[Analytical Perspectives]
[Federal Borrowing and Debt]
[16. Federal Borrowing and Debt]
[From the U.S. Government Printing Office, www.gpo.gov]
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16. FEDERAL BORROWING AND DEBT
Debt is the largest legally binding obligation of the Federal
Government. At the end of 2005, the Government owed $4,592 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 $191
billion of interest on this debt.
Table 16-1. TRENDS IN FEDERAL DEBT HELD BY THE PUBLIC
(Dollar amounts in billions)
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Debt held by the Debt held by the Interest on the debt
public: public as a percent held by the public
------------------------ of: as a percent of: \3\
Fiscal Year -------------------------------------------
Current FY 2000 Credit
Dollars dollars \1\ GDP market Total GDP
debt \2\ outlays
----------------------------------------------------------------------------------------------------------------
1946........................................ 241.9 1,821.3 108.6 N/A 7.4 1.8
1950........................................ 219.0 1,339.9 80.2 53.3 11.4 1.8
1955........................................ 226.6 1,217.3 57.4 43.2 7.6 1.3
1960........................................ 236.8 1,128.0 45.7 33.8 8.5 1.5
1965........................................ 260.8 1,161.4 38.0 26.9 8.1 1.4
1970........................................ 283.2 1,047.8 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 2,164.6 36.4 22.3 16.2 3.7
1990........................................ 2,411.6 2,968.1 42.0 22.6 16.1 3.5
1991........................................ 2,689.0 3,190.0 45.3 24.1 16.2 3.6
1992........................................ 2,999.7 3,471.2 48.1 25.7 15.5 3.4
1993........................................ 3,248.4 3,675.4 49.4 26.6 14.9 3.2
1994........................................ 3,433.1 3,802.6 49.3 26.8 14.4 3.0
1995........................................ 3,604.4 3,910.1 49.2 26.7 15.8 3.3
1996........................................ 3,734.1 3,974.6 48.5 26.3 15.8 3.2
1997........................................ 3,772.3 3,946.3 46.1 25.4 15.7 3.1
1998........................................ 3,721.1 3,846.1 43.1 23.5 15.1 2.9
1999........................................ 3,632.4 3,705.9 39.8 21.5 13.8 2.6
2000........................................ 3,409.8 3,409.8 35.1 19.2 13.0 2.4
2001........................................ 3,319.6 3,243.1 33.0 17.7 11.6 2.1
2002........................................ 3,540.4 3,393.9 34.1 17.7 8.9 1.7
2003........................................ 3,913.4 3,678.7 36.2 18.0 7.5 1.5
2004........................................ 4,295.5 3,943.5 37.2 18.3 7.3 1.5
2005........................................ 4,592.2 4,102.8 37.4 17.9 7.7 1.6
2006 estimate............................... 5,018.9 4,373.6 38.5 N/A 8.5 1.8
2007 estimate............................... 5,391.5 4,597.6 39.2 N/A 9.4 1.9
2008 estimate............................... 5,633.4 4,701.8 38.8 N/A 10.2 2.0
2009 estimate............................... 5,859.4 4,789.6 38.3 N/A 10.5 2.0
2010 estimate............................... 6,060.8 4,852.5 37.6 N/A 10.6 2.0
2011 estimate............................... 6,285.9 4,927.6 37.1 N/A 10.6 2.0
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N/A = Not available.
\1\ Debt in current dollars deflated by the GDP chain-type price index with fiscal year 2000 equal to 100.
\2\ Total credit market debt owed by domestic nonfinancial sectors, modified in some years to be consistent with
budget concepts for the measurement of Federal debt. Financial sectors are omitted to avoid double counting,
since financial intermediaries borrow in the credit market primarily in order to finance lending in the credit
market. Source: Federal Reserve Board flow of funds accounts. Projections are not available.
