Order Code RS20767
January 4, 2001
CRS Report for Congress
Received through the CRS Web
How Budget Surpluses Change Federal Debt
Philip D. Winters
Analyst in Government Finance
Government and Finance Division
Summary
The federal government had a surplus of $237.0 billion in fiscal year (FY) 2000,
while total federal debt increased by $22.9 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 total federal debt, debt held by the public (which
includes debt held by individuals, pension funds, banks, and insurance companies, among
other entities) and debt held by government accounts (almost all in federal trust funds,
such as Social Security). A total or unified surplus, meaning that the government
receives more dollars from the public than it spends on the public, generally will reduce
debt held by the public. A surplus in federal trust fund accounts, meaning that their
income (from both the public and other parts of the government) is greater than their
outgo (to both the public and other parts of the government), increases their holdings of
federal debt. The trust funds are required to invest surpluses in government debt. If debt
held by the trust funds increases faster than debt held by the public decreases, total
federal debt rises.
For the next decade, the projected overall surpluses will reduce the amount of debt
held by the public. The Congressional Budget Office (CBO) even expects that, by late
in the decade, the government will need to find something to do with its accumulating
cash balances other than reducing the publicly held debt. Debt held in government
accounts will continue increasing since these accounts will continue to run surpluses.
Total federal debt is projected to fall through much of the decade and then rise as debt
held by the public is eliminated while debt held by government accounts continues to
increase.
This report will be updated as events warrant.
Total federal debt rose from $5,606.1 billion to $5,629.0 billion, an increase of $22.9
billion, between the end of fiscal year (FY) 1999 and the end of FY2000. But the
government’s total surplus was $237.0 billion in FY2000. 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?
Congressional Research Service ˜ The Library of Congress

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Understanding the effect of the government’s total or unified deficits or surpluses on
the debt, requires understanding the composition of federal debt. The all-encompassing
measure of federal debt is total or gross federal debt. It has two components. One, debt
held by the public, is directly affected by the government’s overall surpluses or deficits
(the balance of the government’s transactions with the public). The other, debt held by
government accounts, is determined by the accounts’ transactions with the public and
other parts of the government, and by the government’s accounting rules and practices.
Measures of Federal Debt
Federal debt consists of securities issued by the Treasury and a relatively few issued
by a limited number of federal agencies.1 The Treasury issues debt called either public
debt or Treasury debt. Federal agencies have, in the past, issued debt called agency debt,
but rarely do so today. Of the $5,629.0 billion in gross federal debt outstanding at the end
of FY2000, $5,601.3 billion (99.5%) had been issued by the Treasury and $27.7 billion
(0.5%) had been issued by federal agencies.2
Different factors affect these two groupings of federal debt, debt held by the public
and debt held by government accounts. 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.3
The Administration’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 .... These cash surpluses are invested
mostly in Treasury debt and ... in agency debt.”4 Almost all debt held by government
accounts is held by federal trust funds. At the end of FY2000, trust funds held 94.3% of
federal debt held by government accounts.5
At the end of FY2000, total federal debt was $5,629.0 billion; debt held by the public
totaled $3,410.2 billion; and debt held in government accounts totaled $2,218.8 billion.
Table 1 contains data on federal debt and its components for the fiscal years 1985 through
the estimates and projections for the fiscal years 2001 through 2010.
1The popular term national debt, which is often substituted for gross or total federal debt, is not
used in federal government publications.
2Federal agencies do not include Government-sponsored enterprises (GSEs) and the government’s
debt numbers do not include debt issued by GDEs.
3GAO. A Glossary of Terms Used in the Federal Budget Process: Exposure Draft, GAO/AFMD-
2.1.1, p. 38. Revised Jan. 1993.
4OMB. The Budget of the United States Government for Fiscal Year 2001. Analytical
Perspectives. p. 275. Feb. 2000.
5This paper will use trust fund as a proxy term for those federal accounts holding federal debt.

