Federal Debt and Interest Costs - Congressional Budget Office

[Pages:116]FEDERAL DEBT AND INTEREST COSTS

The Congress of the United States Congressional Budget Office

NOTES Unless otherwise indicated, all years referred to in this report are fiscal years. Numbers in the text and tables of this report may not add to totals because of rounding.

For sale by the U.S. Govcrn~nentPrinring Office Super~ntendenor f Document\, Mail Stop: SSOP, Washington, DC 20402-9328

ISBN 0-16-041781-3

Preface

he federal debt has grown rapidly in the past decade, and this trend is projected to continue. Interest costs have grown commensurately and now account for about one of every seven dollars spent by the government. In response to a request from the House Committee on Ways and Means, this study provides background material on federal debt and interest costs--their components, their sensitivity to assumptions about future deficits and interest rates, and the choices that the Treasury faces in deciding the mix of securities it will offer.

Ellen Hays, Jeffrey Holland, and Kathy Rufing of the Congressional Budget Office's (CBO1s)Budget Analysis Division wrote the study under the supervision of C.G. Nuckols, Paul Van de Water, and James Horney. Kathy Ruffing wrote Chapters 1, 3, 4, and 7 and Appendix A; Jeffrey Holland wrote Chapters 2 and 6 and Appendix B; Ellen Hays wrote Chapter 5. Robert Arnold of CBO's Macroeconomic Analysis Division conducted the bootstrap simulations described in Chapter 7 (assisted by Michael Simpson) and, with Kathy Ruffing, wrote Appendix C. Frank Russek, Joyce Manchester, Kim Kowalewski, Paul Cullinan, Robert Hartman, and Pearl Richardson of CBO offered insightful comments and criticisms. Chapter 7 also benefited from discussion a t the November 1992 meeting of CBO's Panel of Economic Advisers.

Sherry Snyder edited the manuscript. Chris Spoor provided editorial assistance. Marion Curry produced numerous drafts. With the assistance of Martina Wojak-Piotrow, Kathryn Quattrone prepared the study for publication.

May 1993

Robert D. Reischauer Director

Contents

ONE TWO THREE

FOUR FIVE

SUMMARY AND INTRODUCTION

The Growth of Federal Interest Costs 1 How President Clinton's Proposals

Would Affect Interest and Debt 2 What Drives Federal Debt and

Interest Costs? 3

FEDERAL BORROWING FROM THE PUBLIC

Components of Federal Debt 7 Interest Rates 21 Deficits and the Need to Borrow 23

TRUST FUNDS AND THE GROSS FEDERAL DEBT

The Three Major Types of Trust Funds 28 Where Trust Fund Holdings Come From:

The Role of Earmarking 29 How Trust Funds Are Invested:

The Treasury's Role 31 What If Trust Funds Were Invested

Somewhere Else? 33 Conclusion 34

DEBT SUBJECT TO LIMIT

What the Debt Limit Covers 37 How the Treasury Copes With

Interruptions in the Debt Limit 39 Why Have a Debt Limit? 43

OTHER INTEREST

FFB Interest and the Withering Away of the FFB 46

Interest to and from the Credit Reform Financing Accounts 50

Intragovernmental Interest Payments to the Treasury 51

vi FEDERAL DEBT AND INTEREST COSTS

Interest Earned on Deposits in Tax and Loan Accounts 51

Interest Received from Unemployment Insurance Loans to States 51

Payment to the Resolution Funding Corporation 52

Interest Paid on IRS Refunds 52

SIX

SIMULATIONS WITH THE CBO

INTEREST MODEL

The CBO Model 53 Baseline Projections of Interest and Debt 54 Alternative Scenarios 57

SEVEN

ALTERNATIVE DEBT MANAGEMENT POLICIES

Recent Reforms in the Treasury Market 65

Changing the Mix of Financing 66 Indexed Bonds 78

APPENDIXES

Historical Data and Sources of Information on Interest and Debt

Accuracy of the CBO Model for Projecting Interest on the Public Debt

C

The Bootstrap Simulations

May 1993

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