[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)
----------------------------------------------------------------------------------------------------------------
                                                 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
----------------------------------------------------------------------------------------------------------------
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)
----------------------------------------------------------------------------------------------------------------
                                                                            Estimate
                                       Actual  -----------------------------------------------------------------
                                        2005       2006       2007       2008       2009       2010       2011
----------------------------------------------------------------------------------------------------------------
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....................
                                    ----------------------------------------------------------------------------
        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\.....................
                                    ----------------------------------------------------------------------------
    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
----------------------------------------------------------------------------------------------------------------
* $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\
---------------------------------------------------------------------------
  \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.
---------------------------------------------------------------------------
  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\
---------------------------------------------------------------------------
  \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.''
---------------------------------------------------------------------------
  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

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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\
---------------------------------------------------------------------------
  \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 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.
---------------------------------------------------------------------------
  \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\
---------------------------------------------------------------------------
  \6\ The budget treatment of this fund is further discussed in Chapter 
26 of this volume, ``The Budget System and Concepts.''
---------------------------------------------------------------------------
   Net financing disbursements of the direct loan and guaranteed loan 
financing accounts.--The financing accounts were created by the Federal 
Credit Reform Act of 1990. Under this Act, budget outlays for direct 
loans and loan guarantees consist of the estimated subsidy cost of the 
loans or guarantees at the time when the direct loans or guaranteed 
loans are disbursed. The cash flows to and from the public resulting 
from these loans and guarantees--the disbursement and repayment of 
loans, the default payments on loan guarantees, the collections of 
interest and fees, and so forth--are not costs to the Government except 
for those costs already included in budget outlays. Therefore, they are 
non-budgetary in nature and are recorded as transactions of the non-
budgetary financing account for each credit program. \7\
---------------------------------------------------------------------------
  \7\ The Federal Credit Reform Act of 1990 (sec. 505(b)) requires that 
the financing accounts be non-budgetary. As explained in Chapter 23 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.
---------------------------------------------------------------------------
  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.''
---------------------------------------------------------------------------
  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.

[[Page 233]]

                     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.
---------------------------------------------------------------------------
  \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.
---------------------------------------------------------------------------
  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.
---------------------------------------------------------------------------
  \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

[[Page 234]]

 
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
----------------------------------------------------------------------------------------------------------------
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.