16. FEDERAL BORROWING AND DEBT
Debt is the largest legally binding obligation of the
Federal Government. At the end of 2004, the Government
owed $4,296 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 $168
billion of interest on this debt.
Table 16–1. TRENDS IN FEDERAL DEBT HELD BY THE PUBLIC
(Dollar amounts in billions)
Fiscal Year
Debt held by the public: Debt held by the public as a
percent of:
Interest on the debt held by
the public as a percent of: 3
Current
Dollars
FY 2000
dollars 1 GDP Credit market
debt 2 Total outlays GDP
1946 ............................... 241.9 1,821.2 108.6 N/A 7.4 1.8
1950 ............................... 219.0 1,339.6 80.2 53.3 11.4 1.8
1955 ............................... 226.6 1,217.1 57.4 43.2 7.6 1.3
1960 ............................... 236.8 1,127.8 45.7 33.8 8.5 1.5
1965 ............................... 260.8 1,161.6 38.0 26.9 8.1 1.4
1970 ............................... 283.2 1,047.7 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 2,164.7 36.4 22.3 16.2 3.7
1986 ............................... 1,740.6 2,443.0 39.4 22.6 16.1 3.6
1987 ............................... 1,889.8 2,584.8 40.7 22.3 16.0 3.5
1988 ............................... 2,051.6 2,720.6 41.0 22.2 16.2 3.4
1989 ............................... 2,190.7 2,796.4 40.6 22.0 16.5 3.5
1990 ............................... 2,411.6 2,968.1 42.0 22.6 16.2 3.5
1991 ............................... 2,689.0 3,189.8 45.3 24.1 16.2 3.6
1992 ............................... 2,999.7 3,471.1 48.1 25.7 15.5 3.4
1993 ............................... 3,248.4 3,675.5 49.4 26.6 14.9 3.2
1994 ............................... 3,433.1 3,802.7 49.3 26.8 14.4 3.0
1995 ............................... 3,604.4 3,910.2 49.2 26.7 15.8 3.3
1996 ............................... 3,734.1 3,974.5 48.5 26.3 15.8 3.2
1997 ............................... 3,772.3 3,946.4 46.1 25.3 15.7 3.1
1998 ............................... 3,721.1 3,846.1 43.1 23.5 15.1 2.9
1999 ............................... 3,632.4 3,705.7 39.8 21.4 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 3,395.8 34.1 17.6 8.9 1.7
2003 ............................... 3,913.4 3,687.1 36.1 18.0 7.5 1.5
2004 ............................... 4,295.5 3,968.2 37.2 18.3 7.3 1.5
2005 estimate ................ 4,721.2 4,274.5 38.6 N/A 7.4 1.5
2006 estimate ................ 5,120.8 4,547.4 39.7 N/A 8.6 1.7
2007 estimate ................ 5,454.0 4,745.5 40.1 N/A 9.7 1.9
2008 estimate ................ 5,726.7 4,880.0 39.9 N/A 10.4 2.0
2009 estimate ................ 5,981.8 4,992.7 39.6 N/A 10.8 2.1
2010 estimate ................ 6,211.5 5,078.1 39.1 N/A 11.0 2.1
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).
246 ANALYTICAL PERSPECTIVES
1 Debt held by the public was measured until 1988 as the par value (or face value)
of the security, which is the principal amount due at maturity. (The only exception was
savings bonds.) However, most Treasury securities are sold at a discount from par, and
some are sold at a premium. Treasury debt held by the public is now measured as the
sales price plus the amortized discount (or less the amortized premium). At the time of
sale, the book value equals the sales price. Subsequently, it equals the sales price plus
the amount of the discount that has been amortized up to that time. In equivalent terms,
the book value of the debt equals par less the unamortized discount. (For a security sold
at a premium, the definition is symmetrical.) When the measurement was changed, the
data in Historical Tables were revised as far back as feasible, which was 1956. Agency
debt, except for zero-coupon certificates, is recorded at par. For further analysis of these
concepts, see Special Analysis E, ‘‘Borrowing and Debt,’’ in Special Analyses, Budget of
the United States Government, Fiscal Year 1990, pages E-5 to E-8, although some of
the practices it describes have been revised. In 1997 Treasury began to sell inflationindexed
notes and bonds. The book value of these securities includes a periodic adjustment
for inflation.
2 The term ‘‘agency debt’’ is defined more narrowly in the budget than customarily in
the securities market, where it includes not only the debt of the Federal agencies listed
in table 16–3 but also the debt of the Government-sponsored enterprises listed in table
7-9 at the end of chapter 7 and certain Government-guaranteed securities.
The budget shifted from surplus to deficit in 2002,
and the deficit then grew sharply in 2003 and edged
up a little more in 2004. The shift from a surplus
to a large deficit in these years was primarily because
of several shocks to the economy—which included the
bursting of the stock market bubble, the terrorist attack
of September 11th, and the recession—together with
the additional spending in response to terrorism and
several measures of tax relief that were designed to
stimulate the economy in the near-term and increase
long-term growth. As a result, the deficit is estimated
to rise slightly more in 2005 before declining. Debt
held by the public as a percentage of GDP has risen
since 2001 and is estimated to peak at 40.1 percent
in 2007 before starting to decline gradually.
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 2010. (It is supplemented
for earlier years by tables 7.1-7.3 in Historical
Tables, which is published as a separate volume of the
budget.) As this table shows, Federal debt peaked at
108.6 percent of GDP in 1946, just after the end of
the war. From then until the 1970s, Federal debt grew
gradually, but, due to inflation, it declined in real
terms. 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, but at a slower pace than earlier decades,
and as the economy was disrupted by oil shocks
and inflation. The nominal amount of Federal debt
more than doubled, and Federal debt relative to GDP
and credit market debt stopped declining after the middle
of the decade. The growth of Federal debt accelerated
at the beginning of the 1980s, due in large part
to a deep recession, and the ratio of Federal debt to
GDP grew very sharply. The ratio of Federal debt to
credit market debt also rose, though to a much 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. It 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 11.6 percent by 2001;
interest as a percentage of GDP fell in a similar proportion.
The downward trend in debt relative to GDP ceased
as economic conditions changed and the terrorist attacks
occurred. The decline in the stock market, the
recession, and the initially slow recovery all reduced
tax receipts; tax relief had the same effect; and spending
increased for war and homeland security. As a result
of the ensuing deficits, table 16–1 shows a rise
in debt held by the public throughout the projection
period. The increase in debt, however, is estimated to
slow down. Debt continues to rise by small amounts
as a percentage of GDP in 2004 and 2005 and then
is essentially stable, declining a little in the later years
of the decade.
Debt Held by the Public, Gross Federal Debt,
and Liabilities Other Than Debt
The Federal Government issues debt securities for
two principal purposes. First, it borrows from the public
to finance the Federal deficit.1 Second, it issues debt
to Government accounts, primarily trust funds, that
accumulate surpluses. By law, trust fund surpluses
must generally be invested in Federal securities. The
gross Federal debt is defined to consist of both the
debt held by the public and the debt held by Government
accounts. Nearly all the Federal debt has been
issued by the Treasury and is sometimes called ‘‘public
debt,’’ but a small portion has been issued by other
Government agencies and is called ‘‘agency debt.’’2
Borrowing from the public, whether by the Treasury
or by some other Federal agency, has a significant impact
on the economy. Borrowing from the public is normally
a good approximation of the Federal demand on
credit markets. Regardless of whether the proceeds are
used productively for tangible or intangible investment,
the Federal demand on credit markets has to be financed
out of the saving of households and businesses,
the State and local sector, or the rest of the world.
