Overview of the Federal Debt

Overview of the Federal Debt

Overview of the Federal Debt
D. Andrew Austin
Analyst in Economic Policy
May 11, 2011
Congressional Research Service
7-5700
www.crs.gov
R41815
CRS Report for Congress
P
repared for Members and Committees of Congress

Overview of the Federal Debt

Summary
The size of current and projected federal deficits and the accumulation of federal debt are central
to current congressional deliberations regarding fiscal reforms. This report provides a broad
overview of the federal debt, annual budget deficits, and debt service costs. Federal debt is the
accumulated sum of unrepaid borrowing by the federal government over time. The total federal
debt consists of debt held by the public and intragovernmental debt. Debt owed to the public
represents borrowing from entities other than the federal government, and includes borrowing
from state and local governments, foreign governments and investors, the Federal Reserve
System, and foreign central banks, as well as private investors in the United States.
Intragovernmental debt consists of debt liabilities owed by one part of the federal government to
another, which are mostly held in trust funds. The Social Security Old Age and Survivors’
Insurance (OASI) account is the federal trust fund with the largest holdings of Treasury securities.
The largest 20 trust funds account for about 98% of intragovernmental debt. The Social Security
trust funds were designed to provide financial resources to pay future benefits. The federal
government, however, must raise revenues, cut spending, or borrow in order to obtain funds that
will allow the U.S. Treasury to redeem the trust fund securities in the future.
Nearly all federal debt is subject to a statutory limit. On April 29, 2011, debt subject to limit was
$14,236 billion, about $58 billion below the current statutory debt limit of $14,294 billion. The
U.S. Treasury projects federal debt will reach its statutory limit before May 16, 2011, although
extraordinary measures could extend Treasury’s borrowing capacity until about August 2, 2011.
The U.S. Treasury uses various debt instruments to manage its cash and debt, so that funds are
available to fund outlays and costs of carrying federal debt are minimized. Even when the federal
budget is in balance, Treasury would still have to issue some debt to balance out seasonal
fluctuations in revenues and outlays.
For most of American history, federal debt was closely linked to war finance. In recent decades,
the growing costs of federally financed health care and other entitlement spending have played an
important role in the government’s fiscal situation. Higher spending on defense and other security
costs, as well as tax cuts and other tax policy decisions, have also influenced the size of federal
deficits and the accumulation of debt.
Interest rates on federal debt have fallen to extremely low levels due to the effects of the 2007-
2008 financial crises and subsequent recession. As the economy continues to recover interest rates
will likely rise. Federal debt levels, according to projections, will continue to increase in coming
years. Thus, net interest costs are projected to rise rapidly. According to April 2011 CBO baseline
projections, net interest costs will rise from $213 billion in FY2011 to $534 billion in FY2016.
A growing proportion of the federal debt is held by foreign investors and governments as capital
markets have become more international. Some countries, especially in East Asia, have had very
high savings rates that have financed significant accumulations of federal debt.
Federal debt is a backward-looking reflection of the government’s fiscal condition. Some
forward-looking measures of the federal debt may more accurately reflect the federal
government’s fiscal condition and its ability to face future budgetary challenges. This report will
be updated as events warrant.
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Overview of the Federal Debt

Contents
Structure of the Federal Debt....................................................................................................... 1
Debt Held by the Public ........................................................................................................ 3
Intragovernmental Debt.........................................................................................................5
How Federal Trust Funds Work....................................................................................... 5
Debt Limit ............................................................................................................................ 7
Deficits, Debt, and Interest Costs ................................................................................................ 8
Deficits and the Accumulation of Federal Debt...................................................................... 8
The Federal Debt Over Time ................................................................................................. 9
Interest Costs ...................................................................................................................... 12
Interest Rates on Short-Term and Long-Term Debt .............................................................. 14
Holdings of Federal Debt .......................................................................................................... 15
Maturity Structure of the Federal Debt ................................................................................ 15
Ownership of Publicly Held Debt ........................................................................................ 20
What Is the “Best” Measure of Federal Debt?............................................................................ 23
Conclusion................................................................................................................................ 24