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Table 1. Components of Federal Debt, 1985-2010
(In billions of dollars)
Debt Held by
Total Federal
Debt Held
FY
Government
Debt
by the Public
Accounts
Actual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1985
$1,818
$1,500
$318
1986
2,121
1,737
384
1987
2,346
1,889
457
1988
2,601
2,051
551
1989
2,868
2,190
678
1990
3,207
2,411
796
1991
3,599
2,688
910
1992
4,002
2,999
1,003
1993
4,351
3,248
1,104
1994
4,644
3,432
1,212
1995
4,921
3,603
1,318
1996
5,182
3,733
1,449
1997
5,370
3,771
1,599
1998
5,479
3,720
1,759
1999
5,606
3,633
1,973
2000
5,629
3,410
2,219
Estimates and Projections . . . . . . . . . . . . . . . . . . . . . . . . . .
2001
5,616
3,158
2,485
2002
5,596
2,854
2,742
2003
5,563
2,522
3,041
2004
5,513
2,165
3,348
2005
5,444
1,774
3,670
2006
5,331
1,315
4,016
2007
5,456
1,081
4,375
2008
5,737
989
4,784
2009
6,024
887
5,137
2010
6,370
830
5,540
Sources: OMB. Budget of the United States Government for FY2001, Historical Tables, Feb.
2000; CBO. The Economic and Budget Outlook: an Update, July 2000. Dept. of the
Treasury, Final Monthly Treasury Statement of Receipts and Outlays, Sept. 2000.
Deficits and Surpluses
As currently defined, the government’s total or unified surplus or deficit is the
difference between the net receipts the government collects from the public and the money
it sends back to the public as net outlays. The measure approximates the number of dollars
collected from and spent on the public. If the government collects more than it spends,
it has a surplus; if it spends more than it collects, it has a deficit.
For FY2000, the government had a surplus of $237.0 billion. This is the third annual
surplus in a row for the government. These surpluses represent a significant turnaround
in federal finances; they follow three decades of deficits.
Within the government, the Treasury, acting much as the government’s bank and
bookkeeper, tracks the income and outgo of the government’s multitude of accounts and
funds. The income and outgo measures used within the government differ somewhat from

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the usual definition of receipts
Figure 1. Debt Held by the Public and by
and outlays. Income and
Government Accounts, 1985-2010(projections)
outgo include payments from
6,000
and to government agencies, as
well as payments to and
Debt Held by Govern-
collections from the public. As
ment Accounts
an example, the Social Security
5,000
trust funds are credited with
payroll tax collections from the
public, as well as interest
payments (made by the
4,000
Treasury) on the fund’s
Debt Held by
existing holdings of federal
the Public
debt and federal agency
payments for federal employer
3,000
contributions on behalf of
federal employees. The
program’s outgo is mostly
In Billions of Dollars
payments to the public. The
2,000
resulting surplus for the
program is a result of this
mixture of internal and external
collections and payments.
1,000
Other trust funds would show
a similar mixture of internal
and external collections and
expenditures. Because these
0
internal collections and
1985
1990
1995
2000
2005
2010
expenditures are netted against
Fiscal Year
each other, they do not
become part of the government’s total receipts or outlays.
Changes in Federal Debt
Changes in the holdings of federal debt in the two groups of holders are driven by
different mechanisms. Changes in debt held by the public are closely linked to the
government’s total surplus or deficit. The amount of debt held by the public represents
the net borrowing – the sum of surpluses and deficits – throughout the government’s
history. The changes in the debt holdings of government accounts are propelled by the
surpluses or deficits in the accounts themselves. The cumulative effect of these individual
changes produces the overall change in debt held by government accounts.
Changes in Federal Debt Held by the Public. If the government has a deficit, it
must borrow from the public to acquire the financial resources it needs to cover a portion
of its obligations. It generally borrows by selling debt instruments to the financial markets
or directly to investors. These actions increase the amount of federal debt held by the
public by approximately the size of the deficit. If the government has a surplus, it has
more resources than it needs to cover its obligations. With these extra resources, it
redeems debt, either as it matures or by purchasing government debt from the financial

