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

    [[Page 223]]

                         16.  FEDERAL BORROWING AND DEBT

      Debt is the largest legally binding obligation of the Federal
    Government. At the end of 2006, the Government owed $4,829 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 $237
    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       33.7        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       19.1       13.0        2.4
    2001........................................    3,319.6     3,243.1        33.0       17.6       11.6        2.1
    2002........................................    3,540.4     3,393.9        34.1       17.6        8.9        1.7
    2003........................................    3,913.4     3,677.1        36.2       17.9        7.5        1.5
    2004........................................    4,295.5     3,934.3        37.3       18.1        7.3        1.5

    2005........................................    4,592.2     4,081.7        37.4       17.7        7.7        1.6
    2006........................................    4,829.0     4,163.7        37.0       17.2        8.9        1.8
    2007 estimate...............................    5,083.3     4,274.5        36.9        N/A        9.0        1.8
    2008 estimate...............................    5,345.4     4,388.8        36.8        N/A        9.6        1.9
    2009 estimate...............................    5,553.6     4,458.1        36.3        N/A        9.8        1.9

    2010 estimate...............................    5,671.2     4,456.2        35.2        N/A        9.9        1.9
    2011 estimate...............................    5,748.3     4,425.7        33.9        N/A        9.8        1.8
    2012 estimate...............................    5,711.1     4,311.2        32.1        N/A        9.7        1.8
    ----------------------------------------------------------------------------------------------------------------
    N/A = Not available.
    \1\ Debt in current dollars deflated by the GDP chain-type price index with Fiscal Year 2000 equal to 100.
    \2\ Total credit market debt owed by domestic nonfinancial sectors, modified in some years to be consistent with
      budget concepts for the measurement of Federal debt. Financial sectors are omitted to avoid double counting,
      since financial intermediaries borrow in the credit market primarily in order to finance lending in the credit
      market. Source: Federal Reserve Board flow of funds accounts. Projections are not available.
    \3\ Interest on debt held by the public is estimated as the interest on Treasury debt securities less the
      ``interest received by trust funds'' (subfunction 901 less subfunctions 902 and 903). The estimate of interest
      on debt held by the public does not include the comparatively small amount of interest paid on agency debt or
      the offsets for interest on Treasury debt received by other Government accounts (revolving funds and special
      funds).

    [[Page 224]]

      The deficit was $248 billion in 2006, down from $318 billion in 2005.
    This $248 billion deficit, partially offset by other financing
    transactions totaling $11 billion, required the Government to increase
    its borrowing from the public by $237 billion last year. Debt held by
    the public fell from 37.4 percent of Gross Domestic Product (GDP) at the
    end of 2005 to 37.0 percent of GDP at the end of 2006. The deficit is
    estimated to continue to fall, with the Federal Government achieving
    surplus in 2012. Debt as a percentage of GDP is also estimated to
    continue to fall, reaching 32.1 percent of GDP in 2012.

                        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 2012.
    (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.) 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 rising 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 17.6 percent in 2001 and
    2002. Interest on this debt, relative to total outlays and GDP, declined
    as well. Interest as a share of outlays peaked at 16.5 percent in 1989
    and then fell to 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 in 2002 as economic
    conditions changed following the September 11 terrorist attacks. 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 due to the Global War on Terror. Consequently,
    deficits ensued and debt began to rise, both in nominal terms and as a
    percentage of GDP. However, a growing economy led to a revival of
    receipts and deficits fell in 2005 and 2006. Deficits are expected to
    continue to fall in 2007 through 2012. In nominal dollars, debt is
    estimated to continue to rise through 2011 and then to begin to fall in
    2012 when the Government achieves surplus. Debt as a percent of GDP fell
    in 2006 and is expected to fall by nearly five percentage points by the
    end of 2012.

                                   Table 16-2.  FEDERAL GOVERNMENT FINANCING AND DEBT
                                                (In billions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                Estimate
                                           Actual  -----------------------------------------------------------------
                                            2006       2007       2008       2009       2010       2011       2012
    ----------------------------------------------------------------------------------------------------------------
    Financing:
      Unified budget deficit (-)/           -248.2     -244.2     -239.4     -187.2      -94.4      -53.8       61.0
       surplus (+).....................

