[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
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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\
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\1\ Debt held by the public was measured until 1988 as the par value
(or face value) of the security, which is the principal amount due at
maturity. (The only exception was savings bonds.) However, most Treasury
securities are sold at a discount from par, and some are sold at a
premium. Treasury debt held by the public is now measured as the sales
price plus the amortized discount (or less the amortized premium). At
the time of sale, the book value equals the sales price. Subsequently,
it equals the sales price plus the amount of the discount that has been
amortized up to that time. In equivalent terms, the book value of the
debt equals par less the unamortized discount. (For a security sold at a
premium, the definition is symmetrical.) When the measurement was
changed, the data in Historical Tables were revised as far back as
feasible, which was 1956. Agency debt, except for zero-coupon
certificates, is recorded at par. For further analysis of these
concepts, see Special Analysis E, ``Borrowing and Debt,'' in Special
Analyses, Budget of the United States Government, Fiscal Year 1990,
pages E-5 to E-8, although some of the practices it describes have been
revised. In 1997 Treasury began to sell inflation-indexed notes and
bonds. The book value of these securities includes a periodic adjustment
for inflation.
\2\ The term ``agency debt'' is defined more narrowly in the budget
than customarily in the securities market, where it includes not only
the debt of the Federal agencies listed in table 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\
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\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.''
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[[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\
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\4\ Extensive actuarial analyses of the Social Security and Medicare
programs are published in the annual reports of the boards of trustees
of these funds. Annual actuarial reports are also prepared for major
Federal employee retirement funds. 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.
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\5\ For further explanation of the off-budget Federal entities, see
chapter 23, ``Off-Budget Federal Entities and Non-Budgetary
Activities.''
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The Government's need to borrow, or its ability to repay debt held by
the public, has always depended on several other factors besides the
unified budget surplus or deficit, such as the change in the Treasury
operating cash balance. As shown in table 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\
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\6\ The budget treatment of this fund is further discussed in chapter
26, ``The Budget System and Concepts.''
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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\
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\12\ For further discussion of the trust funds and Federal funds
groups, see chapter 22, ``Trust Funds and Federal Funds.''
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A Federal funds deficit must generally be financed by borrowing, which
can be done either by selling securities to the public or by issuing
securities to Government accounts that are not within the Federal funds
group. Federal funds borrowing consists almost entirely of Treasury
securities that are subject to the statutory debt limit. Very little
debt subject to statutory limit has been issued 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.
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\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.
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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.
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\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.