Federal borrowing thereby competes with the borrowing
247 16. FEDERAL BORROWING AND DEBT
Table 16–2. Federal Government Financing and Debt
(In billions of dollars)
Actual
2004
Estimate
2005 2006 2007 2008 2009 2010
Financing:
Unified budget deficit (–) ....................................................................................................... –412.1 –426.6 –390.1 –312.1 –250.8 –232.9 –207.3
Financing other than the change in debt held by the public:
Net purchases (–) of non-Federal securities by
the National Railroad Retirement Investment Trust .................................................... –2.5 –0.9 0.7 0.5 0.3 0.5 0.5
Changes in: 1
Treasury operating cash balance ................................................................................ –1.4 1.3 ................ ................ ................ ................ ................
Compensating balances 2 ............................................................................................. 22.2 ................ ................ ................ ................ ................ ................
Checks outstanding, etc. 3 ............................................................................................ 6.5 ................ ................ ................ ................ ................ ................
Seigniorage on coins ........................................................................................................ 0.7 0.6 0.7 0.7 0.7 0.7 0.7
Less: Net financing disbursements:
Direct loan financing accounts ..................................................................................... –4.9 –9.1 –12.8 –20.0 –20.7 –20.1 –20.7
Guaranteed loan financing accounts ........................................................................... 9.4 8.9 1.8 –2.3 –2.1 –3.2 –2.9
Total, financing other than the change in debt held by the public 30.0 0.9 –9.5 –21.1 –21.8 –22.2 –22.5
Total, requirement to borrow from the public ................................................ –382.1 –425.7 –399.6 –333.2 –272.6 –255.1 –229.8
Change in debt held by the public ....................................................................................... 382.1 425.7 399.6 333.2 272.6 255.1 229.8
Changes in Debt Subject to Limitation:
Change in debt held by the public ....................................................................................... 382.1 425.7 399.6 333.2 272.6 255.1 229.8
Change in debt held by Government accounts ................................................................... 212.6 251.0 276.6 309.2 325.9 339.8 364.0
Change in other factors ........................................................................................................ 1.1 –13.4 0.2 0.5 0.7 2.8 2.4
Total, change in debt subject to statutory limitation ....................................................... 595.8 663.3 676.4 643.0 599.2 597.7 596.1
Debt Subject to Statutory Limitation, End of Year:
Debt issued by Treasury ....................................................................................................... 7,327.8 8,005.1 8,681.5 9,324.5 9,923.7 10,519.4 11,113.8
Less: Treasury debt not subject to limitation (–) 4 ............................................................... –0.5 –14.5 –14.5 –14.5 –14.5 –12.4 –10.8
Agency debt subject to limitation ......................................................................................... 0.2 0.2 0.2 0.2 0.2 0.2 0.2
Adjustment for discount and premium 5 ............................................................................... 5.8 5.8 5.8 5.8 5.8 5.8 5.8
Total, debt subject to statutory limitation 6 .................................................................. 7,333.4 7,996.6 8,673.0 9,316.0 9,915.3 10,512.9 11,109.1
Debt Outstanding, End of Year:
Gross Federal debt: 7
Debt issued by Treasury .................................................................................................. 7,327.8 8,005.1 8,681.5 9,324.5 9,923.7 10,519.4 11,113.8
Debt issued by other agencies ........................................................................................ 26.8 26.3 26.1 25.6 24.9 24.2 23.5
Total, gross Federal debt ............................................................................................. 7,354.7 8,031.4 8,707.6 9,350.1 9,948.6 10,543.5 11,137.3
Held by:
Debt held by Government accounts ................................................................................ 3,059.1 3,310.2 3,586.8 3,896.1 4,222.0 4,561.8 4,925.8
Debt held by the public 8 .................................................................................................. 4,295.5 4,721.2 5,120.8 5,454.0 5,726.7 5,981.8 6,211.5
1 A decrease in the Treasury operating cash balance or compensating balances (which are assets) 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 Compensating balances were non-interest bearing Treasury bank deposits that Treasury mainly used to compensate banks for collecting tax and non-tax receipts under financial
agency agreements. Most of the balances at the end of 2003 were required to be invested in nonmarketable Depositary Compensation Securities issued by the Treasury; the
rest of the balances, and the entire amount in previous years, was invested in the way that the banks decided. The use of compensating balances was discontinued in 2004, and
the amounts were drawn down to zero.
3 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 and compensating balances), other asset accounts, and profit on sale of
gold.
4 Consists primarily of Federal Financing Bank debt after 2004.
5 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.
6 The statutory debt limit is $8,184 billion.
7 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).
8 At the end of 2004, the Federal Reserve Banks held $700.3 billion of Federal securities and the rest of the public held $3,595.2 billion. Debt held by the Federal Reserve
Banks is not estimated for future years.
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
of other credit market sectors for financial resources
in the credit market. Borrowing from the public thus
affects the size and composition of assets held by the
private sector and the perceived wealth of the public.
It also increases the amount of future taxes required
to pay interest to the public on Federal debt. Borrowing
from the public is therefore an important concern of
Federal fiscal policy.3
248 ANALYTICAL PERSPECTIVES
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.’’
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.
Issuing debt securities to Government accounts performs
an essential function in accounting for the operation
of these funds. The balances of debt represent
the cumulative surpluses of these funds due to the excess
of their tax receipts, interest receipts, and other
collections compared to their spending. The interest on
the debt that is credited to these funds accounts for
the fact that some earmarked taxes and user fees will
be spent at a later time than when the funds receive
the monies. The debt securities are a liability of the
general fund to the fund that holds the securities and
are a mechanism for crediting interest to that fund
on its recorded balances. These accounting balances
generally provide the fund with authority to draw upon
the U.S. Treasury in later years to make future payments
on its behalf to the public. Public policy may
run surpluses and accumulate debt in trust funds and
other Government accounts in anticipation of future
spending.
However, issuing debt to Government accounts does
not have any of the economic effects of borrowing from
the public. It is an internal transaction of the Government,
made between two accounts that are both within
the Government itself. It is not a current transaction
of the Government with the public; it is not financed
by private saving and does not compete with the private
sector for available funds in the credit market; it does
not provide the account with resources other than a
legal claim on the U.S. Treasury, which itself obtains
real resources by taxation and borrowing; and its current
interest does not have to be financed by taxes
or other means.
Furthermore, the debt held by Government accounts
does not represent the estimated amount of the account’s
obligations or responsibilities to make future
payments to the public. For example, if the account
records the transactions of a social insurance program,
the debt that it holds does not represent the actuarial
present value of estimated future benefits (or future
benefits less taxes) for the current participants in the
program; nor does it represent the actuarial present
value of estimated future benefits (or future benefits
less taxes) for the current participants plus the estimated
future participants over some stated time period.
