Order Code RS20065
Updated March 1, 1999
CRS Report for Congress
Received through the CRS Web
Surpluses and Federal Debt
Philip D. Winters
Analyst in Government Finance
Government and Finance Division
Summary
The federal government had a surplus of $70 billion in fiscal year (FY) 1998 while
total federal debt increased by $109 billion. Why did the debt increase even though the
government had a surplus? The answer involves understanding what drives changes in
the two components of federal debt, debt held by the public (such as that held by
individuals, pension funds, banks, and insurance companies, among others) and debt held
by government accounts (mostly in federal trust funds, such as Social Security). Debt
held by the public declines when the government has a surplus. But when the
government accounts that hold federal debt have surpluses, these surpluses increase debt
held by government accounts. If the debt held by government accounts increases faster
than debt held by the public decreases, total federal debt rises.
For the next decade, the expected overall surpluses will reduce the amount of debt
held by the public. Debt held in government accounts will continue increasing since these
accounts will continue to run surpluses. Because of this, total federal debt will continue
growing through FY2005 and then fall through FY2009 (the end of the projection
period), according to the CBO projections.
Total federal debt rose from $5,369.7 billion to $5,478.7 billion, an increase of
$109.0 billion between the end of fiscal year (FY) 1997 and the end of FY1998. But the
government’s total surplus was $70 billion in FY1998. The question then arises as to why
the debt went up and not down. If deficits make the debt rise, should not surpluses make
the debt fall?
For the purposes of understanding the effect of deficits or surpluses on the debt, a
knowledge of the composition of federal debt is needed. The all-encompassing measure
of Federal debt is total or gross federal debt. It has two components. One is directly
affected by the government’s overall surpluses or deficits and is called debt held by the
public. The other is affected by internal government transactions and bookkeeping and is
called debt held by government accounts.
Congressional Research Service ˜ The Library of Congress

---

CRS-2
Measures of Federal Debt
Federal debt is any debt instrument issued by the Treasury or other federal
department or agency. Total federal debt consists of all these securities that are
outstanding. Total debt can be divided into debt issued by the Treasury (called eithe
1
r
Treasury debt or public debt) and debt issued by federal agencies (called agency debt). Of
the $5,478.7 billion in gross federal debt outstanding at the end of FY1998, $5,449.3
billion (99.5%) had been issued by the Treasury and $29.4 billion (0.5%) had been issued
by federal agencies.
For the purposes of understanding the effect of the government’s deficits and
surpluses on federal debt, dividing total debt into the two major holders of the debt, debt
held by the public and debt held by government accounts, is the more interesting and useful
split. As defined by the General Accounting Office (GAO), debt held by the public is,
“That part of the gross federal debt held outside of the federal government. This includes
any federal debt held by individuals, corporations, state or local governments, the Federal
Reserve System, and foreign governments and central banks.” The Administration’
2
s
budget documents in referring to debt held in government accounts states that, “Trust
funds, and some public enterprise revolving funds and special funds, accumulate cash in
excess of current requirements in order to meet future obligations. These cash surpluses
are invested mostly in Treasury debt and, to a very small extent, in agency debt.” Th
3
e
vast majority of debt held by government accounts is held by federal trust funds.
At the end of fiscal year 1998, debt held by the public totaled $3,720.1 billion. Debt
held in government accounts totaled $1,758.6 billion. Table
4
1 contains data on federal
debt for the fiscal years 1985 through 2009.
Deficits and Surpluses
As currently defined, the government’s total surplus or deficit (also called the unified
surplus or deficit) is the difference between the money the government collects from the
public (receipts) and the amount it spends (outlays). If the government collects more than
it spends, it has a surplus; if it spends more than it collects it has a deficit. The total
surplus or deficit does not include internal transactions among government accounts.
By law, the current definition of on-budget activities excludes the transactions of the
Social Security trust funds and the Postal Service. This is a legal separation of federal
accounts and has no effect on the government’s interactions with the wider economy.
1Total or gross federal debt is sometimes called the national debt, a term that has no official
definition.
2GAO. A glossary of terms used in the federal budget process: exposure draft. p.38 Revised
January 1993. GAO/AFMD-2.1.1
OMB.
3
The Budget of the United States Government for fiscal year 1999. Analytical perspectives.
p. 251. February 1998.
In
4
1998, trust funds held $1,645.5 billion and federal funds held $113.1 billion of the debt held
by government accounts..

