Federal Debt: Answers to Frequently Asked Questions--An Update (Letter
Report, 05/28/99, GAO/OCG-99-27).

Although the U.S. government has carried debt throughout its entire
history, the large annual budget deficits of the last 20 years sharply
increased the overall federal debt and its associated annual interest
payments. Deficit reduction measures, along with economic growth, have
helped to shrink annual deficits. At the end of fiscal year 1998, the
federal budget was in surplus for the first time in nearly 30 years, and
surpluses were projected to continue for the next decade. This report
answers frequently-asked questions about the federal debt, deficits and
surpluses, and interest rates. It also answers questions about debt in a
time of surplus.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  OCG-99-27
     TITLE:  Federal Debt: Answers to Frequently Asked Questions--An
	     Update
      DATE:  05/28/99
   SUBJECT:  Interest rates
	     Authority to borrow from public
	     Federal debt
	     Gross national product
	     Economic analysis
	     Debt held by public
	     Deficit reduction
	     US government securities

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United States General Accounting OfficeGAO May 1999 Federal Debt :
Answers to

Frequently AskedQuestions--An Update

GAO/OCG-99-27

GAO United StatesGeneral Accounting Office

Washington, D.C. 20548

Comptroller Generalof the United States

B-282102  May 28, 1999 The Honorable Pete V. DomeniciChairman,
Committee on the Budget United States Senate Dear Mr. Chairman: As
you requested, this report updates information presented in
our1996 publication, Federal Debt: Answers to Frequently Asked
Questions (GAO/AIMD-97-12, November 27, 1996). In this update
wepresent current information on the federal debt, including how
debt is defined and measured; who holds federal debt; how much it
hasgrown in recent years; and its significance to the national
economy. As in our earlier report, we attempt to provide the
information in aclear, concise and easily understandable manner
for a nontechnical audience. This document was prepared under the
direction of Paul L. Posner,Director of Budget Issues, and Susan
J. Irving, Associate Director of Budget Issues, Accounting and
Information Management Division,who may be reached at (202) 512-
9573 if there are any questions.

Sincerely yours,

David M. WalkerComptroller General of the United States

Preface

At the end of fiscal year 1998, the unified budget ofthe federal
government was in surplus for the first time in almost 30 years,
and surpluses were projectedto continue over the next decade. With
this change in the budgetary environment, discussion has begun
onhow the federal government should view these surpluses and to
what degree debt reduction can orshould be achieved.

Although the federal government has carried debtthroughout
virtually all of U.S. history, large annual budget deficits over
the past two decades sharplyincreased the total amount of debt
owed to the public and its associated annual interest
payments.Policymakers responded to the historically high debt
levels in recent years by passing several deficitreduction
initiatives. These actions, along with economic growth, helped
shrink annual deficits andbring about the 1998 surplus.

Even after a year of budgetary surplus, debt held bythe public
stands at about 44 percent of the annual size of the U.S. economy,
a level that the UnitedStates rarely reached before 1940. However,
the projected surpluses, if they materialize, would lead toa
further reduction in this debt. Over the longer term, the
retirement of the baby boom generation will placeadditional
pressures on the budget. These pressures--including, for example,
increasingdemand for health services--will require further action
to prevent debt from rising again in futuredecades.

Many citizens have recognized that a high level offederal debt has
serious consequences for them. Large deficits and rising debt
levels constrain futuregrowth in incomes and living standards by
reducing the amount of saving in the United States available
forprivate investment. Deficits may also raise interest

GAO/OCG-99-27Page 2

Preface rates, increasing household borrowing costs forhomes,
cars, and college loans. In addition to these economic
consequences, thefederal budgetary costs of growing publicly held
debt have reduced the ability of the federal government toprovide
services--almost 15 cents out of every federal budget dollar spent
is used to pay net interest ratherthan to finance other public
priorities. Net interest spending (in nominal terms) grew at an
average rateof 10.6 percent per year between 1980 and 1998. After
Social Security and Defense, net interest is the thirdlargest
spending item in the federal budget. Interest spending is the
least controllable item in the budgetsince it is determined by the
amount of past borrowing and interest rates. Because of the
complex and technical nature of debtissues, there is a substantial
amount of misunderstanding and confusion surrounding them.For
example, the reason the debt limit may need to be raised even in a
time of budgetary surpluses is notobvious. This update addresses
questions that are frequently asked about the federal debt,
deficits andsurpluses, and interest rates. It also addresses some
questions that have arisen about debt in a time ofsurplus.

For readers who are interested in more detailedinformation on the
topics covered here, we also include a short bibliography.

GAO/OCG-99-27Page 3

Preface

GAO/OCG-99-27Page 4 GAO/OCG-99-27Page 5 Contents Preface 2 Section
I: What isthe Federal Debt? 8

Section II:Budgetary Effects of Federal Debt

15

Section III:Economic Effects of Federal Debt

29

Section IV:Federal Debt Management andOwnership

39

Section V: KeyIssues in Evaluating FutureDebt Levels

52

Bibliography 54 Table Table IV.1: Schedule of Treasury
SecuritiesAuctions 40

Figures Figure I.1: Gross Federal Debt and ItsComponents 8

Figure I.2: Distribution of Federal Debt Heldby Government
Accounts 11

GAO/OCG-99-27Page 6

Contents Figure II.1: Surplus or Deficit as a Share ofGDP 16
Figure II.2: Federal Debt Held by the Publicas a Share of GDP 17
Figure II.3: Federal Debt as a Share of GDP 19Figure II.4: Net
General Government Debt of

Selected Countries 20Figure II.5: Unified Budget Deficit or
Surplus and Its Components 22Figure II.6: Net Interest as a Share
of Total Federal Outlays 25Figure II.7: Federal Outlays by
Selected Functions 26Figure II.8: Average Interest Rate on the
Federal Debt 27Figure III.1: GDP Per Capita From GAO Simulations,
1998 to 2070 31Figure III.2: Effect of Federal Budget Surpluses
and Deficits on Net NationalSaving 33 Figure III.3: Effect of
Federal BudgetSurpluses and Deficits on Net National

Saving

34

Figure III.4: Average Net National SavingRates of Selected
Countries 36 Figure III.5: Spending on Social Security,Medicare,
and Medicaid as a Share of GDP

Through 2070 Under GAO's "Save theSurplus" Simulation

38

Figure IV.1: Treasury Bills, Notes, and BondsOutstanding 41 Figure
IV.2: Estimated Ownership of DebtHeld by the Public 44

Abbreviations CBO Congressional Budget Office GDP gross domestic
product GNP gross national product OMB Office of Management and
Budget

GAO/OCG-99-27Page 7

Section I: What is the Federal Debt?