\3\ Interest on debt held by the public is estimated as the interest on Treasury debt securities less the
``interest received by trust funds'' (subfunction 901 less subfunctions 902 and 903). The estimate of interest
on debt held by the public does not include the comparatively small amount of interest paid on agency debt or
the offsets for interest on Treasury debt received by other Government accounts (revolving funds and special
funds).
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The deficit was $318 billion in 2005. This deficit, partially offset
by other financing transactions totaling $22 billion, required the
Government to increase its borrowing from the public by $297 billion
last year. Debt held by the public rose from 37.2 percent of GDP at the
end of 2004 to 37.4 percent at the end of 2005. The deficit is estimated
to rise in 2006 before declining. Debt as a percentage of GDP is
estimated to rise through 2007 before starting to decline gradually
through 2011.
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 2011.
(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, 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 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 sharply. The ratio of Federal debt to credit market
debt also rose, though to a 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. The decline accelerated as surpluses
emerged from 1997 to 2001. Debt 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 17.7 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 8.9 percent by 2002; 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 September 11 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, debt began to rise, both in nominal terms and as a
percentage of GDP. Spending is also increasing in 2006, due in part to
the rebuilding after Hurricane Katrina, but deficits are expected to
begin to decline in 2007. As deficits are reduced, the increase in debt
is estimated to slow. Debt is estimated to continue rising in nominal
dollars, but to begin declining gradually after 2007 as a percent of
GDP.
Table 16-2. FEDERAL GOVERNMENT FINANCING AND DEBT
(In billions of dollars)
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Estimate
Actual -----------------------------------------------------------------
2005 2006 2007 2008 2009 2010 2011
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Financing:
Unified budget deficit (-)....... -318.3 -423.2 -354.2 -223.3 -207.6 -182.7 -204.9
Financing other than the change
in debt held by the public:
Net purchases (-) of non- -2.1 0.3 * * 0.1 0.2 0.6
Federal securities by the
National Railroad Retirement
Investment Trust..............
Changes in: \1\
Treasury operating cash 0.7 ......... ......... ......... ......... ......... .........
balance.....................
Checks outstanding, etc. \2\. 16.5 ......... ......... ......... ......... ......... .........
Seigniorage on coins........... 0.7 0.7 0.7 0.7 0.7 0.7 0.7
Less: Net financing
disbursements:
Direct loan financing -4.9 -16.1 -18.3 -18.8 -19.2 -19.4 -21.0
accounts....................
Guaranteed loan financing 10.7 11.6 -0.8 -0.5 -0.1 -0.2 -0.5
accounts....................
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Total, financing other than 21.7 -3.5 -18.3 -18.6 -18.5 -18.7 -20.2
the change in debt held by
the public................
----------------------------------------------------------------------------
Total, requirement to -296.7 -426.7 -372.6 -241.9 -226.0 -201.4 -225.1
borrow from the public..
Change in debt held by the public 296.7 426.7 372.6 241.9 226.0 201.4 225.1
Changes in Debt Subject to
Limitation:
Change in debt held by the public 296.7 426.7 372.6 241.9 226.0 201.4 225.1
Change in debt held by Government 254.0 279.5 311.4 328.0 345.6 344.3 328.9
accounts........................
Change in other factors.......... -13.0 0.4 0.6 0.6 2.8 2.4 2.5
----------------------------------------------------------------------------
Total, change in debt subject 537.7 706.5 684.5 570.5 574.4 548.1 556.5
to statutory limitation.......
Debt Subject to Statutory
Limitation, End of Year:
Debt issued by Treasury.......... 7,879.2 8,585.7 9,270.2 9,840.7 10,413.0 10,959.4 11,514.2
Less: Treasury debt not subject -14.5 -14.5 -14.5 -14.5 -12.4 -10.7 -8.9
to limitation(-) \3\............
Agency debt subject to limitation 0.1 0.1 0.1 0.1 0.1 0.1 0.1
Adjustment for discount and 6.3 6.3 6.3 6.3 6.3 6.3 6.3
premium \4\.....................