The future transactions of Federal social insurance and
employee retirement programs, which own 92 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
This Budget uses a variety of information sources
to analyze the condition of Social Security and Medicare,
the Government’s two largest social insurance programs.
Chapter 13 of the present volume, ‘‘Stewardship,’’
projects Social Security and Medicare outlays to
2080 relative to GDP. It also discusses in some detail
the actuarial projections prepared for the Social Security
and Medicare trustees reports to evaluate the longrun
actuarial deficiency or shortfall in these programs.
A chapter in the main volume of the budget, ‘‘The Nation’s
Fiscal Outlook,’’ uses the same data in less detail
to explain the long-run fiscal problems of Social Security
and Medicare revealed by these projections. The
actuarial shortfalls are very different in concept and
much larger in size than the amount of Treasury debt
that these programs hold.
For all these reasons, debt held by the public is a
better concept than gross Federal debt for analyzing
the effect of the budget on the economy.
Debt securities do not encompass all the liabilities
of the Federal Government. For example, accounts payable
occur in the normal course of buying goods and
services; Social Security benefits are due and payable
as of the end of the month but, according to statute,
are paid during the next month; loan guarantee liabilities
are incurred when the Government guarantees the
payment of interest and principal on private loans; and
liabilities for future pension and retiree health payments
are incurred as part of the current compensation
for the services performed by Federal civilian and military
employees in producing Government outputs. Like
debt securities sold in the credit market, these liabilities
have their own distinctive effects on the economy.
Federal liabilities are analyzed within the broader conceptual
framework of Federal resources and responsibilities
in chapter 13 of this volume, ‘‘Stewardship.’’ 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 2004 through 2010. In 2004 the Government borrowed
$382 billion, so the debt held by the public increased
to $4,296 billion. The debt held by Government
accounts increased $213 billion, and gross Federal debt
increased by $595 billion to $7,355 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 ex249
16. FEDERAL BORROWING AND DEBT
5 For further explanation of the off-budget Federal entities, see chapter 23, ‘‘Off-Budget
Federal Entities and Non-Budgetary Activities.’’
cluded 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 2004 and is estimated
to have large and growing surpluses throughout the
projection period. The on-budget and off-budget surpluses
or deficits are added together to determine the
Government’s financing needs.
The Government’s need to borrow, or its ability to
repay debt held by the public, has always depended
on several other factors besides the unified budget surplus
or deficit, such as the change in the Treasury
operating cash balance. As shown in table 16–2, these
other factors, which in this table are called ‘‘financing
other than the change in debt held by the public,’’ can
either increase or decrease the Government’s need to
borrow. (An increase in its need to borrow is represented
by a negative sign, like the deficit.) Some of
these individual factors themselves may be either positive
or negative, and some of them vary considerably
in size from year to year. In 2004 the deficit was $412
billion and the ‘‘financing other than the change in
debt held by the public’’ was $30 billion. As a result,
the Government borrowed $382 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 $2,812 billion and the increase in debt held by
the public was $2,989 billion. The other factors added
a total of $177 billion of borrowing, an average of $9
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. In 2004, as shown in table 16–2,
$22 billion of the $30 billion difference was attributable
to a one-time change in compensating balances. In
2003, on the other hand, the difference was only $5
billion, whereas in 2002 several factors were large and
in combination accounted for $63 billion of the $221
billion increase in debt held by the public. Four specific
factors 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. During 2004, however, the initial
cash balance was at about the level that had been
planned. The operating cash balance then ended at essentially
the same amount—only $1 billion more. It
is estimated to again be essentially the same at the
end of 2005. 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.
Change in compensating balances.—Treasury used
compensating balances for many years to compensate
banks for collecting tax and non-tax receipts and providing
other services under financial agency agreements.
Under these agreements, Treasury deposited a
non-interest bearing compensating balance with a bank.
The imputed earnings from the compensating balance,
calculated at the 91-day Treasury bill rate, were the
source of the bank’s compensation for performing the
required services. Treasury determined the size of the
deposit by balancing the value of the services provided
with the imputed earnings of the compensating balance.
Banks could use the compensating balances on deposit
to make loans or buy investments, and all compensating
balances were fully collateralized.
The traditional compensating balances presented difficulties
for cash and debt management in recent years.
First, any decrease in the interest rate that was applied
to compensating balances required Treasury to increase
the size of compensating balances on deposit to pay
for the services it needed. For example, because interest
rates decreased so much during 2002, Treasury had
to increase its compensating balances by $14 billion
in that year. Second, when the debt outstanding
reached the statutory debt limit, Treasury had to draw
down the compensating balances and then make up
for this action afterwards by increasing the balances
to unusually high levels. These actions were inefficient
and disruptive, and they created financial uncertainty
for Treasury and the banks.
In large part because of these difficulties, the 2004
budget proposed legislation that would allow Treasury
to replace compensating balances by a permanent indefinite
appropriation to pay banks directly for their
services as depositaries and financial agents. This also
would simplify Treasury’s cash and debt management,
would ensure that payments to financial institutions
for services were made in a more predictable manner,
and could result in budget savings.
As an interim step, before the legislation could be
enacted, Treasury began to replace its traditional compensating
balances with depositary compensation securities
(DCS) in July 2003. The banks held DCS instead
of other acceptable investments, and the Treasury balances
were secured by the DCS. The cost of the services
provided to Treasury was part of the interest on the
debt under either system. Under the traditional system,
Treasury paid interest to the general public on the
marketable securities sold to acquire the compensating
balances; under the interim system, Treasury paid interest
to banks on the DCS. By the end of December
2003, the traditional compensating balances had been
replaced by DCS.
Congress authorized a permanent indefinite appropriation
to pay for the services in October 2003 in the
250 ANALYTICAL PERSPECTIVES
6 The budget treatment of this fund is further discussed in chapter 26, ‘‘The Budget
System and Concepts.’’
7 The Federal Credit Reform Act of 1990 (sec. 505(b)) requires that the financing accounts
be non-budgetary. As explained in chapter 23, ‘‘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.
Check Clearing for the 21st Century Act (P.L. 108-
100). A permanent indefinite appropriation was then
included in the Consolidated Appropriation Act of 2004
(P.L. 108-199). Treasury replaced the DCS by direct
payments in March 2004. The total compensating balances
at the end of 2003 under both systems were
$22 billion, so table 16–2 shows that they were drawn
down to zero during 2004.
Net purchases of non-Federal securities by the National
Railroad Retirement Investment Trust.—This
trust fund was established by the Railroad Retirement
and Survivors’ Improvement Act of 2001. Most of the
assets in the Railroad Retirement Board trust funds
were transferred to the new trust fund in 2003, which
invests its assets primarily in private stocks and bonds.
