to be reduced by $22 billion. The net financing disbursements
    of the guaranteed loan financing accounts reduced the financing
    requirements by $9 billion, as explained in an earlier section. As an
    offset, special funds and revolving funds, which are part of the Federal
    funds group, invested $25 billion in Treasury securities. The largest
    single investment was $17 billion for the uniformed services retiree
    health care fund. As a net result of all these factors, debt subject to
    limit increased by $596 billion, while debt held by the public increased
    by $382 billion.
      The debt subject to limit is estimated to increase to $7,997 billion
    by the end of 2005, which begins to approach the present statutory debt
    limit of $8,184 billion. This is caused by a rise in the Federal funds
    deficit, supplemented by the other factors shown in table 16-5. 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 $1,916 billion from the end of 2004 through 2010, debt
    subject to limit increases by $3,776 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 16-6, foreign holdings were just over
    $10.0 billion, less than 5 percent of the total Federal debt held by the
    public.
      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 2004 foreign
    holdings of Treasury debt were $1,886 billion, which was 44 percent of
    the total debt held by the public.\13\ Foreign central banks owned 64
    percent of the Federal debt held by foreign residents; private investors
    owned nearly all the rest. The percentage held by foreign central banks
    is up from 56 percent at the end of 2003, because they bought much
    greater quantities of Treasury securities than did private investors.
    All the Federal debt held by foreign residents is denominated in
    dollars.
    ---------------------------------------------------------------------------
      \13\ The debt calculated by the Bureau of Economic Analysis,
    Department of Commerce, is different, though similar in size, because of
    a different method of valuing the securities.
    ---------------------------------------------------------------------------
      Although the amount of Federal debt held by foreign residents has
    grown greatly over this period, the proportion that foreign residents
    own, after increasing abruptly in the very early 1970s, remained about
    15-20 percent 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.\14\ As a
    result, the Federal debt held by individuals and institutions within the
    United States decreased in absolute amount during those years, despite
    further Federal borrowing, and the percentage of Federal debt held by
    foreign residents grew from 19 percent at the end of 1994 to 32 percent
    at the end of 1997. In the next few years the change in foreign debt
    holdings was much smaller. However, the Federal debt held by foreign
    residents increased by $255 billion in 2003 and by $430 billion in 2004.

    [[Page 258]]

    The percentage of Federal debt held by foreign residents increased from
    34 percent to 44 percent during these two years. In 2004, the increase
    in foreign holdings was more than the total Federal borrowing from the
    public.
    ---------------------------------------------------------------------------
      \14\ Table 16-6 does not show the increase in foreign holdings in 1995
    because of a benchmark revision. As explained in footnote 3 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.

                                      Table 16-6.  FOREIGN HOLDINGS OF FEDERAL DEBT
                                              (Dollar amounts in billions)
    ----------------------------------------------------------------------------------------------------------------
                                                                Debt held by the public         Borrowing from the
                                                         ------------------------------------         public
                       Fiscal Year                                                Percentage -----------------------
                                                            Total    Foreign \1\    foreign   Total \2\  Foreign \1\
    ----------------------------------------------------------------------------------------------------------------
    1965................................................      260.8        12.3          4.7        3.9         0.3
    1966................................................      263.7        11.6          4.4        2.9        -0.7
    1967................................................      266.6        11.4          4.3        2.9        -0.2
    1968................................................      289.5        10.7          3.7       22.9        -0.7
    1969................................................      278.1        10.3          3.7      -11.4        -0.4

    1970................................................      283.2        14.0          5.0        5.1         3.8
    1971................................................      303.0        31.8         10.5       19.8        17.8
    1972................................................      322.4        49.2         15.2       19.3        17.3
    1973................................................      340.9        59.4         17.4       18.5        10.3
    1974................................................      343.7        56.8         16.5        2.8        -2.6

    1975................................................      394.7        66.0         16.7       51.0         9.2
    1976................................................      477.4        69.8         14.6       82.7         3.8
    TQ..................................................      495.5        74.6         15.1       18.1         4.9
    1977................................................      549.1        95.5         17.4       53.6        20.9
    1978................................................      607.1       121.0         19.9       58.0        25.4
    1979 \3\............................................      640.3       120.3         18.8       33.2         N/A

    1980................................................      711.9       121.7         17.1       71.6         1.4
    1981................................................      789.4       130.7         16.6       77.5         9.0
    1982................................................      924.6       140.6         15.2      135.2         9.9
    1983................................................    1,137.3       160.1         14.1      212.7        19.5
    1984................................................    1,307.0       175.5         13.4      169.7        15.4

    1985 \3\............................................    1,507.3       222.9         14.8      200.3         N/A
    1986................................................    1,740.6       265.5         15.3      233.4        42.7
    1987................................................    1,889.8       279.5         14.8      149.1        14.0
    1988................................................    2,051.6       345.9         16.9      161.9        66.4
    1989................................................    2,190.7       394.9         18.0      139.1        49.0

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

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

    2000 \3\............................................    3,409.8     1,057.9         31.0     -222.6         N/A
    2001................................................    3,319.6     1,005.5         30.3      -90.2       -52.3
    2002 \3\............................................    3,540.4     1,200.8         33.9      220.8         N/A
    2003................................................    3,913.4     1,455.8         37.2      373.0       255.0
    2004................................................    4,295.5     1,885.9         43.9      382.1       430.2
    ----------------------------------------------------------------------------------------------------------------
    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 of Federal debt are around 15 percent of the foreign-
    owned assets in the United States, depending on the method of measuring
    total assets. The foreign purchases of Federal debt securities do not

    [[Page 259]]

    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 of this volume, ``Credit and Insurance.'' Detailed data are
    presented in tables at the end of that chapter.