      Financing other than borrowing
       from the public:
        Net purchases of non-Federal
         securities by
          the National Railroad               -1.8       -0.9          *          *        0.2        0.6        0.3
           Retirement Investment Trust
           (-).........................
        Changes in: \1\
          Treasury operating cash            -16.4        7.1  .........  .........  .........  .........  .........
           balance (-).................
          Checks outstanding, etc. \2\.       12.7  .........  .........  .........  .........  .........  .........
        Seigniorage on coins...........        0.7        0.8        0.7        0.6        0.5        0.5        0.5
        Credit net financing
         disbursements (-):
          Direct loan financing               -4.7      -10.6      -16.7      -14.7      -18.0      -19.1      -20.5
           accounts....................
          Guaranteed loan financing           21.0       -6.6       -6.8       -7.0       -5.9       -5.4       -4.2
           accounts....................
                                        ----------------------------------------------------------------------------
            Total, financing other than       11.4      -10.1      -22.8      -21.0      -23.2      -23.3      -23.8
             borrowing from the public.
                                        ----------------------------------------------------------------------------
              Total, requirement to         -236.8     -254.3     -262.2     -208.2     -117.5      -77.1       37.2
               borrow from the public..

      Change in debt held by the public      236.8      254.3      262.2      208.2      117.5       77.1      -37.2

    Changes in Debt Subject to
     Limitation:
      Change in debt held by the public      236.8      254.3      262.2      208.2      117.5       77.1      -37.2
      Change in debt held by Government      309.3      302.1      305.6      354.6      381.7      400.1      409.7
       accounts........................
      Less: change in debt not subject         3.2        0.2        0.6        2.6        2.4        2.5        2.1
       to limit and other adjustments..
                                        ----------------------------------------------------------------------------
        Total, change in debt subject        549.2      556.6      568.3      565.5      501.7      479.7      374.6
         to statutory limitation.......

    Debt Subject to Statutory
     Limitation, End of Year:
      Debt issued by Treasury..........    8,425.6    8,982.2    9,550.5   10,113.9   10,613.8   11,091.8   11,465.0
      Less: Treasury debt not subject        -14.5      -14.5      -14.5      -12.4      -10.7       -8.9       -7.6
       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              9.1        9.1        9.1        9.1        9.1        9.1        9.1
       premium \4\.....................
                                        ----------------------------------------------------------------------------
        Total, debt subject to             8,420.3    8,976.9    9,545.2   10,110.6   10,612.3   11,092.0   11,466.6
         statutory limitation \5\......

    Debt Outstanding, End of Year:
      Gross Federal debt: \6\
        Debt issued by Treasury........    8,425.6    8,982.2    9,550.5   10,113.9   10,613.8   11,091.8   11,465.0
        Debt issued by other agencies..       25.8       25.6       25.0       24.5       23.7       23.0       22.3
                                        ----------------------------------------------------------------------------
          Total, gross Federal debt....    8,451.4    9,007.8    9,575.5   10,138.3   10,637.6   11,114.8   11,487.3
      Held by:
        Debt held by Government            3,622.4    3,924.5    4,230.1    4,584.7    4,966.4    5,366.5    5,776.2
         accounts......................
        Debt held by the public \7\....    4,829.0    5,083.3    5,345.4    5,553.6    5,671.2    5,748.3    5,711.1
    ----------------------------------------------------------------------------------------------------------------
    \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 $8,965 billion, enacted on March 20, 2006.
    \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 2006, the Federal Reserve Banks held $768.9 billion of Federal securities and the rest of the
      public held $4,060.0 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. (As used in this Budget, debt
    held by Government accounts refers to debt held by Federal Government
    accounts; investments by State and local governments in Federal
    securities are included as debt held by the public.) 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\ Treasury debt held by the public is 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
    the principal amount due at maturity (par or face value) less the
    unamortized discount. (For a security sold at a premium, the definition
    is symmetrical.) For inflation-indexed notes and bonds, the book value
    includes a periodic adjustment for inflation. Agency debt is generally
    recorded at par.
      \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, is normally a good approximation of the Federal demand
    on credit markets. Regardless of whether the proceeds are used for
    tangible or intangible investment or to finance current consumption, 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 amount of saving imported
    from abroad. It also increases the amount