Q. How large is the federal debt? A. Gross debt is the measure
that captures all of thefederal government's outstanding debt.
Gross debt--which totaled about $5.5 trillion at the end offiscal
year 1998--is comprised of debt held by the public plus debt held
by certain government accounts,such as the Social Security and
Medicare trust funds. (See figure I.1.)

Figure I.1: Gross Federal Debt and Its Components (End of Fiscal
Year 1998)

Source: Department of the Treasury.

GAO/OCG-99-27Page 8

Section I: What is the Federal Debt? Q. What is debt held by the
public? A. The level of debt held by the public--about $3.7
trillion at the end of fiscal year 19981--is a useful measure
because it reflects how much of the nation'swealth is absorbed by
the federal government to finance its obligations. Thus, it best
represents thecumulative effect of past federal borrowing on
today's economy and the federal budget. In this update,
ourdiscussions focus primarily on debt held by the public. The
amount of a borrower's debt by itself is not agood indicator of
the burden imposed by that debt. A borrower's income and wealth
are also important inassessing the burden of debt. Therefore, to
get a better sense of the burden represented by the federaldebt,
debt is often measured in relation to the nation's income. Gross
domestic product (GDP) is a commonlyused measure of national
income. The

GDP is the valueof all goods and services produced within the
United

States in a given year. It is a rough indicator of theeconomic
base from which the government draws its revenues. Thus, the ratio
of debt held by the public asa share of

GDP is a good measure of the burden on thecurrent economy. In
these terms, the federal debt

burden grew in all but two years from 1980 throughthe mid-1990s
and has decreased steadily from then to the present. Figure II.3,
included later, shows thesechanges.

1This total is reported in the Department of the Treasury's Final
Monthly Treasury Statement for Fiscal Year 1998 ThroughSeptember
30, 1998 and is net of unamortized premiums and

discounts on public debt securities.

GAO/OCG-99-27Page 9

Section I: What is the Federal Debt? Q. What is debt held by
government accounts? A. Debt held by government accounts2--about
$1.8 trillion at the end of fiscal year 1998--primarily represents
balances in the Social Security and federalcivilian employee and
military retirement trust funds, which account for almost 75
percent of the total. (Seefigure I.2.) The money is invested in
special U.S. Treasury securities that are guaranteed for
principaland interest by the full faith and credit of the U.S.
government. These trust funds have been runningannual surpluses
that reduce the need for the government to borrow from the public
today because,in effect, they are loaned from one part of the
government to another. The transactions net out onthe government's
consolidated financial statements. However, they also constitute
future obligations ofthe Treasury since the Treasury must pay back
the debt held by government accounts when theseaccounts need to
redeem their securities. Just as with the Treasury's public debt
holders, the governmentaccounts earn interest on their special
Treasury holdings. Interest on securities held by a
governmentaccount may be used for outlays by the account or
invested in additional Treasury securities.

2Debt held by government accounts primarily reflects debt owned by
federal trust funds, including Social Security. In addition to
trustfunds, several funds such as the Bank Insurance Fund also own

government securities, but these investments represent only asmall
portion of the total debt held by government accounts.

GAO/OCG-99-27Page 10

Section I: What is the Federal Debt? Figure I.2: Distribution of
Federal Debt Held by Government Accounts (End of Fiscal Year 1998)

Source: OMB. Q. What is the difference between the two typesof
federal debt? A. Debt held by the public and debt held
bygovernment accounts are very different. Debt held by the public
approximates the federal government'scompetition with other
sectors in the credit markets. This competition affects current
interest rates andprivate capital accumulation. Further, interest
on debt held by the public is a current burden on taxpayers.

GAO/OCG-99-27Page 11

Section I: What is the Federal Debt? In contrast, debt held by the
trust funds performs anaccounting function, but it typically does
not constitute the government's total future commitmentto trust
fund financed programs. It represents the cumulative annual
surpluses of those trust funds plusaccrued interest and also
reflects a future claim on the U.S. Treasury. It does not have the
currenteconomic effects of borrowing from the public and does not
currently compete with the private sector foravailable funds in
the credit market. However, when trust funds redeem securities to
obtain cash to fundexpenditures, they compete with the private
sector and thus have an effect on the economy. Because debt held
by the trust funds is neither equalto future benefit payments nor
a measure of the commitments of the current system, it cannot be
seenas a measure of this future burden. Nevertheless, it provides
an important signal of the existence of thisburden. Whether the
debt recognizes an existing burden or constitutes a new economic
burden for thefuture depends on whether or not these currently
promised benefits would be paid even if trust fundrevenues and
holdings of securities were insufficient to cover the full costs.
Q. What is the debt limit? Does it provide a wayto control the
amount we borrow?

A. The gross debt, excluding some minoradjustments,3 is the
measure that is subject to the federal debt limit. Prior to 1917,
the Congressapproved each issuance of debt. In 1917, to facilitate
planning in World War I, the Congress established adollar ceiling
for federal borrowing, which has been

3A very small amount of the gross debt is excluded from the debt
limit (less than 1 percent at the end of fiscal year 1998).
Theamount excluded is mainly issued by agencies other than the

Department of the Treasury, such as the Tennessee ValleyAuthority.

GAO/OCG-99-27Page 12

Section I: What is the Federal Debt? raised periodically over the
years. This limit, currently$5.95 trillion, receives increased
public attention periodically when the Congress and the
Presidentdebate raising the limit to accommodate further
borrowing. At the end of fiscal year 1998, the amountof debt
subject to limit was about $5.4 trillion.

The debt limit does not determine federal borrowingneeds. These
needs result from all of the revenue and spending decisions the
government makes as well asthe performance of the economy.
Therefore, whenever the government's borrowing approachesthe debt
limit, the Congress and the President must eventually raise the
limit to pay the government's billsas they come due.

Q. Under what circumstances would the debtlimit have to be raised
during periods of budget surpluses? A. Under its January 1999
baseline projections, theCongressional Budget Office (

CBO) estimates that thedebt limit--currently $5.95 trillion--will
not be

reached through 2009. However, some policy actionsor economic
changes resulting in a reduction in annual budget surpluses may
cause the debt limit tobe reached sooner. Additionally, any change
that would increase the balances of the trust funds, suchas the
Social Security trust funds,4 would cause the debt limit to be
reached sooner unless it also causeddebt held by the public to
fall by at least an equal amount. Interestingly, because the
Social Securitytrust funds hold balances in special Treasury
securities, Social Security reform could trigger a risein gross
debt if it led to increases in trust fund balances. In this case,
debt held by governmentaccounts would increase, causing gross debt
to rise as

4Social Security trust funds refers to the combined Old-Age and
Survivors Insurance Trust Fund and Disability Insurance TrustFund.