The Act ordered special treatment of the purchase or
sale of non-Federal assets by this trust fund, treating
such purchases as a means of financing rather than
an outlay. Therefore, the increased need to borrow from
the public to finance the purchase of non-Federal assets
is part of the ‘‘financing other than the change in debt
held by the public’’ rather than included as an increase
in the deficit. This increased borrowing and publicly
held debt by $20 billion in 2003. Net purchases were
relatively small in 2004 and are estimated to remain
relatively small in future years.6
Net financing disbursements of the direct loan and
guaranteed loan financing accounts.—The financing accounts
were created by the Federal Credit Reform Act
of 1990. Under this Act, budget outlays for direct loans
and loan guarantees consist of the estimated subsidy
cost of the loans or guarantees at the time when the
direct loans or guaranteed loans are disbursed. The
cash flows to and from the public resulting from these
loans and guarantees—the disbursement and repayment
of loans, the default payments on loan guarantees,
the collections of interest and fees, and so forth—
are not costs to the Government except for those costs
already included in budget outlays. Therefore, they are
non-budgetary in nature and are recorded as transactions
of the non-budgetary financing account for each
credit program.7
The financing accounts also include several types of
intra-governmental transactions. In particular, they receive
payment from the credit program accounts for
the costs of new direct loans and loan guarantees; they
also receive payment for any upward reestimate of the
costs of direct loans and loan guarantees outstanding.
These collections are offset against the gross disbursements
of the financing accounts in determining the accounts’
total net cash flows. The total net cash flows
of the financing accounts, consisting of transactions
with both the public and the budgetary accounts, are
called ‘‘net financing disbursements.’’ They are defined
in the same way as the ‘‘outlays’’ of a budgetary account
and therefore affect the requirement for borrowing from
the public in the same way as the deficit.
The result is that the intragovernmental transactions
of the financing accounts do not affect Federal borrowing
from the public. Although the deficit changes
because of the budget’s outlay or receipt, the net financing
disbursement changes in an equal amount with the
opposite sign, so the effects cancel out. On the other
hand, financing account disbursements to the public
increase the requirement for borrowing from the public
in the same way as an increase in budget outlays that
are disbursed to the public in cash. Likewise, financing
account receipts from the public can be used to finance
the payment of the Government’s obligations, and
therefore they reduce the requirement for Federal borrowing
from 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 2003 they required $7 billion of
financing, which increased borrowing by this amount.
In 2004, on the other hand, a large upward reestimate
was made in the cost of outstanding Federal Housing
Administration (FHA) housing mortgages. The credit
program account in the budget made a large outlay
to the guaranteed loan financing account, which in turn
had an equal offsetting collection and therefore a large
negative net financing disbursement. The result is
shown as a positive amount in table 16–2, canceling
out the effect of a higher budget deficit on the Government’s
borrowing requirement. Large upward reestimates
of guarantees are also estimated for 2005, after
which the pattern is expected to be more normal. The
financing accounts are estimated to require additional
financing of $11 billion in 2006 and from $17 billion
to $18 billion in each of the following four 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 onbudget
and off-budget, which owned 94 percent of the
total Federal debt held by Government accounts at the
end of 2004. In 2004, for example, the total trust fund
surplus was $193 billion, and Government accounts invested
$213 billion in Federal securities. A major reason
for the larger investment is that some special funds
and revolving funds, as well as the trust funds, invest
in Federal debt. Another factor is that the trust funds
may change the amount of their cash assets not currently
invested. The debt held in major accounts and
the annual investments are shown in table 16–4.
Agency Debt
Several Federal agencies, shown in table 16–3, sell
debt securities to the public and at times in the past
251 16. FEDERAL BORROWING AND DEBT
Table 16–3. AGENCY DEBT
(In millions of dollars)
Borrowing or repayment (–) of debt Debt end
of
2006
estimate
2004
actual
2005
estimate
2006
estimate
Borrowing from the public:
Housing and Urban Development:
Federal Housing Administration ..................................... –79 * ................ 200
Small Business Administration:
Participation certificates: Section 505 development
company ..................................................................... ................ –* ................ 7
Architect of the Capitol ....................................................... –3 –3 –4 156
Farm Credit System Financial Assistance Corporation ..... ................ –325 ................ ................
Federal Communications Commission ............................... –56 * ................ ................
National Archives ................................................................ –8 –8 –10 225
Tennessee Valley Authority:
Bonds and Notes ............................................................ –1,623 –88 –10 23,155
Lease/leaseback obligations ........................................... –60 –35 –33 1,110
Prepayment obligations .................................................. 1,424 –105 –106 1,260
Total, borrowing from the public ........................... –405 –563 –163 26,113
* $500 thousand or less.
8 For an explanation of the monetary credits issued by the Federal Communications Commission
(FCC), see chapter 26 of this volume, ‘‘The Budget System and Concepts.’’ The
budgetary treatment of some of these securities and other securities inherent in the way
programs operate is further explained in Special Analysis E of the 1989 Budget, pp. E-
25 to E-26; and Special Analysis E of the 1988 Budget, pp. E-27 to E-28.
9 The rule addressed all lease-purchases and capital leases from the public, not just
those without substantial private risk. For all such contracts, the rule requires that budget
authority be recorded up front for the present value of the lease payments. See OMB
Circular No. A-11, Appendix B. Also see the section on outlays in chapter 26, ‘‘The Budget
System and Concepts.’’
have sold securities to other Government accounts. During
2004, agencies repaid $0.4 billion of debt held by
the public. Agency debt is less than one percent of
Federal debt held by the public. Agencies are estimated
to repay small amounts of debt in 2005 and 2006.
The reasons for issuing agency debt differ considerably
from one agency to another. The predominant
agency borrower is the Tennessee Valley Authority,
which had borrowed $26 billion from the public as of
the end of 2004, or 97 percent of the total debt of
all agencies. In some earlier periods, other agencies
accounted for a much higher proportion of agency debt
than they do now. TVA sells debt primarily to finance
capital expenditures.
The Federal Housing Administration, on the other
hand, has for many years issued both checks and debentures
as means of paying claims to the public that
arise from defaults on FHA-insured mortgages. Issuing
debentures to pay the Government’s bills is equivalent
to selling securities to the public and then paying the
bills by disbursing the cash borrowed, so the transaction
is recorded as being simultaneously an outlay
and a borrowing. The debentures are therefore classified
as agency debt. The borrowing by FHA and a few
other agencies that have engaged in similar transactions
is thus inherent in the way that their programs
operate.8
Some types of lease-purchase contracts are equivalent
to direct Federal construction financed by Federal borrowing.
A number of years ago, the Federal Government
guaranteed the debt used to finance the construction
of buildings for the National Archives and the Architect
of the Capitol, and subsequently exercised full
control over the design, construction, and operation of
the buildings. The construction expenditures and interest
were therefore classified as Federal outlays, and
the borrowing was classified as Federal agency borrowing
from the public.
The proper budgetary treatment of lease-purchases
was further examined in connection with the Budget
Enforcement Act of 1990. Several changes were made.
Among other decisions, it was determined that outlays
for a lease-purchase without substantial private risk
will be recorded in an amount equal to the asset cost
over the period during which the contractor constructs,
manufactures, or purchases the asset; if the asset already
exists, the outlays will be recorded when the
contract is signed. Agency borrowing will be recorded
each year to the extent of these outlays. The agency
debt will subsequently be redeemed over the lease payment
period by a portion of the annual lease payments
according to an amortization schedule. This rule was
effective starting in 1991.9 The new budgetary treatment
was reviewed in connection with the Balanced
Budget Act of 1997. Some clarifications were made, but
no substantive changes.