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Total, debt subject to 7,871.0 8,577.6 9,262.1 9,832.5 10,406.9 10,955.1 11,511.6
statutory limitation \5\......
Debt Outstanding, End of Year:
Gross Federal debt: \6\
Debt issued by Treasury........ 7,879.2 8,585.7 9,270.2 9,840.7 10,413.0 10,959.4 11,514.2
Debt issued by other agencies.. 26.2 25.8 25.2 24.7 24.0 23.2 22.5
----------------------------------------------------------------------------
Total, gross Federal debt.... 7,905.3 8,611.5 9,295.4 9,865.3 10,436.9 10,982.7 11,536.7
Held by:
Debt held by Government 3,313.1 3,592.6 3,904.0 4,231.9 4,577.5 4,921.8 5,250.8
accounts......................
Debt held by the public \7\.... 4,592.2 5,018.9 5,391.5 5,633.4 5,859.4 6,060.8 6,285.9
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* $50 million or less.
\1\ A decrease in the Treasury operating cash balance (which is an asset) 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\ 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), other asset accounts, and profit on sale of
gold.
\3\ Consists primarily of Federal Financing Bank debt.
\4\ 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.
\5\ The statutory debt limit is $8,184 billion, enacted on November 19, 2004.
\6\ Treasury securities held by the public and zero-coupon bonds held by Government accounts are almost all
measured at sales price plus amortized discount or less amortized premium. Agency debt securities are almost
all measured at face value. Treasury securities in the Government account series are otherwise measured at
face value less unrealized discount (if any).
\7\ At the end of 2005, the Federal Reserve Banks held $736.4 billion of Federal securities and the rest of the
public held $3,855.9 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 of this volume and certain Government-guaranteed
securities.
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Borrowing from the public, whether by the Treasury or by some other
Federal agency, has a significant impact on the economy. Borrowing from
the public is normally a good approximation of the Federal demand on
credit markets. Regardless of whether the proceeds are used productively
for tangible or intangible investment, the Federal demand on credit
markets has to be financed out of the saving of households and
businesses, the State and local sector, or the rest of the world.
Federal borrowing thereby competes with the borrowing of other credit
market sectors for financial resources in the credit market. Borrowing
from the public thus affects the size and composition of assets held by
the private sector and the perceived wealth of the public. It also
increases the amount of future taxes required to pay interest to the
public on Federal debt. Borrowing
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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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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
[[Page 224]]
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 91 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.
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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 the ``Stewardship'' Chapter
of this volume. 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 2005 through
2011. In 2005 the Government borrowed $297 billion, so the debt held by
the public increased to $4,592 billion. The debt held by Government
accounts increased $254 billion, and gross Federal debt increased by
$551 billion to $7,905 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 excluded from the budget by law. Under present
law, the off-budget Federal entities are the Social Security trust funds
(Old-Age and Survivors Insurance and Disability Insurance) and the
Postal Service fund. \5\ The off-budget totals are virtually the same as
Social Security, which had a large surplus in 2005 and is estimated to
have large 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 of this volume, ``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 2005 the deficit was $318
billion and the ``financing other than the change in debt held by the
public'' was $22 billion. As a result, the Government borrowed $297
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 $2,918 billion and the increase in debt held by
the public was $3,085 billion. Thus, the other factors added a total of
$167 billion of borrowing, an average of $8 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. The other factors are
estimated to increase borrowing in each of the years from 2006 through
2011, by amounts ranging from $4 billion in 2006 to $20 billion in 2011.
Three specific factors presented in Table 16-2 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. Since then, however,
changes in the operating cash balance have been much smaller, with a $1
billion increase in 2004 and a $1 billion decrease in 2005. The
operating cash balance is estimated to again be essentially the same at
the end of 2006. 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.
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 2005 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 of this volume, ``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\
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\7\ The Federal Credit Reform Act of 1990 (sec. 505(b)) requires that
the financing accounts be non-budgetary. As explained in Chapter 23 of
this volume, ``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 of this volume.