    [[Page 225]]

    of future resources required to pay interest to the public on Federal
    debt. Borrowing from the public is therefore an important concern of
    Federal fiscal policy. \3\
    ---------------------------------------------------------------------------
      \3\ The Federal subsector of the national income and product accounts
    provides a measure of ``net government saving'' (based on current
    expenditures and current receipts) that can be used to analyze the
    effect of Federal fiscal policy on national saving within the framework
    of an integrated set of measures of aggregate U.S. economic activity.
    The Federal subsector and its differences from the budget are discussed
    in Chapter 14 of this volume, ``National Income and Product Accounts.''
    ---------------------------------------------------------------------------
      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

    [[Page 226]]

    be spent at a later time than when the funds receive the monies. The
    debt securities are a liability of the general fund to the fund that
    holds the securities and are a mechanism for crediting interest to that
    fund on its recorded balances. These accounting balances generally
    provide the fund with authority to draw upon the U.S. Treasury in later
    years to make future payments on its behalf to the public. Public policy
    may run surpluses and accumulate debt in trust funds and other
    Government accounts in anticipation of future spending.
      However, issuing debt to Government accounts does not have any of the
    credit market 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 other resources.
       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 the
    year 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 gauge of
    the effect of the budget on the credit markets than gross Federal debt.
      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 2006 through
    2012. In 2006 the Government borrowed $237 billion, increasing the debt
    held by the public from $4,592 billion at the end of 2005 to $4,829
    billion at the end of 2006. The debt held by Government accounts
    increased $309 billion, and gross Federal debt increased by $546 billion
    to $8,451 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 2006 and is estimated to
    have large surpluses throughout the projection pe

    [[Page 227]]

    riod. 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.''
    ---------------------------------------------------------------------------
      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 borrowing from 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 2006 the deficit was $248 billion and the
    ``financing other than borrowing from the public'' was $11 billion. As a
    result, the Government borrowed $237 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 $2,945 billion and the increase in debt held by
    the public was $3,088 billion. Thus, the other factors added a total of
    $143 billion of borrowing, an average of $7 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 2007 through
    2012, by amounts ranging from $10 billion in 2007 to $24 billion in
    2012. 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 smaller, with a $1
    billion increase in 2004 and a $1 billion decrease in 2005. The cash
    balance increased $16 billion in 2006. The operating cash balance is
    estimated to decrease by $7 billion by the end of 2007 and then to
    remain essentially the same. 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. In 2003,
    most of the assets in the Railroad Retirement Board trust funds were
    transferred to the new trust fund, 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 borrowing from the
    public'' rather than included as an increase in the deficit. This
    increased borrowing expanded publicly held debt by $20 billion in 2003.
    Net purchases have been relatively small since 2003 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.--Under the Federal Credit Reform Act of 1990, budget
    outlays for direct loans and loan guarantees consist of the estimated
    subsidy cost of the loans or guarantees at the time when the direct
    loans or 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 intragovernmental
    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 re

    [[Page 228]]

    ceipts from the public can be used to finance the payment of the
    Government's obligations, and therefore they reduce the requirement for
    Federal borrowing from the public in the same way as an increase in
    budget receipts.
      The impact of the financing accounts became large in the mid-1990s. In
    2005 and 2006, 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. In 2007, net downward reestimates
    are expected and financing accounts will make positive net financing
    disbursements of the downward reestimates to receipt accounts. After
    2007, the pattern is expected to be more normal. The financing accounts
    are estimated to increase the need for borrowing by $17 billion in 2007
    and from $22 billion to $25 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.
      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 93 percent of the
    total Federal debt held by Government accounts at the end of 2006. In
    2006, the total trust fund surplus was $289 billion, and trust funds
    invested $278 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

      Some Federal agencies, shown in Table 16-3, sell or have sold debt
    securities to the public and, at times, to other Government accounts. At
    one time, several other agencies issued debt securities, but this
    activity has declined significantly over time. Currently, new debt is
    issued only by the Tennessee Valley Authority (TVA) and the Federal
    Housing Administration (FHA); the remaining agencies are repaying
    existing borrowing. During 2006, agencies repaid $0.4 billion of debt
    held by the public, resulting in total agency debt of $25.8 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 2007 and 2008.