GAO/OCG-99-27Page 13

Section I: What is the Federal Debt? well unless debt held by the
public were reducedcommensurately.

GAO/OCG-99-27Page 14

Section II: Budgetary Effects of Federal Debt

Q. What does it mean to have a budget surplusor deficit and how
are they related to federal debt? A. The budget surplus or deficit
(also called the"unified" or "total" budget surplus or deficit) is
the difference between total federal spending andrevenue in a
given year. To finance a budget deficit,1 the government borrows
from the public. Availablesurpluses in trust funds reduce or
eliminate the need for the government to borrow from the public to
payfor current expenditures. Alternatively, when a budget surplus
occurs, the government accumulatesexcess funds that are used to
reduce debt held by the public. In other words, deficits or
surpluses generallyapproximate the annual net change in the amount
of government borrowing from the public, while thedebt held by the
public generally represents the amounts of unified deficits
accumulated over timeless any surpluses.

When the Congress makes budgetary decisions, it isalso indirectly
making decisions about the nominal level of debt held by the
public. If the budget is indeficit, the government has to issue
new debt to the public in addition to rolling over maturing debt.
In thecase of a balanced budget, the amount of debt held by the
public would remain essentially unchangedbecause the government
does not retire a portion of its principal each year. Rather, the
Treasury pays onlythe interest costs of debt held by the public.
The principal that comes due is paid off with cash raised

1The surplus or deficit is approximately equal to the yearly
change in the debt held by the public. However, several minor
types oftransactions referred to as "other means of financing"
account for

differences between the two amounts. These "other means"include
changes in the Treasury's cash balances, outstanding payment
obligations, and net financing disbursements by thegovernment's
loan guarantee and direct loan accounts.

GAO/OCG-99-27Page 15

Section II: Budgetary Effects of FederalDebt by issuing new
securities, and the debt is rolled over.2A unified budget surplus
allows the Treasury to reduce the nominal level of debt held by
the public byrolling over less debt when it matures. (See section
IV for more information about the Treasury's debtmanagement.)

Figures II.1 and II.2 show the budget surplus or deficitand the
debt held by the public as shares of

GDP.

Figure II.1: Surplus or Deficit as a Share of GDP (1797-1998)

Note: Data until 1940 are shown as a percent of gross
nationalproduct (GNP); data from 1940 to present are shown as a
percent of GDP. Sources: OMB and Department of Commerce. 2A
balanced budget would not change debt levels themselves but would
reduce the ratio of debt to GDP assuming continuedeconomic growth.

GAO/OCG-99-27Page 16

Section II: Budgetary Effects of FederalDebt Short deficit periods
have caused increases in debtthat lingered long after annual
deficit levels declined. For example, the federal budget deficit
increasedsharply from about 4 percent to about 30 percent of the
economy between the years 1941 and 1943 and,correspondingly,
federal debt held by the public increased sharply until it reached
its zenith as apercentage of

GDP in 1946. It then took 17 years, from1946 until 1963, for the
debt

GDP ratio to return to its1941 level.

Figure II.2: Federal Debt Held by the Public as a Share of GDP
(1797-1998)

Note: Data until 1940 are shown as a percent of GNP; datafrom 1940
to present are shown as a percent of GDP. Sources: OMB and
Department of Commerce.

GAO/OCG-99-27Page 17

Section II: Budgetary Effects of FederalDebt In the past, the
debt-GDP measure rose substantiallyonly as the result of wars and
recessions. Borrowing during these times helped protect the nation
fromforeign aggression and stabilize the economy. Between the
early days of the republic and the recentpast, the only events
that led debt held by the public to increase above 30 percent of
GDP were the CivilWar, World War I, the Great Depression, and
World War II. Recent increases in the debt broke with
historicalpatterns by climbing significantly during a period
marked by the absence of either a major war ordepression.
Beginning in the late 1970s, rising federal budget deficits fueled
a corresponding increase indebt held by the public which
essentially doubled as a share of GDP over a 15-year period
through themid-1990s and reached about 50 percent of

GDP in1993. Since then, the debtGDP measure has stabilizedand
begun to drop, as budget deficits turned to a

surplus in 1998 and economic growth continued. At the end of
fiscal year 1998, debt held by the publicwas about 44 percent of

GDP. While it has begun todecline, this level still is relatively
high by historical

standards. In fact, prior to 1990, the only time thedebt

GDP measure had exceeded the current level wasfrom World War II
through 1961.

CBO's January 1999 projection shows that sustainedsurpluses could
allow debt held by the public to drop to about 9 percent of GDP by
2009, the lowest levelsince 1917.

CBO's projection, however, is a baselineprojection that assumes no
changes in tax or

spending policies over the period--that is, it assumesthat the
entire unified budget surplus would be used to reduce debt held by
the public. Under thisassumption, debt held by the public as a
percentage of GDP would be lower than debt held by government

GAO/OCG-99-27Page 18

Section II: Budgetary Effects of FederalDebt accounts as a
percentage of GDP beginning in 2004.Debt held by government
accounts will continue to rise steadily during this timeframe
under CBO'sprojections. (See figure II.3.)

Figure II.3: Federal Debt as a Share of GDP (1970-2009)

Sources: OMB and CBO (January 1999 projections for fiscalyears
1999 through 2009). While the current ratio of debt held by the
public to GDP in the United States is high by historicalstandards,
in 1997 the United States was in the middle

of a group of seven major industrialized nations when

GAO/OCG-99-27Page 19

Section II: Budgetary Effects of FederalDebt looking at net
general government debt3 as a share ofthe economy. (See figure
II.4.) Figure II.4: Net General Government Debt of Selected
Countries (1997 Estimates)

Source: Organization for Economic Cooperation andDevelopment 3Net
general government debt includes the consolidated debt of all
levels of government (national, state or regional, and local).