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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 to, or receipt from, a
financing account, 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
[[Page 226]]
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
2004 and 2005, large upward reestimates were made in the cost of
outstanding direct and guaranteed loans. The credit program accounts in
the budget made large outlays to the financing accounts, which in turn
had equal offsetting collections and therefore large negative net
financing disbursements. 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 are also
estimated for 2006, after which the pattern is expected to be more
normal. The financing accounts are estimated to increase the need for
borrowing by $5 billion in 2006 and from $19 billion to $22 billion in
each of the following five 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.
In addition, prior to 2005, the change in compensating balances was an
important factor. Treasury used compensating balances--deposits of non-
interest bearing balances--to compensate banks for collecting tax and
non-tax receipts and providing other services. The imputed earnings from
the compensating balances, calculated at the 91-day Treasury bill rate,
were the source of the bank's compensation for performing the required
services. Banks could use the compensating balances on deposit to make
loans or buy investments, and all compensating balances were fully
collateralized. However, the compensating balances presented
difficulties for cash and debt management. First, changes in the applied
interest rate required Treasury to change the size of compensating
balances on deposit to pay for the services it needed. 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 to replace compensating balances by a permanent indefinite
appropriation to pay banks directly for their services as depositaries
and financial agents. Congress included a permanent indefinite
appropriation in the Consolidated Appropriation Act of 2004 (P.L. 108-
199), and compensating balances were drawn down to zero during 2004.
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 2005. In
2005, the total trust fund surplus was $237 billion, and trust funds
invested $226 billion in Federal securities. Investment may differ
somewhat from the surplus due to changes in the amount of cash assets
not currently invested. The remainder of debt issued to Government
accounts is owned by a number of special funds and revolving funds. 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 have sold securities to other
Government accounts. During 2005, agencies repaid $0.7 billion of debt
held by the public, resulting in total agency debt of $26.2 billion as
of the end of the year. Agency debt is less than one percent of Federal
debt held by the public. Agencies are estimated to repay small amounts
of debt in 2006 and 2007.
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 2005, or 98 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 2007
2005 2006 2007 estimate
actual estimate estimate
----------------------------------------------------------------------------------------------------------------
Borrowing from the public:
Housing and Urban Development:
Federal Housing Administration.................................. -54 * ......... 146
Small Business Administration:
Participation certificates: Section 505 development company..... ......... -* -7 .........
Architect of the Capitol.......................................... -3 -4 -4 152
Farm Credit System Financial Assistance Corporation............... -325 ......... ......... .........
National Archives................................................. -8 -9 -10 215
Tennessee Valley Authority:
Bonds and Notes................................................. -156 -208 -387 22,501
Lease/leaseback obligations..................................... -35 -33 -39 1,071
Prepayment obligations.......................................... -105 -106 -105 1,155
-------------------------------------------
Total, borrowing from the public.............................. -686 -360 -552 25,241
Borrowing from other funds:
Tennessee Valley Authority........................................ ......... ......... ......... 1
-------------------------------------------
Total, borrowing from other funds............................. ......... ......... ......... 1
-------------------------------------------
Total, agency borrowing....................................... -686 -360 -552 25,242
----------------------------------------------------------------------------------------------------------------
* $500,000 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. This borrowing
is thus inherent in the way that the FHA program operates. 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.
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.
Under current budgetary treatment, outlays for a lease-purchase
without substantial private risk are 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 are recorded when the contract is signed. Agency borrowing is
recorded each year to the extent of these outlays. The agency debt is
subsequently redeemed over the lease payment period by a portion
[[Page 227]]
of the annual lease payments according to an amortization schedule. \8\
---------------------------------------------------------------------------
\8\ This rule of budgetary treatment became effective in 1991. 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. This budgetary treatment was
reviewed in connection with the Balanced Budget Act of 1997. Some
clarifications were made, but no substantive changes. See OMB Circular
No. A-11, Appendix B. Also see the section on outlays in Chapter 26 of
this volume, ``The Budget System and Concepts.''