                                                Table 16-3.  AGENCY DEBT
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                           Borrowing or repayment (-) of
                                                                                        debt                Debt end
                                                                         ---------------------------------  of  2008
                                                                             2006       2007       2008     estimate
                                                                            actual    estimate   estimate
    ----------------------------------------------------------------------------------------------------------------
    Borrowing from the public:
      Housing and Urban Development:
        Federal Housing Administration..................................        -34          *  .........        112
      Small Business Administration:
        Participation certificates: Section 505 development company.....  .........         -7  .........  .........
      Architect of the Capitol..........................................         -3         -4         -4        148
      National Archives.................................................         -9        -10        -11        204
      Tennessee Valley Authority:
        Bonds and notes.................................................       -205        -11       -388     22,493
        Lease/leaseback obligations.....................................        -34        -37        -43      1,029
        Prepayment obligations..........................................       -106       -105       -106      1,033
                                                                         -------------------------------------------
          Total, borrowing from the public..............................       -391       -174       -552     25,019

    Borrowing from other funds:
      Tennessee Valley Authority........................................          6  .........  .........          7
                                                                         -------------------------------------------
          Total, borrowing from other funds.............................          6  .........  .........          7
                                                                         -------------------------------------------
          Total, agency borrowing.......................................       -385       -174       -552     25,026
    ----------------------------------------------------------------------------------------------------------------
    * $500,000 or less.

    [[Page 229]]

      The predominant agency borrower is the Tennessee Valley Authority,
    which had borrowed $25 billion from the public as of the end of 2006, or
    98 percent of the total debt of all agencies. TVA sells debt primarily
    to finance capital expenditures.
      The TVA has traditionally financed its capital construction by selling
    bonds and notes to the public. Since 2000, it has also employed two
    types of alternative financing methods, lease/leaseback obligations and
    prepayment obligations. The Office of Management and Budget determined
    that each of these methods is a means of financing the acquisition of
    assets owned and used by the Government, or of refinancing 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 budget therefore records the upfront
    cash proceeds from these methods as borrowing from the public, not
    offsetting collections. The obligations under these methods are reported
    as liabilities on TVA's balance sheet under generally accepted
    accounting principles. Table 16-3 presents these alternative financing
    methods separately from TVA bonds and notes to distinguish between the
    types of borrowing.
      The first type of alternative financing method is 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.
    The arrangement is at least as governmental as a ``lease-purchase
    without substantial private risk.'' \8\ The same budget treatment was
    applied to the lease/leaseback of qualified technological equipment in
    2003. The obligations for lease/leasebacks were $1.1 billion at the end
    of 2006 and are estimated to decline steadily in the following years as
    they are amortized.
    ---------------------------------------------------------------------------
      \8\ For further detail on the current budgetary treatment of lease-
    purchase without substantial private risk, 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 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 entered into a 15-year, $1.5 billion
    contract with Memphis Light, Gas, and Water (MLGW) in 2004. The
    prepayment obligations were $1.2 billion at the end of 2006 and are
    estimated to continue to decline as TVA provides electric power under
    the contracts.
      The Federal Housing Administration has for many years issued both
    checks and debentures as means of paying claims to the public that arise
    from defaults on FHA-insured mortgages. Issuing debentures to pay the
    Government's bills is equivalent to selling securities to the public and
    then paying the bills by disbursing the cash borrowed, so the
    transaction is recorded as being simultaneously an outlay and borrowing.
    The debentures are therefore classified as agency debt.
      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. These
    arrangements are equivalent to direct Federal construction financed by
    Federal borrowing. The construction expenditures and interest were
    therefore classified as Federal outlays, and the borrowing was
    classified as Federal agency borrowing from the public.
      The amount of agency securities sold to the public has been reduced
    over time 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 $309 billion in 2006, and is estimated to
    be $302 billion in 2007 and $306 billion in 2008, as shown in Table 16-
    4. The holdings of Federal securities by Government accounts are
    estimated to grow to $4,230 billion by the end of 2008, or 44 percent of
    the gross Federal debt. The percentage is estimated to rise in the
    following years, as the trust funds and several major revolving funds
    and special funds continue to accumulate surpluses while borrowing from
    the public begins to fall.