GAO/OCG-99-27Page 20

Section II: Budgetary Effects of FederalDebt Q. What is the role
of trust funds in measuringbudget deficits or surpluses? A.
Although the unified budget balance is the mostcomprehensive
measure of net annual spending or revenue in a given year, another
measure--the federalfunds balance--is necessary to explain annual
changes in the gross federal debt. As noted earlier, thegross debt
includes the debt held by federal trust fund accounts. Recently,
in the aggregate, these trust fundshave been running cash
surpluses which are invested in special U.S. Treasury securities.4
These surplusesreduce the need for the federal government to
borrow from the public. When the trust fund surpluses andthe
interest they earn from the Treasury are excluded from the budget,
there is a deficit in the remainder ofthe budget--the so-called
federal funds portion. At the end of 1998, the unified budget had
a surplus of$69.2 billion--the net result of a trust funds surplus
of $161.2 billion and a federal funds deficit of$92.0 billion.
(See figure II.5.) This is the first time since 1969 that trust
funds surpluses exceeded thefederal funds deficit--leading to a
unified budget surplus.

4The Social Security trust funds have run the largest surpluses.
Some other trust funds like the Hazardous Substance Superfundhad
deficits in 1998.

GAO/OCG-99-27Page 21

Section II: Budgetary Effects of FederalDebt Figure II.5: Unified
Budget Deficit or Surplus and Its Components (1968-1998)

Source: OMB. When a trust fund program needs to pay benefits
andexpenses and these outlays exceed dedicated tax receipts, it
redeems some of its Treasury securities asneeded. The Treasury
would need to obtain cash to pay these redemptions. Cash could be
obtained in oneof the following ways: increased taxes, spending
cuts, increased borrowing from the public, or (if the
unifiedbudget is in surplus) retiring less debt. Some trust funds
support programs with long-term commitmentswhere current
expenditures on benefits and

GAO/OCG-99-27Page 22

Section II: Budgetary Effects of FederalDebt administration
already exceed dedicated annual taxrevenues (a cash deficit). The
Medicare Hospital Insurance (Part A) Trust Fund has had a cash
deficitsince 1992 and, as needed, it redeemed a portion of its
accumulated securities each year to pay currentclaims. The
combined Social Security trust funds are projected to reach the
point when currentexpenditures exceed annual receipts by 2014.5

Q. How does the federal debt affect the federalbudget and how has
this relationship changed over time? A. The federal debt primarily
affects the federalbudget through the level of interest spending.
The federal government pays interest to holders ofTreasury
securities. There are two measures of federal interest--net
interest and gross interest. Netinterest, largely the interest
paid on the debt held by the public,6 represents the current
burden of servicingthe debt. It reflects the amount the government
pays to its outside creditors. Gross interest includes both
interest paid to thepublic and the interest credited to federal
government trust funds and other government accounts that
holdfederal debt. The trust funds interest payments do not affect
either the budget or the economy because thereis no net change in
current spending--in effect, one

5This date has been recently revised from 2013. See Social
Security and Surpluses: GAO's Perspective on the President's
Proposals(GAO/T-AIMD/HEHS-99-95, February 23, 1999); Social
Security and

Surpluses: GAO's Perspective on the President's Proposals(GAO/T-
AIMD/HEHS-99-96, February 23, 1999); and Social Security: What the
President's Proposal Does and Does Not Do(GAO/T-AIMD/HEHS-99-76,
February 9, 1999).

6In addition to the interest that the federal government pays on
debt held by the public, the government also earns some
interestfrom various sources and pays interest for purposes other
than

borrowing from the public. These amounts are only a small
portionof net interest and, taken together, somewhat reduce its
total.

GAO/OCG-99-27Page 23

Section II: Budgetary Effects of FederalDebt part of the
government pays the interest and anotherpart receives it. However,
this interest, along with all other trust fund revenue, makes up
part of the trustfund surplus, which is invested in government
debt securities. Net interest rose sharply from about 9 percent of
totalfederal spending in fiscal year 1980 to about a 15 percent
share in fiscal year 1995 and has remainedalmost flat since then.
(See figure II.6.) In 1998, net interest spending was about $243
billion--14.7 percent of total federal outlays--and it remained
the third largest spending item in the federal budget.(See figure
II.7.) This relatively large interest burden can significantly
reduce budgetary flexibility. Unlikemost of the budget, it cannot
be changed directly.

GAO/OCG-99-27Page 24

Section II: Budgetary Effects of FederalDebt Figure II.6: Net
Interest as a Share of Total Federal Outlays (1940-2009)

Sources: OMB and CBO (fiscal years 1999-2009 projection).

GAO/OCG-99-27Page 25

Section II: Budgetary Effects of FederalDebt Figure II.7: Federal
Outlays by Selected Functions (Fiscal Year 1998)

Source: OMB. Interest spending is a function of interest rates
andthe amount of debt on which interest must be paid. At any given
interest rate, additional borrowing willdrive up interest
payments. Similarly, at any given level of debt, higher interest
rates increase theamount of interest paid.

Although the debt incurred during World War II wasextremely large,
interest rates were much lower than they are today. (See figures
II.2 and II.8.)

GAO/OCG-99-27Page 26

Section II: Budgetary Effects of FederalDebt Figure II.8: Average
Interest Rate on the Federal Debt (1940-1998)

Source: OMB. In the past, interest payments contributed to
deficitsand helped fuel a rising debt burden. Rising debt, in
turn, raised interest costs to the budget, and thefederal
government increased debt held by the public to finance these
interest payments. A change from a budget deficit to a surplus
reducesfederal debt and replaces this "vicious cycle" with a
"virtuous cycle" in which budget surpluses result inlower debt
levels. Lower debt levels lead to lower

GAO/OCG-99-27Page 27

Section II: Budgetary Effects of FederalDebt interest payments--
possibly at lower interest rates.7These lower interest payments in
turn lead to larger potential surpluses and/or increased
budgetflexibility.

CBO figures show that if all projectedsurpluses are retained and
are used to reduce debt

held by the public, net interest--primarily the interestpaid on
debt held by the public--will decline from about 15 percent of net
outlays in fiscal year 1998 toabout 4 percent in fiscal year
2009.8 (See figure II.6.) CBO numbers also show that about 23
percent of thegrowing budget surpluses projected over the next 10
years come from interest savings if the surplus ismaintained and
is fully used to reduce debt held by the public. Using CBO
estimates, if the budget were tobe in balance rather than in
surplus from 2000-2009, net interest costs in fiscal year 2009
would be$123 billion greater--or about $568 billion cumulatively
between now and then. Nevertheless,despite the stabilization of
the interest burden since 1995, the budget remains vulnerable to
changes ininterest rates because the debt remains relatively high
as a percentage of GDP. CBO estimates that if interestrates rise
by 1 percentage point above their projected levels for fiscal
years 2000-2009, the surplus would beabout $20 billion lower each
year.9

7Just as deficits put upward pressure on interest rates, a period
of budget surpluses should relieve this pressure. Lower interest
ratesthen reduce interest costs.

8CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009,
January 1999.

9Ibid. p. 112.

GAO/OCG-99-27Page 28

Section III: Economic Effects of Federal Debt

Q. What are the economic consequences offederal borrowing? A.
Borrowing has both benefits and costs. Manybelieve that additional
borrowing is appropriate under certain circumstances. For example,
some believethat the automatic increase in federal borrowing that
occurs during recessions benefits the economy byhelping to
maintain income and spending levels. Such net borrowing may occur
in response to the reducedtax receipts that result from a
shrinking economy and the increased need for federal benefit
payments (forexample, unemployment insurance).

Others believe that additional federal borrowing alsois
appropriate for investment spending, such as building roads,
training workers, or conductingscientific research.1 If an
investment is well chosen, it can ultimately boost worker
productivity andeconomic growth in the long term, producing a
larger economy from which to pay the interest and principalon the
borrowed funds. However, from 1986 to 1998, federal borrowing was
accompanied by a decline infederal investment spending as a share
of the economy. If net federal borrowing is not used for any of
thepurposes described above, many believe that the costs are
likely to outweigh the benefits. In this case,the benefits of any
increased federal spending or tax reduction are likely to be more
concentrated in theshort term, while the costs tend to occur
mainly in the long term. This timing difference can have important

1However, CBO's analysis showed that many federal investment
projects yield economic benefits that are small or even negative.
Alimited number of other federal investment projects have high

returns that would be forgone without federal involvement;however,
because they are few in number, their potential impact on growth
is small. See The Economic Effects of Federal Spending
onInfrastructure and Other Investments, June 1998.

GAO/OCG-99-27Page 29

Section III: Economic Effects ofFederal Debt implications for
different generations. The cost oftoday's increase in borrowing
will be imposed upon tomorrow's workers and taxpayers, who may not
fullyshare in the benefits of the additional spending (or lower
taxes) made possible by the borrowing. To theextent that deficits
reduce private investment, they also may reduce or slow the growth
of the livingstandards of future generations.

Figure III.1 shows our latest simulation2 illustratingthat saving
all or a significant share of the surplus in the near term would
produce demonstrable gains inper capita

GDP over the long run. This higher GDP inturn would increase the
nation's economic capacity to

handle all its commitments in the future.

2Simulations should not be viewed as forecasts of budgetary or
economic outcomes 50 or more years in the future. Rather,
theyshould be seen only as illustrations of the budget or economic

outcomes associated with alternative policy paths based on
currentinformation about demographic and budgetary trends and the
functioning of the economy.

GAO/OCG-99-27Page 30

Section III: Economic Effects ofFederal Debt Figure III.1: GDP Per
Capita From GAO Simulations, 1998 to 2070

Note: The "on-budget balance" path assumes that thenon-Social
Security part of the budget is balanced, and the overall fiscal
position of the government reflects the surplus ordeficit of the
Social Security trust funds. The "save the surplus" path assumes
that there will be no changes in current policiesand that budget
surpluses through 2027 are used to reduce debt held by the public.
The "no surplus" path assumes that taxcuts and permanent increases
in discretionary spending eliminate the surpluses but keep the
budget in balance through2008. Thereafter, deficits reemerge as
spending pressures grow. Source: GAO long-term model.

GAO/OCG-99-27Page 31

Section III: Economic Effects ofFederal Debt Federal borrowing can
reduce the funds that areavailable for private investment and
exert an upward pressure on interest rates. Since the
federalgovernment competes with private investors for scarce
capital, federal borrowing can reduce theamount available for
other investors. Government borrowing can be large enough to
affect the overalllevel of interest rates, making borrowing more
expensive for individuals and families who take outloans for
homes, cars, and college.

Q. What is the interaction between federalborrowing and saving? A.
The large amounts of federal borrowing in the1980s and 1990s
occurred at a time when private saving was declining as a share of
the economy. Thismeant that large federal government deficits
further decreased a shrinking pool of domestic privatesavings
available for private investment. The federal government ran a
surplus in fiscal year 1998--for thefirst time since 1969--so that
it added to, instead of subtracting from, the saving of other
sectors. Theprivate saving rate, however, has diminished further
in 1998, reaching its lowest level since shortly afterWorld War
II. This makes the contribution of federal surpluses to national
saving even more important.(See figures III.2 and III.3.)

GAO/OCG-99-27Page 32

Section III: Economic Effects ofFederal Debt Figure III.2: Effect
of Federal Budget Surpluses and Deficits on Net National Saving
(1960-1989)

Note: Net national saving is composed of total private andpublic
sector saving. Net nonfederal saving excludes capital depreciation
and is composed of private saving and theaggregate state and local
government surplus/deficit. All data are on a national income and
product accounts basis. Source: Department of Commerce.

GAO/OCG-99-27Page 33

Section III: Economic Effects ofFederal Debt Figure III.3: Effect
of Federal Budget Surpluses and Deficits on Net National Saving
(1990-1998)

Note: Net national saving is composed of total private andpublic
sector saving. Net nonfederal saving excludes capital depreciation
and is composed of private saving and theaggregate state and local
government surplus/deficit. All data are on a national income and
product accounts basis. Source: Department of Commerce.

The U.S. national saving rate is not only low byhistorical
standards, it has been well below that of other major industrial
countries over the past few

GAO/OCG-99-27Page 34

Section III: Economic Effects ofFederal Debt decades. From 1960
through 1996, U.S. net nationalsaving as a share of

GDP was sixth among a group ofseven major industrialized
countries. (See figure

III.4.) A low national saving rate can have seriousimplications
for the economy, particularly for its long-term growth. Saving
provides the resources tobuild new factories, develop new
technologies, and improve the skills of the workforce. Such
investmentsmay boost workers' productivity, which in turn produces
higher wages and faster economic growth.Less investment today
means slower economic growth tomorrow.