The Tennessee Valley Authority has traditionally financed
its capital construction by selling bonds and
notes to the public. Starting in 2000, it has also employed
two types of alternative financing methods. The
first type of alternative financing method was lease/
leasebacks. TVA signed contracts to lease some recently
constructed power generators to private investors and
simultaneously lease them back. It received a lump sum
for leasing out its assets, and then leased them back
at fixed annual payments for a set number of years.
TVA retains substantially all of the economic benefits
and risks related to ownership of the assets, and the
252 ANALYTICAL PERSPECTIVES
lease/leasebacks are reported as liabilities on TVA’s balance
sheet under generally accepted accounting principles.
The Office of Management and Budget determined
that the TVA lease/leasebacks are a means of financing
the acquisition of assets owned and used by the Government.
The arrangement is at least as governmental
as a ‘‘lease-purchase without substantial private risk.’’
The budget therefore records the upfront cash proceeds
from the lease as borrowing from the public, not offsetting
collections. Agency debt in the form of a lease
obligation is recorded as a type of borrowing. The same
budget treatment was applied to the lease/leaseback
of qualified technological equipment in 2003. The total
amount of the lease obligations beginning in 2000 is
shown in table 16–3 separately from TVA bonds and
notes to distinguish between the types of borrowing.
The obligations for lease/leasebacks were $1.2 billion
at the end of 2004 and are estimated to decline steadily
in the following years as they are amortized.
The second type of alternative financing method is
prepayments for power that TVA sells to its power distributors.
Under the Discounted Energy Units program,
which began in 2003, distributors may prepay a portion
of the price of the power they plan to purchase in
the future. In return, they obtain a discount on a specific
quantity of the future power they buy from TVA.
The quantity varies, depending on TVA’s estimated cost
of borrowing. Most of the prepayments have been relatively
small. However, TVA also entered into a contract
with Memphis Light, Gas, and Water (MLGW),
under which that distributor prepaid $1.5 billion in
2004 for a large portion of its power needs over the
next 15 years in return for a discount on that power.
MLGW, in turn, financed its prepayment by selling taxexempt
bonds.
The Office of Management and Budget determined
that these prepayments are also a means of financing
the acquisition of assets owned and used by the Federal
Government, or, in effect, are used to refinance debt
previously incurred to finance such assets. They are
equivalent in concept to other forms of borrowing from
the public, although at different terms and conditions.
The prepayment obligations are recorded as liabilities,
called ‘‘unearned revenue,’’ on TVA’s balance sheet
under generally accepted accounting principles. The
budget therefore records the upfront cash proceeds from
the prepayment as borrowing from the public, not offsetting
collections. Agency debt in the form of a prepayment
obligation is recorded as a type of borrowing. The
total amount of prepayment obligations is shown in
table 16–3 separately from bonds and notes and lease/
leaseback obligations to distinguish among the types
of borrowing. The prepayment obligations increased
from zero to $47 million during 2003 and to $1,471
billion at the end of 2004 because of the contract with
Memphis Light, Gas, and Water. The obligations are
estimated to decline steadily in the following years as
TVA provides electric power under the contracts.
The amount of agency securities sold to the public
has been reduced by borrowing from the Federal Financing
Bank (FFB). The FFB is an entity within the
Treasury Department, one of whose purposes is to substitute
Treasury borrowing for agency borrowing from
the public. It has the authority to purchase agency
debt and finance these purchases by borrowing from
the Treasury. Agency borrowing from the FFB is not
included in gross Federal debt. It would be double
counting to add together (a) the agency borrowing from
the FFB and (b) the Treasury borrowing from the public
that was needed to provide the FFB with the funds
to lend to the agencies.
Debt Held by Government Accounts
Trust funds, and some special funds and public enterprise
revolving funds, accumulate cash in excess of current
needs in order to meet future obligations. These
cash surpluses are generally invested in Treasury debt.
Investment by trust funds and other Government accounts
has risen greatly for many years. It was $213
billion in 2004, as shown in table 16–4, and is estimated
to rise to $277 billion in 2006. The holdings
of Federal securities by Government accounts are estimated
to grow to $3,587 billion by the end of 2006,
or 41 percent of the gross Federal debt. The percentage
is estimated to rise gradually in the following years,
as the trust funds and several major revolving funds
and special funds continue to accumulate surpluses.
The large investment by Government accounts is concentrated
among a few trust funds. The two Social Security
trust funds—Old-Age and Survivors Insurance
and Disability Insurance—have a large combined surplus
and invest $486 billion during 2004-06, which is
66 percent of the total estimated investment by Government
accounts. The two Medicare trust funds—Hospital
Insurance and Supplementary Medical Insurance—account
for another 7 percent of the total estimated investment.
Apart from these four social insurance funds, the
largest investment is by the funds for Federal employee
retirement. The principal trust fund for Federal civilian
employees is the civil service retirement and disability
trust fund, which accounts for 13 percent of the total
investment by Government accounts during 2004-06.
The military retirement trust fund and the special fund
for uniformed services retiree health care account for
another 12 percent. Altogether, the investment by Social
Security, Medicare, and these three Federal employee
retirement funds is almost as much as the total
investment by Government accounts during this period.
At the end of 2006, they are estimated to own 91 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 re253
16. FEDERAL BORROWING AND DEBT
10 For purposes of the debt limit, the FHA debt was calculated to be $184 million.
corded at par in the OMB and Treasury reports on
Federal debt. However, there are two kinds of exceptions.
First, in 1991, Treasury began to issue zero-coupon
bonds to a very few Government accounts. Because
the purchase price is a small fraction of par value and
the amounts are large, the holdings are recorded in
table 16–4 at par value less unamortized discount. The
only two Government accounts that held zero-coupon
bonds during the period of this table are the Nuclear
Waste Disposal fund in the Department of Energy and
the Pension Benefit Guaranty Corporation (PBGC). The
total unamortized discount on zero-coupon bonds was
$15.1 billion at the end of 2004.
Second, in September 1993 Treasury began to subtract
the unrealized discount on other Government account
series securities in calculating ‘‘net federal securities
held as investments of government accounts.’’ Unlike
the discount recorded for zero-coupon bonds and
debt held by the public, the unrealized discount is the
discount at the time of issue and is not amortized over
the term of the security. In table 16–4 it is shown
as a separate item at the end of the table and not
distributed by account. The amount was $1.4 billion
at the end of 2004.
Limitations on Federal Debt
Definition of debt subject to limit.—Statutory limitations
have usually been placed on Federal debt. Until
World War I, the Congress ordinarily authorized a specific
amount of debt for each separate issue. Beginning
with the Second Liberty Bond Act of 1917, however,
the nature of the limitation was modified in several
steps until it developed into a ceiling on the total
amount of most Federal debt outstanding. This last
type of limitation has been in effect since 1941. The
limit currently applies to most debt issued by the
Treasury since September 1917, whether held by the
public or by Government accounts; and other debt
issued by Federal agencies that, according to explicit
statute, is guaranteed as to principal and interest by
the United States Government.