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markets. The redemptions reduce the amount of debt held by the public by approximately
the size of the surplus.
Changes in Federal Debt Held by Government Accounts. Changes in the amount
of debt held by government accounts are independent of the government’s overall surplus
or deficit. Instead, these changes in debt holdings depend on the surpluses or deficits in
the trust funds themselves. These surpluses or deficits are determined by the government’s
accounting rules and the legislation establishing or modifying the revenues and programs
associated with the accounts and trust funds. If they have surpluses, they are required by
law to invest them in Treasury debt securities. This investment increases the amount of
debt held by government accounts. If the trust funds should have deficits, they must
redeem some of their debt holdings through the Treasury for the resources needed to
cover some part of their obligations. Their redemption reduces the amount of debt held
by government accounts.
The Means of Financing. Various relatively small financing factors, combined in
the category called other means of financing (MOF) mean that deficits or surpluses do not
equal the annual change in debt held by the public. Table 2 links the budget’s annual
balance, surpluses or deficits, and the changes in debt held by the public. These factors
include reductions (or increases) in the government’s cash balances, seigniorage,
and other, miscellaneous changes. The largest [element in this
category]...reflects the capitalization of financing accounts used for credit
programs...[direct loan and loan guarantee 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

To make the calculations in 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 MOF are shown as positive if they increase debt and negative if they
decrease it.7

Over the next decade, the MOF is expected to stabilize between $10 billion and $13
billion a year, which would be relatively small compared to the size of the expected
changes in debt held by the public during the same period. This result should make the
projected surpluses fairly good proxies for the annual change in the debt held by the public,
at least through mid-decade.8
The sum of the changes in debt held by the public and the changes in debt held by
government accounts equals change in total federal debt. Table 2 displays the major
components of change in total federal debt. The surplus or deficit is combined with the
6CBO, The Economic and Budget Outlook: Fiscal Years 1999-2008, Jan. 1998, pp. 41-42.
7In 1999, the MOF was 30.2% of the total change in debt held by the public. In 2000, the MOF
was 6.4% of the total change in debt held by the public.
8The other means of financing are discussed in more detail in the CRS Report 94-1004E, The
Debt, the Deficit, and the Means of Financing, Dec. 5, 1994.

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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 changes in the debt held by government accounts are
larger than the changes in debt held by the public, total federal debt will rise.
Table 2. Budget Balance and the Change
in Federal Debt, 1985-2006
(In billions of dollars)
Means of
Change in
Trust fund and
Deficit or
Change in
FY
Financing
Debt Held by
Account Surpluses
Surplus(-)
Total Debt
(MOF)
the Public
and Adjustments
1985
$212
+
$-13
=
$199
+
$54
=
$253
1986
221
+
16
=
237
+
66
=
303
1987
150
+
2
=
152
+
74
=
226
1988
155
+
7
=
162
+
93
=
255
1989
153
+
-13
=
139
+
128
=
267
1990
221
+
0
=
221
+
118
=
339
1991
269
+
8
=
277
+
115
=
392
1992
290
+
20
=
311
+
93
=
404
1993
255
+
-6
=
249
+
101
=
349
1994
203
+
-19
=
185
+
108
=
292
1995
164
+
7
=
171
+
106
=
277
1996
107
+
22
=
130
+
131
=
261
1997
22
+
16
=
38
+
150
=
188
1998
-70
+
19
=
-51
+
160
=
109
1999
-124
+
35
=
-89
+
216
=
127
2000
-237
+
14
=
-223
+
246
=
23
Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2001
-268
+
17
=
-251
+
251
=
-1
2002
-312
+
8
=
-304
+
284
=
-20
2003
-345
+
13
=
-332
+
299
=
-33
2004
-369
+
12
=
-357
+
307
=
-50
2005
-402
+
11
=
-391
+
322
=
-69
2006
-469
+
10
=
-459
+
346
=
-113
Sources: OMB. Budget of the United States Government for FY2001, Historical Tables, Feb. 2000;
CBO, The Economic and Budget Outlook: An Update, July 2000. Dept. of the Treasury, Final
Monthly Treasury Statement of Receipts and Outlays, Sept. 2000.
Note: CBO’s report assumes the government will retain some debt held by the public (possibly savings
bonds and the state and local government series) and will invest some of the surpluses after FY2006.
Although the government is expected to have large surpluses throughout this decade,
total federal debt may or may not be smaller at the end of the decade than at the beginning.
According to CBO’s projections, the surpluses will reduce the debt held by the public
through at least FY2006, when CBO assumes that the government will use part of the
surplus for something other than reducing the publicly held debt (and debt held by the
public becomes very small). During the same period, the continuing surpluses in federal
trust funds, in particular, will increase the debt held by government accounts. CBO’s
projections show total federal debt falling through FY2006 and then rising for the rest of
the decade. Large government surpluses do not assure a reduction in total debt, only a
reduction in debt held by the public.

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