GAO/OCG-99-27Page 35

Section III: Economic Effects ofFederal Debt Figure III.4: Average
Net National Saving Rates of Selected Countries (1960-1997)

Source: Organization for Economic Cooperation andDevelopment. A
drop in national saving does not necessarily resultin an
equivalent decline in investment because the United States can
borrow from abroad to help financedomestic investment. Indeed,
part of the recent decline in national saving has been offset
byincreased borrowing from foreign investors. The effects of
foreign investment, however, are mixed.While foreign investment
benefits the United States by allowing it to invest more than it
saves, the interestpayments on this investment flow abroad.

GAO/OCG-99-27Page 36

Section III: Economic Effects ofFederal Debt Some analysts believe
that the United States will haveto pay higher interest rates to
attract foreign investment in the future. This is because
othercountries have economic and fiscal challenges of their own,
such as the aging of the baby boom generation.Other countries
could earn relatively higher returns on their savings at home if
there were more profitableopportunities available in their own
countries. Further, the United States dollar faces a newcompetitor
in international capital markets--the euro, which is the single
currency of 11 European countriesincluding France, Germany, Italy,
Spain, and the Netherlands. Some have suggested that
theavailability of the euro eventually could eliminate the unique
advantage held by U.S. securities--a broad,deep market for low-
risk securities denominated in an easily convertible currency.
Because the debt of thesecountries will be denominated in a single
currency, some analysts believe that euro-denominated
debtsecurities may someday become close competitors for U.S.
Treasury securities. Q. What are the projected demographic
changesand their implications for debt?

A. The baby boom generation's retirement has seriousimplications
for the future path of federal debt. First, under current federal
budget policies, as the babyboom generation leaves the workforce,
spending pressures will grow rapidly due to increased costs
ofMedicare, Medicaid, and Social Security. If no further policy
actions are taken, these three programs alonewill double as a
share of

GDP by 2070. (See figureIII.5.) Unless offsetting fiscal actions
were taken,

deficits would re-emerge in the second decade of thetwenty-first
century, thereby prompting higher levels of debt and interest
costs. Second, because there willbe fewer workers per beneficiary
in the future, workers will face greater burdens in financing
these

GAO/OCG-99-27Page 37

Section III: Economic Effects ofFederal Debt costs. Reducing
federal debt would expand the futuregrowth of the economy,
permitting tomorrow's workforce to finance more easily the
retirement costsof the baby boom generation.

Figure III.5: Spending on Social Security, Medicare, and Medicaid
as a Share of GDP Through 2070 Under GAO's "Save the Surplus"
Simulation

Note: In 2030, net interest as a share of GDP is -0.9 percent.
Source: GAO's long-term model.

GAO/OCG-99-27Page 38

Section IV: Federal Debt Management and Ownership

Q. How does the government borrow and whatinstruments are used?
A. The federal government borrows by issuingsecurities, mostly
through the Department of the Treasury. The U.S. Treasury has the
single largestoutstanding stock of debt instruments in the
financial markets. Most of the securities that constitute debtheld
by the public are marketable, meaning that once the government
issues them, they can be resold bywhoever owns them.1 These
marketable securities consist of bills that mature in a year or
less, noteswith original maturities of at least one year to over
10 years, and bonds with original maturities frommore than 10
years out to 30 years. (See table IV.1.)

1The government also issues nonmarketable securities, which cannot
be resold. Examples of nonmarketable securities includesavings
bonds and special securities for state and local

governments. The securities held by government trust funds (suchas
Social Security and Medicare) and other government accounts also
are primarily nonmarketable.

GAO/OCG-99-27Page 39

Section IV: Federal Debt Managementand Ownership Table IV.1:
Schedule of Treasury Securities Auctions Maturity Frequency
Treasury bills 91-day (3-month) Weekly 182-day (6-month) Weekly
52-week (1 year) Every 4 weeks Cash Management Irregular, as
needed Notes 2-year Monthly 5-year February, May, August, November
10-year February, May, August, November Bonds 30-year February,
August, November Inflation-indexed securities 10-year January and
July 30-year April and October

Source: Department of the Treasury

Bills are issued at a discount from the par amount--orface value--
and the Treasury repays the par value at maturity. The difference
constitutes interest. Notesand bonds pay interest semi-annually at
a fixed rate. Most of these notes and bonds, called
nominalsecurities, return the par value at maturity; others,
called inflation-indexed securities, repay principaladjusted for
inflation. At the end of fiscal year 1998, a total of $3.3
trillion in all forms of marketablesecurities was outstanding.

The mix of securities changes regularly as new debt isissued. The
mix of securities is important because it can have a significant
influence on interest payments.For example, a long-term nominal
bond typically

GAO/OCG-99-27Page 40

Section IV: Federal Debt Managementand Ownership carries a higher
interest rate--or cost to thegovernment--than a shorter term
security because investors demand higher interest to compensate
forwhat they see as greater risks, such as higher inflation in the
future. However, long-term bonds offer thecertainty of knowing
what Treasury's payments will be over a longer period. (See figure
IV.1.)

Figure IV.1: Treasury Bills, Notes, and Bonds Outstanding (End of
Fiscal Years 1990-1998)

Source: Department of the Treasury.

GAO/OCG-99-27Page 41

Section IV: Federal Debt Managementand Ownership The Treasury
introduced inflation-indexed securitiesin 1997 because it believed
that allowing investors to avoid the risk of inflation would
reduce the cost tothe government of longer term securities.
Interest payments on inflation-indexed securities are adjustedfor
inflation as they are paid because they are figured on the
inflation-adjusted principal. However, thelargest payments to
investors are back-loaded; that is, the payments for inflation-
adjusted principal aremade at maturity. If inflation is higher
than expected, the financing costs of inflation-indexed securities
maybe greater than the cost of nominal securities. The converse
would be true if inflation were lower thananticipated. Both the
pattern of payment and total costs of inflation-indexed securities
are different fromthose of nominal securities. With inflation-
indexed securities, small changes in inflation can have
asignificant effect on the budget.

The budget includes interest outlays for both nominaland
inflation-indexed securities similarly--on an accural basis rather
than when the interest is paid toinvestors.2

Q. Who holds Treasury securities and how haveinvestors changed
over time? A. The federal debt held by the public is owed to awide
variety of investors, including individuals, banks, businesses,
pension funds, the FederalReserve, state and local governments,
and foreign governments. These buyers are attracted by
thesecurities' perceived freedom from credit risk, ready

2On nominal securities, the interest is computed as a fixed
percentage of the principal, accrued monthly in the budget,
andpaid in cash semi-annually. On inflation-indexed securities,
the

principal is adjusted for inflation, accrued monthly in the
budget,and not paid until the security is redeemed. Interest on
inflation-indexed securities is computed as a fixed percentage
ofthe inflation-adjusted principal, accrued monthly in the budget,
and paid in cash semi-annually.