The third part of table 16–2 compares total Treasury
debt with the amount of Federal debt that is subject
to the limit. Nearly all Treasury debt is subject to the
debt limit. Most of the Treasury debt not subject to
the general statutory limit was issued by the Federal
Financing Bank (FFB). The FFB, which is within the
Treasury Department, is authorized to have outstanding
up to $15 billion of publicly issued debt. It
issued $14 billion of securities to the Civil Service 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 first maturity
date is June 30, 2009, nearly five year after
issuance; the final maturity date is June 30, 2019. The
securities are expected to remain outstanding until they
mature, and this assumption is reflected in tables 16–2
and 16–5. 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 $513 million at the end of 2004 and gradually
declines over time.
The sole type of agency debt currently subject to the
general limit is the debentures issued by the Federal
Housing Administration, which were $200 million at
the end of 2004.10 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.
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 elsewhere 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, and this adjustment is defined in footnote
7 to table 16–2 (and footnote 4 of table 16–5).
The amount is relatively small: $5.8 billion at the end
of 2004 compared to the total unamortized discount
(less premium) of $51.2 billion on all Treasury securities.
254 ANALYTICAL PERSPECTIVES
Table 16–4. DEBT HELD BY GOVERNMENT ACCOUNTS 1
(In millions of dollars)
Description
Investment or Disinvestment (–) Holdings
end
of 2006
estimate
2004
actual
2005
estimate
2006
estimate
Investment in Treasury debt:
Energy:
Nuclear waste disposal fund 1 ........................................................ 1,894 957 .................... 17,043
Uranium enrichment decontamination fund .................................... 247 453 270 4,380
Health and Human Services:
Federal hospital insurance trust fund ............................................. 13,068 9,809 17,583 291,767
Federal supplementary medical insurance trust fund .................... –7,410 1,164 14,868 33,471
Vaccine Injury compensation fund ................................................. 118 148 166 2,329
Housing and Urban Development:
Federal Housing Administration mutual mortgage fund ................ –499 4,400 2,603 30,324
Other HUD ...................................................................................... 321 345 308 8,219
Interior:Abandoned Mine Reclamation fund ...................................... 118 3 .................... 2,048
Labor:
Unemployment trust fund ................................................................ –2,949 827 .................... 46,066
Pension Benefit Guaranty Corporation 1 ........................................ 264 514 299 13,293
State:Foreign Service retirement and disability trust fund ............... 538 582 96 13,506
Transportation:
Highway trust fund .......................................................................... –3,366 2,980 450 13,642
Airport and airway trust fund .......................................................... –626 –35 –629 9,228
Homeland Security:
Oil spill liability trust fund ............................................................... –126 –132 –187 510
Aquatic resources trust fund .......................................................... 34 –144 .................... 1,306
Treasury:Exchange stabilization fund ................................................ –184 394 .................... 10,713
Veterans Affairs:
National service life insurance trust fund ....................................... –298 –395 –476 10,078
Other trust funds ............................................................................. 37 16 12 2,033
Federal funds .................................................................................. –24 –25 –33 415
Other Defense-Civil:
Uniformed Services Retiree Health Care Fund ............................. 17,418 22,209 23,626 81,699
Military retirement trust fund ........................................................... 4,918 10,319 8,370 195,969
Harbor maintenance trust fund ....................................................... 295 –404 .................... 1,833
Environmental Protection Agency:
Hazardous substance trust fund .................................................... –281 143 150 2,520
Leaking underground storage tank trust fund ................................ 195 203 .................... 2,436
International Assistance Programs:
Overseas Private Investment Corporation ..................................... 137 166 .................... 3,961
Office of Personnel Management:
Civil Service retirement and disability trust fund ........................... 30,151 31,941 31,290 695,091
Employees life insurance fund ....................................................... 1,329 1,280 1,319 30,706
Employees health benefits fund ..................................................... 1,737 1,316 1,344 13,434
Social Security Administration:
Federal old-age and survivors insurance trust fund 2 ................... 139,172 151,016 164,948 1,768,563
Federal disability insurance trust fund 2 ......................................... 12,007 9,982 8,979 201,760
Farm Credit System Insurance Corporation:
Farm Credit System Insurance fund .............................................. 205 –92 .................... 1,924
Federal Deposit Insurance Corporation:
Bank Insurance fund ....................................................................... 1,035 1,276 37 33,402
FSLIC Resolution fund .................................................................... 50 297 .................... 3,310
Savings Association Insurance fund .............................................. 430 625 340 12,817
National Credit Union Administration:Share insurance fund ............ 352 441 409 6,909
Postal Service fund 2 ........................................................................... –1,368 –1 .................... 1,282
Railroad Retirement Board trust funds 1 ............................................. –555 –212 490 2,042
Other Federal funds 3 .......................................................................... 4,584 454 11 13,874
Other trust funds 3 ............................................................................... –384 –1,790 2 4,381
Unrealized discount, 3 .......................................................................... –28 * .................... –1,477
Total, investment in Treasury debt 1 ...................................... 212,559 251,032 276,645 3,586,806
255 16. FEDERAL BORROWING AND DEBT
11 The Acts and the statutory limits since 1940 are listed in Historical Tables, Budget
of the United States Government, table 7.3.
Table 16–4. DEBT HELD BY GOVERNMENT ACCOUNTS 1—Continued
(In millions of dollars)
Description
Investment or Disinvestment (–) Holdings
end
of 2006
estimate
2004
actual
2005
estimate
2006
estimate
Total, investment in Federal debt 1 212,559 251,032 276,645 3,586,806
MEMORANDUM
Investment by Federal funds (on-budget) ............................................... 26,350 32,417 27,870 244,331
Investment by Federal funds (off-budget) ............................................... –1,368 –* .................... 1,282
Investment by trust funds (on-budget) .................................................... 36,426 57,617 74,848 1,372,348
Investment by trust funds (off-budget) .................................................... 151,178 160,998 173,927 1,970,323
Unrealized discount 1 ............................................................................... –28 * .................... –1,477
* $500 thousand or less.
1 Debt held by Government accounts is measured at face value except for the Treasury zero-coupon bonds held by the Nuclear
Waste Disposal fund and the Pension Benefit Guaranty Corporation (PBGC), which are recorded at market or redemption
price; and the unrealized discount on Government account series, which is not distributed by account. Changes are not estimated
in the unrealized discount. If recorded at face value, the debt held by the Nuclear Waste Disposal fund would be $14.4 billion
higher than recorded in this table at the end of 2004; the debt held by PBGC would be $0.7 billion higher.
2 Off-budget Federal entity.
3 Retroactive adjustments were made as of the end of 2003. The debt held by the Telecommunications Development Fund is
not recorded as Federal debt ($32 million); the debt held by the Railroad Retirement Board trust funds is increased by $2 million;
and the absolute value of the unrealized discount is decreased by $193 million.
Changes in the debt limit.—The statutory debt
limit has been changed many times. Since 1960, Congress
has passed 71 separate acts to raise the limit,
extend the duration of a temporary increase, or revise
the definition. For a long period up to 1990, the debt
limit was also changed frequently. During the 1990s,
however, the debt limit was increased three times by
amounts large enough to last for two years or more.