---------------------------------------------------------------------------
The Tennessee Valley Authority has traditionally financed its capital
construction by selling bonds and notes to the public. Starting in 2000,
it has also employed two types of alternative financing methods. The
first type of alternative financing method was lease/leasebacks. TVA
signed contracts to lease some recently constructed power generators to
private investors and simultaneously lease them back. It received a lump
sum for leasing out its assets, and then leased them back at fixed
annual payments for a set number of years. TVA retains substantially all
of the economic benefits and risks related to ownership of the assets,
and the lease/leasebacks are reported as liabilities on TVA's balance
sheet under generally accepted accounting principles.
The Office of Management and Budget determined that the TVA lease/
leasebacks are a means of financing the acquisition of assets owned and
used by the Government. The arrangement is at least as governmental as a
``lease-purchase without substantial private risk.'' The budget
therefore records the upfront cash proceeds from the lease as borrowing
from the public, not offsetting collections. Agency debt in the form of
a lease obligation is recorded as a type of borrowing. The same budget
treatment was applied to the lease/leaseback of qualified technological
equipment in 2003. The total amount of the lease obligations beginning
in 2000 is shown in Table 16-3 separately from TVA bonds and notes to
distinguish between the types of borrowing. The obligations for lease/
leasebacks were $1.1 billion at the end of 2005 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 off
[[Page 228]]
setting 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 declined by $0.1
billion in 2005 and are estimated to continue 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 $254 billion in 2005, as shown in Table
16-4, and is estimated to rise to $311 billion in 2007. The holdings of
Federal securities by Government accounts are estimated to grow to
$3,904 billion by the end of 2007, or 42 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 $546 billion during 2005-07, which is 65 percent of
the total estimated investment by Government accounts. The funds for
Federal employee retirement also invest a large share of the total. The
principal trust fund for Federal civilian employees is the civil service
retirement and disability trust fund, which accounts for 11 percent of
the total investment by Government accounts during 2005-07. The military
retirement trust fund and the special fund for uniformed services
retiree health care account for another 13 percent. The two Medicare
trust funds--Hospital Insurance and Supplementary Medical Insurance--
account for another 9 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 2007, they are estimated to own 92 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 recorded at par in
the OMB and Treasury reports on Federal debt. However, there are two
kinds of exceptions. First, in 1991, Treasury began to issue zero-coupon
bonds to a very few Government accounts. Because the purchase price is a
small fraction of par value and the amounts are large, the holdings are
recorded in Table 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 $16.5 billion at the end
of 2005.
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 $1.6 billion at the end of 2005.
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 Re
[[Page 229]]
tirement 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 securities mature on dates from June 30,
2009 through June 30, 2019. The securities are assumed to remain
outstanding until they mature. 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 $509 million at the end
of 2005 and gradually declines over time.
The sole agency debt currently subject to the general limit, $130
million at the end of 2005, is certain debentures issued by the Federal
Housing Administration. \9\ 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.
---------------------------------------------------------------------------
\9\ At the end of 2005, $16 million of FHA debentures was not subject
to limit.
---------------------------------------------------------------------------
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 earlier 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. The amount is relatively small: $6.3
billion at the end of 2005 compared to the total unamortized discount
(less premium) of $53.5 billion on all Treasury securities.