---

CRS-3
Most analysis of federal budget activity uses totals for federal spending and receipts that
ignore this distinction.
For FY1998, the government had a surplus of $70.0 billion. This is the first surplus
for the government since FY1969 (the surplus that year was $3.2 billion). It also
represents a large turnaround in federal finances. In FY1992, the deficit reached a dollar
record high of $290.4 billion.
Table 1. Components of Federal Debt, 1985-2009
(In billions of dollars)
Debt Held
Debt Held in
FY
Total Federal Debt
by the Public
Government Accounts
1985
$1,817.5
$1,499.9
$317.6
1986
2,120.6
1,736.7
383.9
1987
2,346.1
1,888.7
457.4
1988
2,601.3
2,050.8
550.5
1989
2,868.0
2,189.9
678.2
1990
3,206.6
2,410.7
795.8
1991
3,598.5
2,688.1
910.4
1992
4,002.1
2,998.8
1,003.3
1993
4,351.4
3,247.5
1,103.9
1994
4,643.7
3,432.1
1,211.6
1995
4,921.0
3,603.4
1,317.6
1996
5,181.9
3,733.0
1,449.0
1997
5,369.7
3,771.1
1,598.6
1998
5,478.7
3,720.1
1,758.6
Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1999
5,578.9
3,630.4
1,948.6
2000
5,668.8
3,514.9
2,153.9
2001
5,742.9
3,377.7
2,365.2
2002
5,772.3
3,183.4
2,588.9
2003
5,810.1
2,989.0
2,821.2
2004
5,830.6
2,770.4
3,060.1
2005
5,839.1
2,529.1
3,310.0
2006
5,804.6
2,236.9
3,567.7
2007
5,753.3
1,916.8
3,836.6
2008
5,681.7
1,574.3
4,107.3
2009
5,587.1
1,205.2
4,381.5
Sources: OMB. Budget of the United States Government for FY2000. Historical Tables. February
1999. CBO. The economic and budget outlook: fiscal years 2000-2009. January 1999.
The Link Between Surpluses and Deficits and Changes in the Debt
What links the annual surplus or deficit to the annual change in total federal debt?
For that portion of total federal debt held by the public, the link is very close. When the
government has a deficit it acquires the money it needs beyond its receipts by borrowing
through the sale of debt instruments to the private financial markets. This increases the
amount of debt held by the public. If the government has a surplus, maturing federal debt
is paid off with the extra cash the government has available. This decreases the amount
5
of debt held by the public. The size of the surplus or deficit is similar to the annual change
in federal debt held by the public.
Changes in the amount of debt held by government accounts is relatively independent
of the government’s overall surplus or deficit. Instead these changes result from the
5When the government has deficit, it usually pays holders of maturing debt by issuing new debt.

---

CRS-4
surpluses or deficits, including interest transfers from the general fund, of the accounts
themselves.
Changes in Debt Held in Government Accounts. What drives changes in that
portion of federal debt held in government accounts? The government holds its own debt
within designated accounts because it is required to by law. The annual surpluses (and in
recent years it is always a surplus) in these accounts cumulatively is what drives changes
in debt held by government accounts. Any account surplus is converted into more debt
held by these accounts.
Most of the programs
Figure 1. Debt Held by the Public and
with significant holdings
by Government Accounts, 1985-2009
of federal debt fall into
$ 4 , 5 0 0
the category of federal
trust funds, such as the
$ 4 , 0 0 0
Social Security and the
Held by the Public
Highway Trust Funds.
$ 3 , 5 0 0
Some federal programs
produce surpluses (or
$ 3 , 0 0 0
sometimes deficits) within
their accounts because
$ 2 , 5 0 0
they were established to
$ 2 , 0 0 0
have income (including
the interest earnings on
Billions of Dollars $1,500
their holdings of federal
debt) and outlays credited
$ 1 , 0 0 0
directly to their programs.
Held in Government Accounts
In contrast, the majority
$ 5 0 0
of federal programs, in
number if not in size,
$ 0
receive funding from the
1 9 8 5
1 9 9 0
1 9 9 5
2 0 0 0
2 0 0 5
Treasury’s general fund,
Fiscal Year
u s u a l l y t h r o u g h
appropriations. They do
not have their own earmarked or dedicated sources of income.
Any surplus generated in government accounts is required, by law, to be invested in
government debt. The mechanism by which this occurs, since it occurs completely within
government accounts, differs materially from the borrowing that the government does
from the public. All money that the government receives from the public flows through
the Treasury. The Treasury then credits specified federal accounts with receipts
earmarked for them (e.g. payroll taxes for Social Security) and adds in any interest
earnings on their already held debt. If an account that can hold government debt is
credited with more income than it needs for its expenditures, the Treasury issues an
amount of debt to that account equal to its surplus income. The actual cash from the
accounts in surplus is then credited to the general fund.
The Means of Financing. Because of the intricacies of federal accounting, the
match between deficits and surpluses and the annual change in debt held by the public is
not exact. Table 2 links the budget’s annual balance, surpluses or deficits, and the changes
in debt held by the public. In addition to the surplus or deficit affecting the debt held by