All three of these increases were enacted as part of
a deficit reduction package or a plan to balance the
budget and were intended to last a relatively long time:
the Omnibus Budget Reconciliation Act of 1990, the
Omnibus Budget Reconciliation Act of 1993, and the
Balanced Budget Act of 1997.11
The Balanced Budget Act of 1997 increased the debt
limit to $5,950 billion, which lasted until 2002. The
debt reached the limit in April 2002, the Treasury Department
took a variety of administrative actions to
keep within the limit, and on June 28 the President
signed a bill to raise the limit to $6,400 billion. This
process was repeated within less than one year. The
debt reached the limit in February 2003, the Treasury
Department again responded with various administrative
actions, and on May 27, 2003, the President signed
a bill that raised the limit to $7,384 billion.
This limit did not last much longer than the previous
limit. By August 2004, the Secretary of Treasury wrote
Congress that the debt subject to limit might reach
the ceiling in September or October 2004. It did reach
the limit on October 14 and stayed there until the
limit was increased.
Treasury took a number of administrative steps to
meet the Government’s obligation to pay its bills and
invest its trust funds while keeping debt under the
statutory limit. On October 14, 2004, the Secretary of
Treasury declared that he would not be able to fully
invest the Government Securities Investment Fund (Gfund)
as of that day. This fund is one component of
the Thrift Savings Fund, a defined contribution pension
plan for Federal employees. The Secretary has statutory
authority to suspend investment of the G-fund in Treasury
securities as needed to prevent the debt from exceeding
the debt limit. When he does this, he is required
to make the fund whole after the debt limit
has been raised by restoring the forgone interest and
investing the fund fully. Starting on October 14, Treasury
determined each day the amount of investments
that would allow the fund to be invested as fully as
possible without exceeding the debt limit. That amount
was invested, and no more. The balances not invested
varied throughout the period. In addition to this step,
Treasury discontinued the acceptance of subscriptions
to the state and local government series of securities.
As the need for financing grew, Treasury took further
steps. On November 15, the Federal Financing Bank
(FFB) issued $14 billion of FFB securities to the Civil
Service Retirement and Disability fund in exchange for
an equal amount of regular Treasury securities, which
FFB then exchanged with Treasury at market value
in return for the extinguishment of an equal market
value of FFB debt owed to Treasury. The FFB securities
are not subject to the debt limit, as explained
above, whereas the regular Treasury securities are subject
to the limit. The Secretary also declared a debt
issuance suspension period from November 17 to December
2. This allowed him to redeem a limited amount
of securities held by the Civil Service Retirement and
Disability fund and stop investing its receipts. Treasury
disinvested part of the Exchange Stabilization fund for
one day. Treasury also delayed the announcement of
auctions of marketable securities.
256 ANALYTICAL PERSPECTIVES
All the steps taken during October and November
had also been taken on previous occasions when the
debt had reached the statutory limit, including 2002
or 2003. When the debt limit was reached in those
years, Treasury also reduced its compensating balances
held in banks to pay for services under financial agency
agreements. However, compensating balances were discontinued
in 2004, as explained in a previous section.
Table 16–5. FEDERAL FUNDS FINANCING AND CHANGE IN DEBT SUBJECT TO STATUTORY LIMIT
(In billions of dollars)
Description Actual
2004
Estimate
2005 2006 2007 2008 2009 2010
Federal funds deficit (–) ......................................................................................................... –604.8 –653.0 –657.0 –583.5 –537.4 –530.7 –526.4
Means of financing other than borrowing:
Change in: 1
Treasury operating cash balances ................................................................................... –1.4 1.3 ................ ................ ................ ................ ................
Compensating balances 2 ................................................................................................. 22.2 ................ ................ ................ ................ ................ ................
Checks outstanding, etc 3 ................................................................................................. 9.1 6.9 18.9 0.5 0.3 0.5 0.5
Seignorage on coins ............................................................................................................. 0.7 0.6 0.7 0.7 0.7 0.7 0.7
Less: Net financing disbursements:
Direct loan financing accounts ......................................................................................... –4.9 –9.1 –12.8 –20.0 –20.7 –20.1 –20.7
Guaranteed loan financing accounts ................................................................................ 9.4 8.9 1.8 –2.3 –2.1 –3.2 –2.9
Total, means of financing other than borrowing ................................................... 35.1 8.7 8.6 –21.1 –21.8 –22.2 –22.5
Decrease or increase (–) in Federal debt held by Federal funds ........................................... –25.0 –32.4 –27.9 –37.9 –39.3 –42.0 –44.9
Increase or decrease (–) in Federal debt not subject to limit ................................................. –0.3 13.4 –0.2 –0.5 –0.7 –2.8 –2.4
Total, requirement for Federal funds borrowing subject to debt limit ................... 595.0 663.3 676.4 643.0 599.2 597.7 596.1
Change in discount and premium 4 .......................................................................................... 0.7 ................ ................ ................ ................ ................ ................
Change in unrealized discount 5 ............................................................................................... –* ................ ................ ................ ................ ................ ................
Increase in debt subject to limit ........................................................................................... 595.7 663.3 676.4 643.0 599.2 597.7 596.1
ADDENDUM
Debt subject to statutory limit 6 ................................................................................................. 7,333.4 7,996.6 8,673.0 9,316.0 9,915.3 10,512.9 11,109.1
* $50 million or less
1 A decrease in the Treasury operating cash balance or compensating balances (which are assets) is a means of financing the deficit and therefore has a positive sign. An increase
in checks outstanding (which is a liability) is also a means of financing the deficit and therefore also has a positive sign.
2 Compensating balances were non-interest bearing Treasury bank deposits that Treasury mainly used to compensate banks for collecting tax and non-tax receipts under financial
agency agreements. Most of the balances at the end of 2003 were required to be invested in nonmarketable Depositary Compensation Securities issued by the Treasury; the
rest of the balances, and the entire amount in previous years, was invested in the way that the banks decided. The use of compensating balances was discontinued in 2004 and
the amounts were drawn down to zero.
3 Besides checks outstanding, includes accrued interest payable on Treasury debt, miscellaneous liability accounts, allocations of special drawing rights; and, as an offset, cash
and monetary assets (other than the Treasury operating cash balance and compensating balances), miscellaneous asset accounts, and profit on the sale of gold.
4 Consists of unamortized discount (less premium) on public issues of Treasury notes and bonds (other than zero-coupon bonds) and unrealized discount on Government account
series securities. The unrealized discount is for Government account series securities.
6 The statutory debt limit is $8,184 billion.
These Treasury actions were used for a little more
than one month. Congress passed a bill raising the
debt limit to $8,184 billion on November 18, and the
President signed the bill on November 19. Treasury
promptly invested the G-fund and Civil Service Retirement
and Disability fund fully and restored the forgone
interest as prescribed by law. The securities whose auctions
were postponed were issued on time, except for
one issue of 4-week bills that was delayed a few days,
and subscriptions to the state and local government
series were accepted again.
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.