    [[Page 230]]

                                    Table 16-4.  DEBT HELD BY GOVERNMENT ACCOUNTS \1\
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                     Investment or Disinvestment (-)       Holdings
                                                                 ---------------------------------------   end  of
                           Description                                2006         2007         2008         2008
                                                                     actual      estimate     estimate     estimate
    ----------------------------------------------------------------------------------------------------------------
    Investment in Treasury debt:
      Energy:
        Nuclear waste disposal fund \1\.........................        1,044           57          874       19,653
        Uranium enrichment decontamination fund.................          337          321          112        4,661
      Health and Human Services:
        Federal hospital insurance trust fund...................       24,919       11,858        3,341      317,385
        Federal supplementary medical insurance trust fund......       15,857        8,794        6,325       48,180
        Vaccine injury compensation fund........................          214          -77          -87        2,216
      Homeland Security: Aquatic resources trust fund...........          100           15         -363        1,301
      Housing and Urban Development:
        Federal Housing Administration mutual mortgage fund.....         -612         -597          217       21,650
        Guarantees of mortgage-backed securities................          436          336          349        9,070
      Interior:
        Bureau of Land Management permanent operating funds.....          622           70           54        2,465
        Environmental improvement and restoration fund..........           39           51           51        1,153
        Abandoned mine reclamation fund.........................          131          112          112        2,490
      Labor:
        Unemployment trust fund.................................       11,407       12,787       12,000       91,000
        Pension Benefit Guaranty Corporation \1\................        2,618       -8,985         -456        5,546
      State: Foreign service retirement and disability trust              516         -477          134       13,533
       fund.....................................................
      Transportation:
        Highway trust fund......................................        2,727        2,210       -1,628       11,580
        Airport and airway trust fund...........................       -2,154         -667         -158        7,068
      Treasury: Exchange stabilization fund.....................          473          346          353       16,410
      Veterans Affairs:
        National service life insurance trust fund..............         -409         -478         -531        9,180
        Veterans special life insurance fund....................           32           12          -17        1,955
      Corps of Engineers: Harbor maintenance trust fund.........          542          421          520        4,105
      Other Defense-Civil:
        Medicare-eligible retiree health care fund..............       19,867       23,471       24,076      120,287
        Military retirement trust fund..........................        4,528       27,072        7,582      216,464
        Education benefits fund.................................          216          141          148        1,530
      Environmental Protection Agency:
        Hazardous substance trust fund..........................          315           -9  ...........        2,631
        Leaking underground storage tank trust fund.............          229          230          230        3,126
      International Assistance Programs:
        Overseas Private Investment Corporation.................          244           95          140        4,508
      Office of Personnel Management:
        Civil service retirement and disability trust fund......       29,186        9,296       30,148      729,380
        Employees life insurance fund...........................        1,797        1,400        1,669       34,351
        Employees health benefits fund..........................        2,292        1,553          709       17,087
        Postal Service retiree health benefits fund.............  ...........       31,358        6,883       38,241
      Social Security Administration:
        Federal old-age and survivors insurance trust fund \2\..      176,971      180,187      203,556    2,176,872
        Federal disability insurance trust fund \2\.............        8,915        4,156        5,698      212,032
      District of Columbia: Federal pension fund................          -20           -5           12        3,616
      Farm Credit System Insurance Corporation:
        Farm Credit System Insurance fund.......................          150          270          213        2,571
      Federal Communications Commission: Universal service fund.          605           -*  ...........        4,762
      Federal Deposit Insurance Corporation:
        Federal deposit insurance fund..........................        1,158        1,542        2,579       50,337
        FSLIC resolution fund...................................          -94          246          294        3,569
      National Credit Union Administration: Share insurance fund          326          251          376        7,376
      Postal Service fund \2\...................................        3,015       -3,088  ...........        1,145
      Railroad Retirement Board trust funds.....................         -109          161           79        2,131
      Other Federal funds.......................................        1,139       -2,191           -9        5,095
      Other trust funds.........................................           32         -139          -13        4,302
      Unrealized discount \1\...................................         -317  ...........  ...........       -1,962
                                                                 ---------------------------------------------------
          Total, investment in Treasury debt \1\................      309,285      302,108      305,572    4,230,051
                                                                 ===================================================

    [[Page 231]]

    Investment in agency debt:
      Railroad Retirement Board:
        National Railroad Retirement Investment Trust...........            6  ...........  ...........            7
                                                                 ---------------------------------------------------
          Total, investment in agency debt \1\..................            6  ...........  ...........            7
                                                                 ===================================================
            Total, investment in Federal debt \1\...............      309,291      302,108      305,572    4,230,058
                                                                 ===================================================