Table 16-4. DEBT HELD BY GOVERNMENT ACCOUNTS \1\
(In millions of dollars)
----------------------------------------------------------------------------------------------------------------
Investment or Disinvestment (-) Holdings
--------------------------------------- end of
Description 2005 2006 2007 2007
actual estimate estimate estimate
----------------------------------------------------------------------------------------------------------------
Investment in Treasury debt:
Energy:
Nuclear waste disposal fund \1\......................... 1,592 804 845 19,327
Uranium enrichment decontamination fund................. 234 298 301 4,490
Health and Human Services:
Federal hospital insurance trust fund................... 12,892 18,386 20,579 316,233
Federal supplementary medical insurance trust fund...... -235 11,430 9,514 38,148
Vaccine injury compensation fund........................ 151 197 199 2,561
Housing and Urban Development:
Federal Housing Administration mutual mortgage fund..... -678 465 ........... 23,107
Other HUD............................................... 387 320 330 8,603
Interior: Abandoned mine reclamation fund................. 90 140 170 2,445
Labor:
Unemployment trust fund................................. 9,567 -8,740 13,610 59,676
Pension Benefit Guaranty Corporation \1\................ -111 -807 -113 11,448
State: Foreign service retirement and disability trust 532 20 20 13,399
fund.....................................................
Transportation:
Highway trust fund...................................... -1,941 2,358 -1,120 9,509
Airport and airway trust fund........................... 156 -980 -151 8,916
Homeland Security:
Oil spill liability trust fund.......................... -98 -134 -11 587
Aquatic resources trust fund............................ 99 -445 198 1,301
Treasury: Exchange stabilization fund..................... 4,919 214 ........... 15,452
Veterans Affairs:
National service life insurance trust fund.............. -351 -423 -484 9,690
Other trust funds....................................... 32 16 10 2,063
Federal funds........................................... -24 -28 -31 390
Other Defense-Civil:
Uniformed services retiree health care fund............. 17,009 30,288 32,324 115,485
Military retirement trust fund.......................... 1 16,856 9,146 203,284
Harbor maintenance trust fund........................... 384 -788 ........... 1,833
Environmental Protection Agency:
Hazardous substance trust fund.......................... 98 19 ........... 2,344
Leaking underground storage tank trust fund............. 204 -1 ........... 2,436
International Assistance Programs:
Overseas Private Investment Corporation................. 234 135 136 4,300
Office of Personnel Management:
Civil service retirement and disability trust fund...... 28,890 30,004 30,465 721,219
[[Page 230]]
Employees life insurance fund........................... 1,378 1,452 1,642 32,579
Employees health benefits fund.......................... 1,759 1,548 1,053 15,134
Social Security Administration:
Federal old-age and survivors insurance trust fund \2\.. 163,560 171,664 185,852 1,973,675
Federal disability insurance trust fund \2\............. 10,464 8,251 6,558 208,072
Farm Credit System Insurance Corporation:
Farm Credit System Insurance fund....................... -77 -14 ........... 1,924
Federal Deposit Insurance Corporation:
Bank insurance fund..................................... 644 -32,733 ........... ...........
FSLIC resolution fund................................... 110 187 ........... 3,310
Savings association insurance fund...................... 473 -12,325 ........... ...........
Deposit insurance fund.................................. ........... 46,219 ........... 46,219
National Credit Union Administration: Share insurance fund 364 344 386 7,153
Postal Service fund \2\................................... -65 * ........... 1,218
Railroad Retirement Board trust funds \1\................. 236 439 10 2,449
Other Federal funds \3\................................... 2,827 -5,120 -165 10,934
Other trust funds......................................... -1,561 -52 127 4,682
Unrealized discount \1\................................... -168 ........... ........... -1,645
---------------------------------------------------
Total, investment in Treasury debt \1\.................. 253,974 279,463 311,400 3,903,950
===================================================
Investment in agency debt:
Railroad Retirement Board:
National Railroad Retirement Investment Trust........... ........... ........... ........... 1
---------------------------------------------------
Total, investment in agency debt \1\.................. ........... ........... ........... 1
===================================================
Total, investment in Federal debt \1\ 253,974 279,463 311,400 3,903,951
===================================================
MEMORANDUM
Investment by Federal funds (on-budget)..................... 27,991 28,386 34,183 274,587
Investment by Federal funds (off-budget).................... -65 * ........... 1,218
Investment by trust funds (on-budget)....................... 52,192 71,162 84,807 1,448,044
Investment by trust funds (off-budget)...................... 174,024 179,915 192,410 2,181,747
Unrealized discount \1\..................................... -168 ........... ........... -1,645
----------------------------------------------------------------------------------------------------------------
* $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 $15.9 billion higher than recorded in this table at the end of 2005;
the debt held by PBGC would be $0.7 billion higher.