257 16. FEDERAL BORROWING AND DEBT
12 For further discussion of the trust funds and Federal funds groups, see chapter 22,
‘‘Trust Funds and Federal Funds.’’
13 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.
14 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.
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 half of the estimated total increase from
2005 through 2010.
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.
12
A Federal funds deficit must generally be financed
by borrowing, which can be done either by selling securities
to the public or by issuing securities to Government
accounts that are not within the Federal funds
group. Federal funds borrowing consists almost entirely
of Treasury securities that are subject to the statutory
debt limit. Very little debt subject to statutory limit
has been issued for reasons except to finance the Federal
funds deficit. The change in debt subject to limit
is therefore determined primarily by the Federal funds
deficit, which is equal to the difference between the
total Government surplus and the trust fund surplus.
Trust fund surpluses are almost entirely invested in
securities subject to the debt limit, and trust funds
hold most of the debt held by Government accounts.
Table 16–5 derives the change in debt subject to
limit. In 2004 the Federal funds deficit was $605 billion,
and other factors reduced the requirement to borrow
subject to limit by $9 billion. The largest of these
factors was ending the use of compensating balances,
which allowed borrowing to be reduced by $22 billion.
The net financing disbursements of the guaranteed loan
financing accounts reduced the financing requirements
by $9 billion, as explained in an earlier section. As
an offset, special funds and revolving funds, which are
part of the Federal funds group, invested $25 billion
in Treasury securities. The largest single investment
was $17 billion for the uniformed services retiree health
care fund. As a net result of all these factors, debt
subject to limit increased by $596 billion, while debt
held by the public increased by $382 billion.
The debt subject to limit is estimated to increase
to $7,997 billion by the end of 2005, which begins to
approach the present statutory debt limit of $8,184 billion.
This is caused by a rise in the Federal funds
deficit, supplemented by the other factors shown in
table 16–5. Some of these factors are large, especially
the investment by Federal special and revolving funds
and in particular the special fund for uniformed services
retiree health care. As a result, while debt held
by the public increases by $1,916 billion from the end
of 2004 through 2010, debt subject to limit increases
by $3,776 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, as shown
in table 16–6, foreign holdings were just over $10.0
billion, less than 5 percent of the total Federal debt
held by the public.
Foreign holdings began to grow significantly starting
in 1970. This increase has been almost entirely due
to decisions by foreign central banks, corporations, and
individuals, rather than the direct marketing of these
securities to foreign residents. At the end of 2004 foreign
holdings of Treasury debt were $1,886 billion,
which was 44 percent of the total debt held by the
public.13 Foreign central banks owned 64 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 56 percent at the
end of 2003, because they bought much greater quantities
of Treasury securities than did private investors.
All the Federal debt held by foreign residents is denominated
in dollars.
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.14 As a result, the
Federal debt held by individuals and institutions within
the United States decreased in absolute amount during
those years, despite further Federal borrowing, and the
percentage of Federal debt held by foreign residents
grew from 19 percent at the end of 1994 to 32 percent
at the end of 1997. In the next few years the change
in foreign debt holdings was much smaller. However,
the Federal debt held by foreign residents increased
by $255 billion in 2003 and by $430 billion in 2004.
258 ANALYTICAL PERSPECTIVES
The percentage of Federal debt held by foreign residents
increased from 34 percent to 44 percent during
these two years. In 2004, the increase in foreign holdings
was more than the total Federal borrowing from
the public.
Table 16–6. FOREIGN HOLDINGS OF FEDERAL DEBT
(Dollar amounts in billions)
Fiscal Year
Debt held by the public Borrowing from the
public
Total Foreign 1
Percentage
foreign Total 2 Foreign 1
1965 .............................................................................. 260.8 12.3 4.7 3.9 0.3
1966 .............................................................................. 263.7 11.6 4.4 2.9 –0.7
1967 .............................................................................. 266.6 11.4 4.3 2.9 –0.2
1968 .............................................................................. 289.5 10.7 3.7 22.9 –0.7
1969 .............................................................................. 278.1 10.3 3.7 –11.4 –0.4
1970 .............................................................................. 283.2 14.0 5.0 5.1 3.8
1971 .............................................................................. 303.0 31.8 10.5 19.8 17.8
1972 .............................................................................. 322.4 49.2 15.2 19.3 17.3
1973 .............................................................................. 340.9 59.4 17.4 18.5 10.3
1974 .............................................................................. 343.7 56.8 16.5 2.8 –2.6
1975 .............................................................................. 394.7 66.0 16.7 51.0 9.2
1976 .............................................................................. 477.4 69.8 14.6 82.7 3.8
TQ ................................................................................. 495.5 74.6 15.1 18.1 4.9
1977 .............................................................................. 549.1 95.5 17.4 53.6 20.9
1978 .............................................................................. 607.1 121.0 19.9 58.0 25.4
1979 3 ............................................................................ 640.3 120.3 18.8 33.2 N/A
1980 .............................................................................. 711.9 121.7 17.1 71.6 1.4
1981 .............................................................................. 789.4 130.7 16.6 77.5 9.0
1982 .............................................................................. 924.6 140.6 15.2 135.2 9.9
1983 .............................................................................. 1,137.3 160.1 14.1 212.7 19.5
1984 .............................................................................. 1,307.0 175.5 13.4 169.7 15.4
1985 3 ............................................................................ 1,507.3 222.9 14.8 200.3 N/A
1986 .............................................................................. 1,740.6 265.5 15.3 233.4 42.7
1987 .............................................................................. 1,889.8 279.5 14.8 149.1 14.0
1988 .............................................................................. 2,051.6 345.9 16.9 161.9 66.4
1989 .............................................................................. 2,190.7 394.9 18.0 139.1 49.0
1990 3 ............................................................................ 2,411.6 440.3 18.3 220.8 N/A
1991 .............................................................................. 2,689.0 477.3 17.7 277.4 37.0
1992 .............................................................................. 2,999.7 535.2 17.8 310.7 57.9
1993 .............................................................................. 3,248.4 591.3 18.2 248.7 56.1
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 1,455.8 37.2 373.0 255.0
2004 .............................................................................. 4,295.5 1,885.9 43.9 382.1 430.2
N/A = Not available.
1 Estimated by Treasury Department. These estimates exclude agency debt, the holdings of which are believed to
be small. The data on foreign holdings are recorded by methods that are not fully comparable with the data on debt
held by the public. Projections of foreign holdings are not available.
2 Borrowing from the public is defined as equal to the change in debt held by the public from the beginning of the
year to the end, except to the extent that the amount of debt is changed by reclassification.
3 Benchmark revisions reduced the estimated foreign holdings of the Federal debt as of December 1978; increased
the estimated foreign holdings as of December 1984 and December 1989; reduced the estimated holdings
as of December 1994 and March 2000; and increased the estimated holdings as of June 2002. A conceptual revision
increased the estimated foreign holdings as of 1999. The change in debt that is recorded as held by foreign
residents in these fiscal years reflects the benchmark or conceptual revisions as well as the net purchases of Federal
securities. Borrowing is therefore not shown in these years.
Foreign holdings of Federal debt are around 15 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
259 16. FEDERAL BORROWING AND DEBT
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.