                             MEMORANDUM

    Investment by Federal funds (on-budget).....................       28,463       46,748       36,230      323,460
    Investment by Federal funds (off-budget)....................        3,015       -3,088  ...........        1,145
    Investment by trust funds (on-budget).......................       92,245       74,105       60,088    1,518,512
    Investment by trust funds (off-budget)......................      185,886      184,343      209,254    2,388,904
    Unrealized discount \1\.....................................         -317  ...........  ...........       -1,962
    ----------------------------------------------------------------------------------------------------------------
    * $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, at the end of
      2006 the debt figures would be $17.8 billion higher for the Nuclear Waste Disposal fund and $21.6 billion
      higher for PBGC than recorded in this table.
    \2\ Off-budget Federal entity.

      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 $579 billion during 2006-08, which is 63 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 Fund (CSRDF). In 2007, funds are being
    transferred from the CSRDF, the Postal Service, and other sources to
    create a new special fund for Postal Service retiree health benefits.
    Together the CSRDF and the new Postal Service retiree health benefit
    fund account for 12 percent of the total investment by Government
    accounts during 2006-08. The military retirement trust fund and the
    special fund for uniformed services Medicare-eligible retiree health
    care account for another 12 percent. The two Medicare trust funds--
    Hospital Insurance and Supplementary Medical Insurance--account for
    another 8 percent. Altogether, the investment by Social Security,
    Medicare, and these four Federal employee retirement funds is almost as
    much as the total investment by Government accounts during this period.
    At the end of 2008, they are estimated to own 94 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, Treasury issues 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 $39.4 billion at the end of 2006.
      Second, Treasury subtracts 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
    $2.0 billion at the end of 2006.

                           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

    [[Page 232]]

    type of limitation has been in effect since 1941. The limit currently
    applies to most debt issued by the Treasury since September 1917,
    whether held by the public or by Government accounts; and other debt
    issued by Federal agencies that, according to explicit statute, is
    guaranteed as to principal and interest by the United States Government.
      The third part of Table 16-2 compares total Treasury debt with the
    amount of Federal debt that is subject to the limit. Nearly all Treasury
    debt is subject to the debt limit. Most of the Treasury debt not subject
    to the general statutory limit was issued by the Federal Financing Bank
    (FFB). The FFB, which is within the Treasury Department, is authorized
    to have outstanding up to $15 billion of publicly issued debt. It issued
    $14 billion of securities to the Civil Service Retirement and Disability
    Fund on November 15, 2004, in exchange for an equal amount of regular
    Treasury securities, as explained below in the section on changes in the
    debt limit. The FFB securities have the same interest rates and
    maturities as the regular Treasury securities for which they were
    exchanged. The securities mature on dates from June 30, 2009, through
    June 30, 2019. 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 $506 million at the end of 2006 and
    gradually declines over time.
       The sole agency debt currently subject to the general limit, $96
    million at the end of 2006, 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 2006, $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: $9.1
    billion at the end of 2006 compared to the total unamortized discount
    (less premium) of $81.4 billion on all Treasury securities.
      Changes in the debt limit.--The statutory debt limit has been changed
    many times. Since 1960, Congress has passed 72 separate acts to raise
    the limit, extend the duration of a temporary increase, or revise the
    definition. \10\
    ---------------------------------------------------------------------------
      \10\ The Acts and the statutory limits since 1940 are listed in
    Historical Tables, Budget of the United States Government, Fiscal Year
    2008, Table 7.3.
    ---------------------------------------------------------------------------
      During the 1990s, 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. The 1997 increase lasted
    until 2002.
      Since 2002, the debt has reached the limit four times. In each
    instance, the limit has been increased by an amount sufficient to last
    less than two years. The debt limit was increased to $6,400 billion on
    June 28, 2002, to $7,384 billion on May 27, 2003, to $8,184 billion on
    November 19, 2004, and to $8,965 billion on March 20, 2006. Each time,
    in the weeks prior to the increase, the Treasury Department has taken a
    variety of administrative actions to meet the Government's obligation to
    pay its bills and invest its trust funds while keeping debt under the
    existing limit.
       In the months leading to the most recent increase, the Secretary of
    Treasury wrote Congress in December 2005 that the debt subject to limit
    would reach the ceiling in February 2006. It did reach the limit on
    February 16 and stayed there until the limit was increased.
      On February 16, 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
    Plan, 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. 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, 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, as
    authorized by law. The Exchange Stabilization fund was disinvested. The
    Secretary also declared a debt issuance suspension period from March 6
    to May 26. This allowed him to redeem a limited amount of securities
    held by the Civil Service Retirement and Disability Fund and stop
    investing its receipts.
      These Treasury actions were used for a little more than one month.
    Congress passed a bill raising the debt limit to $8,965 billion on March
    16, and the President signed the bill on March 20. Treasury promptly
    invested the G-fund and Civil Service Retirement and Disability Fund
    fully and restored the forgone interest as prescribed by law. Treasury
    also fully invested the Exchange Stabilization fund and reinstated
    acceptance of subscriptions to the State and local government series.
      All the steps taken during February or March had also been taken on
    previous occasions when the debt