\2\ Off-budget Federal entity.
\3\ Includes a $16 million decrease to the debt held by the National Archives and Records Administration at the
end of 2004.
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. \10\
---------------------------------------------------------------------------
\10\ The Acts and the statutory limits since 1940 are listed in
Historical Tables, Budget of the United States Government, Fiscal Year
2007, Table 7.3.
---------------------------------------------------------------------------
The Balanced Budget Act of 1997 increased the debt limit to $5,950
billion, which lasted until 2002. When 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,
so 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.
[[Page 231]]
Treasury took a number of administrative steps during this period 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, 2004, 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.
All the steps taken during October and November had also been taken on
previous occasions when the debt had reached the statutory limit,
including in 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 -----------------------------------------------------------------
2005 2006 2007 2008 2009 2010 2011
----------------------------------------------------------------------------------------------------------------
Federal funds deficit (-).......... -555.1 -688.9 -620.4 -517.7 -516.9 -487.2 -490.5
Means of financing other than
borrowing:
Change in: \1\
Treasury operating cash 0.7 ......... ......... ......... ......... ......... .........
balances......................
Other \2\...................... 25.0 14.9 -11.0 * 0.1 0.2 0.6
Seignorage on coins.............. 0.7 0.7 0.7 0.7 0.7 0.7 0.7
Less: Net financing
disbursements:
Direct loan financing accounts. -4.9 -16.1 -18.3 -18.8 -19.2 -19.4 -21.0
Guaranteed loan financing 10.7 11.6 -0.8 -0.5 -0.1 -0.2 -0.5
accounts......................
----------------------------------------------------------------------------
Total, means of financing 32.2 11.1 -29.4 -18.6 -18.5 -18.7 -20.2
other than borrowing........
============================================================================
Decrease or increase (-) in Federal -27.9 -28.4 -34.2 -33.6 -36.2 -39.8 -43.4
debt held by Federal funds........
Increase or decrease (-) in Federal 13.4 -0.4 -0.6 -0.6 -2.8 -2.4 -2.5
debt not subject to limit.........
============================================================================
Total, requirement for Federal 537.5 706.5 684.5 570.5 574.4 548.1 556.5
funds borrowing subject to
debt limit....................
============================================================================
Change in adjustment for discount 0.4 ......... ......... ......... ......... ......... .........
and premium \3\...................
Change in unrealized discount \4\.. -0.2 ......... ......... ......... ......... ......... .........
============================================================================
Increase in debt subject to limit.. 537.7 706.5 684.5 570.5 574.4 548.1 556.5
ADDENDUM
Debt subject to statutory limit \5\ 7,871.0 8,577.6 9,262.1 9,832.5 10,406.9 10,955.1 11,511.6
----------------------------------------------------------------------------------------------------------------
* $50 million or less.
\1\ A decrease in the Treasury operating cash balance (which is an asset) 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\ Includes Federal fund transactions that correspond to those defined in table 16-2, footnote 2, but that are
for Federal funds alone with respect to the public and trust funds.
\3\ 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.
\4\ The unrealized discount is for Government account series securities.
\5\ The statutory debt limit is $8,184 billion, enacted on November 19, 2004.
[[Page 232]]
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.
On December 29, 2005, the Secretary of Treasury sent the Congress a
letter stating that the statutory debt limit enacted in November 2004
would be reached in mid-February 2006. The letter stated that even if
Treasury took steps such as those used previously once the Government
reached the debt limit, Treasury could not continue to finance
Government operations past mid-March.
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.
The House of Representatives first adopted this rule for 1980,
although it was not included in the rules for several years before 2003.