GAO/OCG-99-27Page 42

Section IV: Federal Debt Managementand Ownership marketability,
exemption from state and local taxes,and wide range of maturities.
The Department of the Treasury estimated that the largest share of
debt heldby the public--35 percent--was owned by businesses and
various (mainly financial) institutions at the endof fiscal year
1998. Since the Department of the Treasury does not track sales
between investors,information on ownership is estimated based on
survey and actual data. (See figure IV.2.) Mostsecurities are sold
initially to dealers and brokers that resell the securities.3

3In 1997 auctions, dealers and brokers, who would likely resell
Treasury securities, were allotted about 71 percent of
nominalnotes, about 65 percent of nominal bonds, about 55 percent
of

inflation-indexed notes, and about 53 percent of bills.

GAO/OCG-99-27Page 43

Section IV: Federal Debt Managementand Ownership Figure IV.2:
Estimated Ownership of Debt Held by the Public (End of Fiscal
Years 1990 and 1998)

Note: The Treasury has indicated that it will revise
thepresentation of ownership statistics in the June 1999 Treasury
Bulletin. Source: Department of the Treasury, Treasury Bulletin,
TablesOFS-1 and OFS-2, December 1993 and December 1998.

Although debt ownership is concentrated amongbusinesses and other
institutions, many small investors also directly own Treasury
securities. Forexample, anyone who owns a United States savings
bond holds a portion of the debt. Further, manypension funds and
money market accounts include debt securities, so small investors
also arerepresented indirectly through these holdings.

The Treasury Department estimates that abouttwo-thirds of the debt
is owed to U.S. investors, which

GAO/OCG-99-27Page 44

Section IV: Federal Debt Managementand Ownership means that
interest and principal payments are mademainly to U.S. residents
and institutions. The remaining one-third of the debt is owned by
foreigninvestors, including central banks as well as private
investors. Estimates of foreign and internationalownership
increased from about 18 percent to about 32 percent between 1990
and 1998 due, in part, toattractive returns and uncertainties in
financial markets worldwide. The United States benefits
fromforeign purchases of government bonds because foreign
investors fill part of our borrowing needs.However, to service
this foreign-owned debt, the United States government must send
interestpayments abroad, which adds to the incomes of residents of
other countries rather than to theincomes of United States
residents.

State and local governments purchase specialnon-marketable
Treasury securities, known as State and Local Government Series
(SLGs) securities, totemporarily invest funds until they are
needed for other purposes. For example, a state may issue
debtsecurities or borrow funds to facilitate their financing of
capital projects. In addition, states and localgovernments
purchase other Treasury securities as investments for their
pension funds. Treasuryestimates that holdings by state and local
governments amount to about 12.5 percent of debtheld by the public
in 1998--down from 22 percent in 1990 but up from a low of 11.7
percent in 1997. Federal Reserve ownership of public debt
increasedfrom 9 percent to 12 percent between 1990 and 1998 in
line with the growth in demand for bank reservesand currency.

GAO/OCG-99-27Page 45

Section IV: Federal Debt Managementand Ownership Q. What are the
Treasury's goals for debtmanagement? A. The U.S. Treasury has the
following three principalgoals for debt management:

* to ensure the government has sufficient cash at alltimes to pay
its obligations,

* to ensure the government finances its debt at thelowest cost,
and

* to promote efficient capital markets.

The first goal--sound cash management--representsthe Treasury's
central mission--receiving revenues and paying the expenses of the
U.S. government. Cashbalances vary throughout the fiscal year,
reflecting the significant seasonal swing in receipts and
outlays.The cycles for issuing bills, notes, and bonds are
determined largely by the Treasury's cashmanagement needs. When
the budget was in deficit, the government generally borrowed
heavily in all butthe third quarter of the fiscal year, which
includes the April income tax deadline. In fiscal year 1998,
whichshowed a budget surplus, the government borrowed heavily in
the first half of the fiscal year but reduceddebt held by the
public in the second half of the fiscal year. Cash on hand may
vary significantly if actualrevenue or outlays differ
significantly from projections. The Treasury also issues
cashmanagement bills from time to time to cover seasonal low
points in available cash. Treasury officials believe the best
approach toachieving the lowest cost-financing is to maintain a
regular and predictable auction schedule as well as

GAO/OCG-99-27Page 46

Section IV: Federal Debt Managementand Ownership broad and deep
markets.4 The Treasury takes along-term perspective on the cost of
debt and does not "time the market" to take advantage of
marketconditions.

The efficient markets goal is achieved by issuing debtwith various
maturities and in sufficient amounts to appeal to the broadest
range of investors. That is, theTreasury's intent is to ensure
that the market is sufficiently liquid--broad and deep--in
outstandingissues. For example, the Treasury seeks to balance the
needs of individual investors who may want tobuy and hold short-
term Treasury bills and notes with the needs of financial dealers
who purchase long-termnotes and bonds for resale on the secondary
market. One way the Treasury balances the needs of
differentinvestors with the need to ensure sufficient amount of
debt in a maturity range is by changing specificinstruments in
response to market demands. Prompted by reduced borrowing
accompanying thesurplus, for example, in May 1998, the Treasury
discontinued 3-year notes because it determined thatinvestor
demand was being met with the existing 2-year and 5-year notes. To
bolster market efficiencyand liquidity, the Treasury also decided
to auction new 5-year notes quarterly rather thanmonthly--allowing
4 larger auctions rather than 12 smaller ones.

4The regular and predictable offering schedule has helped to
reduce the government's borrowing costs because, for example,
investorsuncertain about the schedule may switch to alternative
instruments

and offerings may become compressed. Maintaining broad anddeep
markets appeals to a broader range of investors and mitigates
refunding risks.

GAO/OCG-99-27Page 47

Section IV: Federal Debt Managementand Ownership Q. How does the
Treasury balance its three goalsfor debt management? A. These
three goals are interrelated, but they are notalways entirely
compatible. Because of this, the Treasury chooses strategies that
balance its needs ata given time. These strategies include varying
the size of debt issues, changing the timing of auctions,
andvarying the types of debt instruments it offers. For example,
in the early 1990s when debt outstandingwas quite large, the
Treasury reduced the average maturity on the debt and issued fewer
long-termbonds to lower its interest costs.