    [[Page 233]]

    had reached the statutory limit, including in 2002, 2003, or 2004. In
    addition, Treasury has previously replaced regular Treasury securities
    with borrowing by the Federal Financing Bank, which, as explained above,
    is not subject to the debt limit. On November 15, 2004, prior to the
    November 19 debt limit increase, the Federal Financing Bank issued $14
    billion of FFB securities to the Civil Service Retirement and Disability
    Fund in exchange for an equal amount of regular Treasury securities. FFB
    then exchanged those regular Treasury securities with Treasury at market
    value in return for the extinguishment of an equal market value of FFB
    debt owed to Treasury. As indicated above, the FFB securities issued to
    CSRDF begin to mature in June 2009. When the debt limit was reached in
    2002 and 2003, Treasury also reduced its compensating balances--deposits
    held in banks to pay for services under financial agency agreements.
    However, compensating balances were discontinued in 2004.
      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.
      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 over two-thirds of the
    estimated total increase from 2007 through 2012.
       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 deficit or 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. The trust fund surplus
    reduces the total budget deficit or increases the total budget surplus,
    decreasing the need to borrow from the public or increasing the ability
    to repay borrowing from the public. When the trust fund surplus is
    invested in Federal securities, the debt held by Government accounts
    increases, offsetting the decrease in debt held by the public by an
    equal amount. Thus, there is no net effect on gross Federal debt.
      Table 16-5 derives the change in debt subject to limit. In 2006 the
    Federal funds deficit was $537 billion, and other factors reduced
    financing requirements by $13 billion. The net financing disbursements
    of the guaranteed loan financing accounts reduced the financing
    requirements by $16 billion, as explained in an earlier section. As an
    offset, special funds and revolving funds, which are part of the Federal
    funds group, invested $31 billion in Treasury securities. The largest
    single investment was $20 billion for the uniformed services Medicare-
    eligible retiree health care fund. In addition, an adjustment is made
    for the relatively minor difference between the trust fund surplus and
    the trust funds' investment in Federal securities (including the changes
    in the National Railroad Retirement Investment Trust's investments in
    non-Federal securities). As a net result of all these factors, $546
    billion in financing was required. Therefore, gross Federal debt
    increased by $546 billion. Since Federal debt not subject to limit
    decreased by $0.4 billion and the adjustment for discount and premium
    changed by $2.8 billion, the debt subject to limit increased by $549
    billion, while debt held by the public increased by $237 billion.

    [[Page 234]]

      The debt subject to limit is estimated to increase to $8,977 billion
    by the end of 2007, which exceeds the present statutory debt limit of
    $8,965 billion. (This estimate does not reflect any administrative
    actions that Treasury might take to meet the Government's obligations
    while staying within the statutory limit.) The estimated increases in
    the debt subject to limit are caused by the continued Federal funds
    deficit, supplemented by the other factors shown in Table 16-5. While
    debt held by the public increases by $882 billion from the end of 2006
    through 2012, debt subject to limit increases by $3,046 billion.

