Order Code RS20302
Updated August 10, 2000
CRS Report for Congress
Received through the CRS Web
Paying Down the Federal Debt:
A Discussion of Methods
James M. Bickley
Specialist in Public Finance
Government and Finance Division
Summary
The federal government has begun running budget surpluses; that is, the flow of revenue
into the Treasury has been exceeding the outflow of expenditures. The Treasury has been
lowering the amount of outstanding publicly held debt by reducing new debt issuance as
existing federal debt issues mature. On January 13, 2000, the Treasury announced that during
calendar year 2000, it would buy back outstanding Treasury securities worth as much as $30
billion. This report examines these two methods of paying down the publicly held debt and
will be updated as developments warrant.
The federal government has been running budget surpluses; that is, the flow of revenue into
the Treasury has exceeded the outflow of expenditures. Consequently, the U.S. Treasury has
been reducing the amount of outstanding publicly held debt.1 This report examines methods of
paying down the publicly held debt.
The Congressional Budget Office (CBO) reports that the budget surplus was $124 billion
in fiscal year 1999. CBO’s baseline estimates of the budget, under the assumption that
discretionary spending grows at the rate of inflation after fiscal year 2000, shows rising budget
surpluses through fiscal year 2005; consequently, the publicly held debt will decline at an
increasing rate in nominal dollars.2 In July 2000, CBO’s baseline projections, under the
1The sum of publicly held federal debt and federal debt held in government accounts equals total
federal debt. For an explanation of the relationship between budget surpluses (and deficits) and
different concepts of federal debt, see: U.S. Library of Congress, Congressional Research
Service, Surpluses and Federal Debt, by Philip D. Winters, CRS Report RS20065 (Washington:
March 1, 1999), 6 p.
2These forecasts are based on positive assumptions about control of discretionary spending and
are examined in the following source: U.S. Library of Congress, Congressional Research Service,
(continued...)
Congressional Research Service ˜ The Library of Congress

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assumption that discretionary spending grows at the rate of inflation after fiscal year 2000,
indicate that the publicly held debt will decline from year-to-year as follows: $3,633 billion
(FY1999 actual), $3,409 billion (FY2000), $3,158 billion (FY2001), $2,854 billion (FY2002),
$2,522 billion (FY2003), $2,165 billion (FY2004), and $1,774 billion (FY2005).3
Methods of Paying Down the Debt
When the government first began running surpluses in FY1988, the Treasury used only
one method to pay down the debt–reducing new debt issuance. Today, the Treasury has
another method–buying back outstanding debt.4
Reduction and Elimination of New Debt Issuance.
All publicly held debt eventually matures. To reduce the debt outstanding, the Treasury
has been issuing smaller replacement issues, issuing securities less frequently, and discontinuing
the issuance of particular maturities. For example, on May 6, 1998, the Treasury announced
that it would stop issuing three-year notes after May 1998, and the auctions of five-year notes
would be changed to quarterly auctions from monthly auctions.5 The dollar volume of new debt
issued has been less than the dollar volume of maturing debt; consequently, the dollar volume
of outstanding publicly held debt has declined.
Buybacks of Outstanding Debt.
On August 4, 1999, the U.S. Treasury published for comment proposed rules for
permitting it to buy back outstanding debt securities before maturity.
Lawrence H. Summers, the Secretary of the Treasury, stated that buybacks of debt would
offer the following three advantages:
First, by prepaying the debt we would be able to maintain larger auction
sizes than
would otherwise be possible. Enhancing the liquidity of Treasury’s benchmark
securities should lower the government’s interest costs over time and promote
overall market liquidity.
2(...continued)
Budget Surpluses or Deficits under Alternative Discretionary Spending Assumptions, by
Philip D. Winters, CRS Report RS20283 (Washington: July 30, 1999), 4 p.
3U.S. Congressional Budget Office, The Budget and Economic Outlook: An Update
(Washington: GPO, July 2000), p. 3.
4For an overview of federal debt management, see: U.S. Library of Congress, Congressional
Research Service, Federal Debt Management: An Overview of Concepts and Policy Options,
by James M. Bickley, CRS Report 98-370 E (Washington: April 15, 1998), 28 p.
5Berry, John M., “Treasury to Reduce Sales of Securities”, The Washington Post, May 7, 1998.
p. E4.

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Second, by paying off debt that has substantial remaining maturity, we would
be able to prevent what would otherwise be a potentially costly and unjustified
increase in the average maturity of our debt: from just over five years to more than
seven years on the current trajectory.
Third, by paying off debt, we can absorb excess cash at times of the year when
tax revenues exceed immediate spending needs. This kind of absorption is an
important part of sound debt management.6
On January 13, 2000, the Treasury Department announced that during calendar year 2000
it would purchase outstanding Treasury securities before maturity worth as much as $30 billion.7
On January 19, 2000, the Treasury published its final rules which adopted the proposed rules
without significant changes. Under the final rules, redemption prices would be determined
through a process in which market participants would submit competitive offers to sell particular
Treasury securities back to the Treasury.8 On March 9, 2000, the Treasury bought back $1
billion in Treasury bonds in its first debt buyback in calendar year 2000.9, 10
On August 2, 2000, Gary Gensler, Under Secretary of the Treasury for Domestic
Finance, stated that the Treasury had conducted 10 buyback operations resulting in the
redemption of securities with a total par value of $17.5 billion.11 Furthermore, Mr. Gensler
indicated that the Treasury was on schedule to buy back $30 billion in Treasury securities in
calendar year 2000.12
6U.S. Treasury. Treasury News. Statement of Lawrence H. Summers, Secretary of the
Treasury. Washington, August 4, 1999. p. 2.
7Dreazen, Yochi J. And Gregory Zuckerman, “Treasury Announces Its Plan to Buy Back Debt
of as Much as $30 Billion, Above Expectations,” The Wall Street Journal, v. 235, no. 11,
January 14, 2000. p. C19.
8For a presentation of the final rules, see: U.S. Dept. of the Treasury, Fiscal Service, "Marketable
Treasury Securities Redemption Operations," Federal Register, v. 65, no. 12, January 19, 2000,
pp. 3114-3118.
9“Treasury Announces Debt Buyback Operation,” Treasury News, Department of the Treasury,
March 7, 2000. p. 1.
10The Treasury last repurchased debt during the Hoover Administration in 1930 as reported in the
following source: Zuckerman, Jacob M. and Jacob M. Schlesinger, “Treasury Unveils
Anticipated Buyback Plan as Bond Prices Finish with Only Small Gains,” The Wall Street
Journal, v. 235, no. 48, March 8, 2000, p. C24.
11“Under Secretary of the Treasury for Domestic Finance Gary Gensler Remarks at the August
2000 Treasury Quarterly Refunding,” Treasury News, Department of the Treasury, August 2,
2000. p. 2.
12Ibid.

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