[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 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).


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  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

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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

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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

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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.