                   Table 16-5.  FEDERAL FUNDS FINANCING AND CHANGE IN DEBT SUBJECT TO STATUTORY LIMIT
                                                (In billions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                Estimate
                Description                Actual  -----------------------------------------------------------------
                                            2006       2007       2008       2009       2010       2011       2012
    ----------------------------------------------------------------------------------------------------------------
    Change in Gross Federal Debt:
      Federal funds deficit (-)........     -537.3     -489.7     -533.3     -498.2     -428.9     -403.1     -296.7
      Means of financing other than           13.2       -9.3      -22.8      -21.0      -23.4      -24.0      -24.1
       borrowing--Federal funds \1\....
      Decrease or increase (-) in            -31.5      -43.7      -36.2      -43.6      -47.2      -50.8      -52.0
       Federal debt held by Federal
       funds...........................
      Adjustments for trust fund               9.2      -13.7       24.6          *        0.2        0.6        0.3
       surplus not invested in Federal
       securities \2\..................
      Less: change in unrealized              -0.3  .........  .........  .........  .........  .........  .........
       discount on Federal debt held by
       Federal funds...................
                                        ============================================================================
        Total financing requirements...     -546.1     -556.4     -567.7     -562.8     -499.3     -477.2     -372.5

    Change in Debt Subject to Limit:
      Change in gross Federal debt.....      546.1      556.4      567.7      562.8      499.3      477.2      372.5
      Less: increase or decrease (-) in       -0.4       -0.2       -0.6       -2.6       -2.4       -2.5       -2.1
       Federal debt not subject to
       limit...........................
      Less: change in adjustment for          -2.8  .........  .........  .........  .........  .........  .........
       discount and premium \3\........
                                        ============================================================================
        Total, change in debt subject        549.2      556.6      568.3      565.5      501.7      479.7      374.6
         to limit......................
                                        ============================================================================
                  ADDENDUM

    Debt subject to statutory limit \4\    8,420.3    8,976.9    9,545.2   10,110.6   10,612.3   11,092.0   11,466.6
    ----------------------------------------------------------------------------------------------------------------
    * $50 million or less.
    \1\ Includes Federal fund transactions that correspond to those presented in Table 16-2, but that are for
      Federal funds alone with respect to the public and trust funds.
    \2\ Includes trust fund holdings in other cash assets and changes in the investments of the National Railroad
      Retirement Investment Trust in non-Federal securities.
    \3\ Consists of unamortized discount (less premium) on public issues of Treasury notes and bonds (other than
      zero-coupon bonds).
    \4\ The statutory debt limit is $8,965 billion.

                         Debt Held by Foreign Residents

      During most of American history, the Federal debt was held almost
    entirely by individuals and institutions within the United States. In
    the late 1960s, 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.
      Foreign holdings of Federal debt are presented in Table 16-6. At the
    end of 2006, foreign holdings of Treasury debt were $2,134 billion,
    which was 44 percent of the total debt held by the public. \12\ Foreign
    central banks owned 66 percent of the Federal debt held by foreign
    residents; private investors owned nearly all the rest. The percentage
    held by foreign central banks is up from 63 percent at the end of 2005.
    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, large increases in the Federal
    debt held by foreign residents resumed beginning in 2003. Federal debt
    held by foreign residents increased by $203 billion in 2006, and by an
    average of $233 billion annually over the last four years. The
    percentage of Federal debt held

    [[Page 235]]

    by foreign residents increased from 34 percent to 44 percent during
    these four years. The increase in foreign holdings was about 86 percent
    of total Federal borrowing in 2006 and about 72 percent of total Federal
    borrowing over the last four years.
    ---------------------------------------------------------------------------
      \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.
    ---------------------------------------------------------------------------
      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.

                                      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

    1970................................................      283.2        14.0          5.0        5.1         3.8
    1975................................................      394.7        66.0         16.7       51.0         9.2

    1980................................................      711.9       121.7         17.1       71.6         1.4
    1985 \3\............................................    1,507.3       222.9         14.8      200.3         N/A

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

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

    2000 \3\............................................    3,409.8     1,057.9         31.0     -222.6         N/A
    2001................................................    3,319.6     1,005.5         30.3      -90.2       -52.3
    2002 \3\............................................    3,540.4     1,200.8         33.9      220.8         N/A
    2003................................................    3,913.4     1,454.2         37.2      373.0       253.4
    2004................................................    4,295.5     1,798.7         41.9      382.1       344.5

    2005................................................    4,592.2     1,930.6         42.0      296.7       131.9
    2006................................................    4,829.0     2,133.6         44.2      236.8       202.9
    ----------------------------------------------------------------------------------------------------------------
    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 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.