By virtue of adopting the Congressional budget resolution for 2005, the
House was deemed to have voted in favor of raising the debt limit to a
level of $8,965 billion. The Senate had not taken action on this limit
as of the writing of this Budget.
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 2006 through 2011.
The budget is composed of two groups of funds, Federal funds and trust
funds. The Federal funds, in the main, are derived from tax receipts and
borrowing and are used for the general purposes of the Government. The
trust funds, on the other hand, are financed by taxes or other receipts
earmarked by law for specified purposes, such as paying Social Security
benefits or making grants to state governments for highway construction.
\11\
---------------------------------------------------------------------------
\11\ For further discussion of the trust funds and Federal funds
groups, see Chapter 22 of this volume, ``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 2005 the
Federal funds deficit was $555 billion, and other factors reduced the
requirement to borrow subject to limit by $18 billion. The net financing
disbursements of the guaranteed loan financing accounts reduced the
financing requirements by $11 billion, as explained in an earlier
section. As an offset, special funds and revolving funds, which are part
of the Federal funds group, invested $28 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 $538 billion, while debt held by the
public increased by $297 billion.
The debt subject to limit is estimated to increase to $8,578 billion
by the end of 2006, which exceeds 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. As a result,
while debt held by the public increases by $1,694 billion from the end
of 2005 through 2011, debt subject to limit increases by $3,641 billion.
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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 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 2005 foreign
holdings of Treasury debt were $2,070 billion, which was 45 percent of
the total debt held by the public. \12\ Foreign central banks owned 63
percent of the Federal debt held by foreign residents; private investors
owned nearly all the rest. The percentage held by foreign central banks
is down slightly from 64 percent at the end of 2004. All the Federal
debt held by foreign residents is denominated in dollars.
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\12\ 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. \13\ As
a result, the Federal debt held by individuals and institutions within
the United States decreased in absolute amount during those years,
despite further Federal borrowing, and the percentage of Federal debt
held by foreign residents grew from 19 percent at the end of 1994 to 32
percent at the end of 1997. In the next few years the change in foreign
debt holdings was much smaller. However, the Federal debt held by
foreign residents increased by $253 billion in 2003, $382 billion in
2004, and $233 billion in 2005. The percentage of Federal debt held by
foreign residents increased from 34 percent to 45 percent during these
three years. The increase in foreign holdings was slightly greater than
the total Federal borrowing from the public in 2004 and about 80 percent
of total Federal borrowing in 2005.
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\13\ 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
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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 1,454.2 37.2 373.0 253.4
2004................................................ 4,295.5 1,836.6 42.8 382.1 382.4
2005................................................ 4,592.2 2,070.0 45.1 296.7 233.4
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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 15-20 percent of the
foreign-owned assets in the United States, depending on the method of
measuring total assets. The foreign purchases of Federal debt securities
do not measure the full impact of the capital inflow from abroad on the
market for Federal debt securities. The capital inflow supplies
additional funds to the credit market generally, and thus affects the
market for Federal debt. For example, the capital inflow includes
deposits in U.S. financial intermediaries that themselves buy Federal
debt.
Federal, Federally Guaranteed, and Other Federally Assisted Borrowing
The effect of the Government on borrowing in the credit market arises
not only from its own borrowing to finance Federal operations but also
from its assistance to certain borrowing by the public. The Government
guarantees borrowing by private and other non-Federal lenders, which is
another term for guaranteed lending. In addition to its guarantees, it
has established private corporations called ``Government-sponsored
enterprises,'' or GSEs, to provide financial intermediation for
specified public purposes; it exempts the interest on most State and
local government debt from income tax; it permits mortgage interest to
be deducted in calculating taxable income; and it insures the deposits
of banks and thrift institutions, which themselves make loans.
Federal credit programs and other forms of assistance are discussed in
Chapter 7 of this volume, ``Credit and Insurance.'' Detailed data are
presented in tables at the end of that chapter.