---

CRS-5
the public, there are a number of factors called other means of financing or OMOF. These
factors,
“affect the government’s need to borrow money from the public...[They]
include reductions (or increases) in the government’s cash balances, seigniorage,
and other, miscellaneous changes. The largest of the other borrowing needs
reflects the capitalization of financing accounts used for credit
programs...[Direct loan and credit] programs require disbursements up front by
the government with the promise of repayment at a later date. Those up-front
outlays are not counted toward the deficit [or surplus], which reflects only the
estimated subsidy costs of such programs.”6
Table 2. Budget Balance and the Change
in Federal Debt, 1986-2009
(in billions of dollars)
Other Means
Change in
Trust fund
Deficit or
Change in
FY
of Financing
Debt held by
surpluses &
Surplus(-)
total debt
(OMOF)
the public
adjustments
1985
$212.3
+
-$12.9
=
$199.4
+
$53.5
=
$252.9
1986
221.2
+
15.6
=
236.8
+
66.3
=
303.1
1987
149.8
+
2.2
=
152.0
+
73.5
=
225.5
1988
155.2
+
6.9
=
162.1
+
93.1
=
255.2
1989
152.5
+
-13.4
=
139.1
+
127.6
=
266.7
1990
221.2
+
-0.4
=
220.8
+
117.8
=
338.6
1991
269.4
+
8.0
=
277.4
+
114.5
=
391.9
1992
290.4
+
20.3
=
310.7
+
92.9
=
403.6
1993
255.0
+
-6.3
=
248.7
+
100.6
=
349.3
1994
203.1
+
-18.5
=
184.6
+
107.7
=
292.3
1995
163.9
+
7.4
=
171.3
+
106.0
=
277.3
1996
107.4
+
22.2
=
129.6
+
131.3
=
260.9
1997
21.9
+
16.2
=
38.1
+
149.7
=
187.8
1998
-70.0
+
19.0
=
-51.0
+
160.0
=
109.0
Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1999
-107.1
+
17.4
=
-89.7
+
189.9
=
100.2
2000
-130.7
+
15.2
=
-115.5
+
205.4
=
89.9
2001
-150.9
+
13.7
=
-137.2
+
211.3
=
74.1
2002
-208.7
+
14.4
=
-194.3
+
223.7
=
29.4
2003
-209.4
+
15.0
=
-194.4
+
232.2
=
37.8
2004
-233.5
+
14.9
=
-218.6
+
239.1
=
20.5
2005
-255.8
+
14.5
=
-241.3
+
249.8
=
8.5
2006
-306.1
+
13.9
=
-292.2
+
257.7
=
-34.5
2007
-333.5
+
13.4
=
-320.1
+
268.8
=
-51.3
2008
-355.3
+
12.8
=
-342.5
+
270.9
=
-71.6
2009
-381.4
+
12.6
=
-368.8
+
274.2
=
-94.6
Sources: OMB. Budget of the United States government for FY2000. Historical Tables. February
1999. CBO. The economic and budget outlook: fiscal years 2000-2009. January 1999.
To make the calculations in the table 2 easier to follow, deficits are shown as positive
since they increase the debt held by the public and surpluses are shown as negative since
they reduce it. The OMOF are shown as positive if they increase debt and negative if they
decrease it.7
6CBO. The economic and budget outlook: fiscal years 1999-2008. January 1998. p. 41-42.
In
7
1997, the OMOF was $16.2 billion while the deficit was $21.9 billion. The change in debt held
by the public was a $38.1 billion increase, making the OMOF 42.5% of the total change in debt
held by the public. In the example for 1991, the OMOF was 2.9% of the total change in debt held
(continued...)

---

CRS-6

Over the next decade, the OMOF is expected to decline slightly, from $18 billion in
FY1999 to $12 billion in FY2009, and be relatively small compared to the size of the
surpluses in the first decade of the new century. This decline and relatively small size
combined with the expectation of growing surpluses should make the expected surpluses
good proxies for the annual change in the debt held by the public.8
The sum of the changes in debt held by the public and the changes in debt held by
government accounts equals changes in total federal debt. Table 2 displays the major
components of change in total federal debt. The surplus or deficit is combined with the
other means of financing resulting in the change in debt held by the public. This amount
is then combined with the change in debt held by government accounts to produce the
change in total federal debt. If the surpluses in the accounts that hold debt are larger than
the overall surplus, total federal debt will rise. If the accounts’ surpluses are smaller than
the overall surpluses, total federal debt will fall.
According to CBO estimates from January 1999, the government will have surpluses
in its annual budget for all the fiscal years from 1998 through 2009. The annual surpluses
will reduce the debt held by the public through this entire period. The continuing surpluses
in federal accounts that hold federal debt will keep increasing the debt held by government
accounts throughout the period. This combination will mean that total federal debt will
increase for several years, through FY2005 until the overall surplus exceeds the surplus
in the accounts holding federal debt. Total federal debt will decline through FY2009, the
edge of the projection period. Currently, debt held by the public is over twice the size of
debt held in government accounts. In addition, the CBO projections show that by the end
of FY 2004, the debt held by government accounts will exceed debt held by the public for
the first time ever. The projections indicate that by the end of 2009, internally held debt
will be 3.6 times larger than the debt held externally. Figure 1 shows these changes
graphically.
7(...continued)
by the public.
8The other means of financing are discussed in more detail in the CRS report, The Debt, the
Deficit, and the Means of Financing (report number 94-1004E), December 5, 1994.

---