Tensions exist among the Treasury's goals. Cashmanagement needs
may not be entirely compatible with the goal of maintaining
efficient markets throughoptimal market liquidity across the
maturity spectrum. Because new Treasury bills are issuedweekly,
they represent an easy way for the Treasury to increase or dispose
of cash balances. For example,if the Treasury received a large
unexpected influx of cash it could reduce the amount of new bills
it issuedat the next weekly auction. If the reduction were large
enough or happened often enough, this could have anegative effect
on liquidity in the bill market (by reducing the supply too low to
meet market demandwithout a premium) and, therefore, reduce market
efficiency. It also will cause a greater share of theremaining
debt to be shifted at least temporarily to higher interest-
bearing, longer term securities. Thiswas the case in the third
quarter of fiscal year 1998 when the Treasury had to quickly
absorb asurprisingly large revenue inflow from tax receipts. The
Treasury significantly reduced the amount of billsit rolled over,
thus raising the percentage of outstanding debt held in longer
term, higher costinstruments.

GAO/OCG-99-27Page 48

Section IV: Federal Debt Managementand Ownership Another trade-off
that the Treasury must address isthe relative proportions of
longer-term versus shorter-term debt and the resulting
implications forcost and market efficiency. Interest rates for
shorter-term debt usually are lower than those forlonger-term debt
in part because borrowers face less interest rate risk. For the
Treasury, this means thatissuing short-term debt lowers the cost
of borrowing today but runs the risk of higher costs when the
debtmust be refinanced. Issuing more long-term debt sacrifices
lower costs initially for a more predictablecost over a longer
term, albeit one that denies the Treasury the benefit of rate
decreases beforelong-term debt is due. At the end of fiscal years
1997 and 1998, the Treasury held more longer term thanshorter term
debt.

Q. How does debt management in a time ofbudget surplus differ from
debt management during periods of budget deficits? A. The
Treasury's three debt managementgoals--sufficient cash on hand,
lowest cost financing, and efficient markets--remain the same
regardless ofwhether the unified budget is in surplus or deficit.
However, the Treasury may use different strategies topursue these
goals when debt levels are declining. Additionally, while the
Treasury continually makesdecisions on the composition of the
federal debt, balancing the goals becomes more challenging whenthe
amount of debt held by the public is being reduced. During periods
of budget deficits and increasing debt,the Treasury's primary
consideration was how to make debt instruments more attractive to
potentialinvestors and whether to introduce new instruments. Under
these conditions, it is easier to maximize twogoals--lowest cost
financing and promoting efficient

GAO/OCG-99-27Page 49

Section IV: Federal Debt Managementand Ownership markets. In
contrast, budget surpluses and reductionsin debt held by the
public present a particular challenge to the Treasury in achieving
its goals oflowest cost financing and maintaining market
efficiency. As debt held by the public falls, thetrade-offs
between lowest cost financing and promoting efficient markets by
offering a wide varietyof debt instruments with a variety of
maturities and yields become more pronounced. That is, as
budgetsurpluses reduce the need for the Treasury to issue debt to
the public, the Treasury will face a challengein sustaining
efficient markets in each and every instrument. In looking at the
efficient market issue,the Treasury considers the demand of
potential investors for different instruments--such as thosewho
want to purchase bills and those who want notes or bonds. This
balancing act becomes more difficultwith a declining supply of
government securities available to the public. The Treasury also
considersthe needs of investors such as brokers and dealers who
want to purchase nominal notes and bonds5 forresale on the
secondary market as well as the desires of other investors that
want securities such asinflation-indexed instruments to buy and
hold over longer periods of time. Furthermore, introducing anew
class of security, such as inflation-indexed notes and bonds, when
overall debt held by the public isbeing reduced means that the
Treasury can issue less new nominal debt to preserve the liquidity
of otherissues and adds complexity to achieving these goals.

To balance its goals in a time of declining debt heldby the
public, the Treasury has a number of options. For example, it can
choose not to issue new debt toreplace the maturing debt (that is,
not rolling over debt) and/or it could repurchase outstanding debt
inthe market in advance of its maturity date. Other debt
management actions--such as eliminating a debtinstrument, reducing
the number of debt instruments

5Nominal notes and bonds are not indexed for inflation.

GAO/OCG-99-27Page 50

Section IV: Federal Debt Managementand Ownership in a given
auction, and/or changing the auctioncycle--also can be helpful in
the context of debt reduction.

GAO/OCG-99-27Page 51

Section V: Key Issues in Evaluating Future Debt Levels

Q. What are the key issues in evaluating thelevel of debt in the
future? A. While the debt held by the public has declinedrecently
as a share of

GDP, it remains relatively high.Further reductions in the debt-to

GDP ratio will helpbuild the fiscal capacity to provide baby boom

retirees with needed retirement and health careservices if such
reductions lead to more private investment and greater productive
capacity. Boostingsaving, thus raising investment and economic
growth, is a key to responding to these challenges and willcreate
a larger economy.

However, there is no consensus on the optimal levelof debt as a
share of the economy or on how quickly to reduce debt. As we have
seen in our nation'shistory, debt levels have fluctuated over
time, even when there was consensus on the need to reduce debtand
general progress toward that goal.

Although the situation the United States is nowfacing--how to
respond to a budget surplus--presents new challenges, it is not
unique. Anumber of other countries have faced such questions.
Several of those countries that have come to theconclusion that
their debt burden is too high have made debt levels an explicit
part of their fiscaldecision-making process. Australia, New
Zealand, and the United Kingdom all attempt to define prudentdebt
levels as national goals. These debt goals can prove important in
times of surplus. New Zealand, forexample, used its debt goals as
justification for maintaining spending restraint and attempting to
runsustained surpluses. The government promised that once it met
its initial debt target, it would give a taxcut. When it hit that
specified debt target, it delivered on its promised tax cut.

GAO/OCG-99-27Page 52

Section V: Key Issues in EvaluatingFuture Debt Levels Evaluating
the overall level of debt for the futureinvolves balancing a
number of considerations, such as the uses of federal borrowing
(either forinvestment or consumption), the desired mix of private
versus public investment spending, and futureneeds (for example,
paying for the retirement of the baby boom generation).

GAO/OCG-99-27Page 53

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GAO/T-AIMD/HEHS-99-95,February 23, 1999).

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GAO/T-AIMD/HEHS-99-96,February 23, 1999).

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GAO/T-AIMD/HEHS-99-76, February 9,1999).

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Bibliography The Economic and Budget Outlook: Fiscal Years2000-
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(935282) GAO/OCG-99-27Page 55

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