Figures
Figure 1. Structure of Federal Debt.............................................................................................. 2
Figure 2. United States Government Budget Surplus or Deficit.................................................. 11
Figure 3. Federal Net Interest Costs as a Percentage of GDP ..................................................... 13
Figure 4. Interest Rates for Selected Treasury Securities by Maturity......................................... 15
Figure 5. Average Maturity of Privately Held U.S. Marketable Debt, 1945-2001 ....................... 16
Figure 6. Composition of Privately Held U.S. Marketable Interest-Bearing Public Debt
By Maturity Class .................................................................................................................. 18
Figure 7. Average Maturity of Privately Held U.S. Marketable Interest-Bearing Public
Debt....................................................................................................................................... 19
Figure 8. Holdings of Interest-Bearing U.S. Treasury Securities by Country .............................. 21
Figure 9. Holdings of U.S. Treasury Securities By Type of Investor........................................... 22

Tables
Table 1. Federal Debt Held by the Public..................................................................................... 4
Table 2. Federal Intragovernmental Debt ..................................................................................... 4

Contacts
Author Contact Information ...................................................................................................... 24

Congressional Research Service

Overview of the Federal Debt

he size of current and projected federal deficits and the accumulation of federal debt are
central to current congressional deliberations regarding fiscal reforms. This report
T provides a broad overview of the federal debt, annual budget deficits, debt service costs,
and related issues. Citations to other CRS reports that provide more detail on these topics are
included.1
This report describes the structure of the federal debt, which is divided between debt held by the
public (i.e., held by entities other than the federal government) and intragovernmental debt. Most
debt held by the public is marketable, while all but a tiny portion of intragovernmental debt is
nonmarketable and held in federal trust funds. The workings of federal trust funds and the federal
debt limit are then briefly described.
While the federal debt is the accumulation of annual deficits, reconciling a deficit with the year-
over-year increase in federal debt requires certain technical adjustments (discussed below). The
report then discusses the relationship between deficits and the federal debt, and the history of the
debt in recent decades.
A following section discusses elements of federal debt management. The U.S. Treasury aims to
maintain a mix of maturities among securities making up the federal debt that minimize
borrowing costs and risks associated with changing market conditions. Interest yields on fixed
income securities, such as Treasury bills, notes, and bonds, depend on their maturity (i.e., how
long until a security is redeemed).
Finally, the report examines ownership of publicly held debt, both in terms of the nationality and
the type of investor (insurers, mutual funds, etc.).
Structure of the Federal Debt
Federal debt is the accumulated sum of unrepaid borrowing by the federal government over time.
The total federal debt consists of debt held by the public and intragovernmental debt. Debt owed
to the public represents borrowing from entities other than the federal government, and includes
borrowing from state and local governments, foreign governments and investors, the Federal
Reserve System, foreign central banks, as well as private investors in the United States.
Intragovernmental debt consists of debt liabilities owed by one part of the federal government to
another, which are mostly held in trust funds. Federal debt at the end of calendar 2010, split by
intragovernmental and publicly held components, is shown in Figure 1.

1 See also U.S. Congressional Budget Office (CBO), Federal Debt and Interest Costs, December 2010, available at
http://www.cbo.gov/doc.cfm?index=11999&zzz=41471.
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Figure 1. Structure of Federal Debt
$Billions, end of calendar year 2010

Source: CRS analysis of U.S. Treasury data. Notes: Total federal debt outstanding at the end of December 31, 2010, was $14,025 billion. See text and Tables 1 and 2.
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Debt Held by the Public
Table 1 provides a breakdown of publicly held debt.2 As of December 31, 2010, total federal debt
outstanding was $14,025 billion, debt held by the public was $9,390 billion, and
intragovernmental debt was $4,613 billion. The bulk of debt held by the public is in the form of
marketable securities that can be freely traded in capital markets. U.S. savings bonds are an
example of nonmarketable federal debt held by the public. Nearly all intragovernmental debt is
nonmarketable.
Table 2 shows components of intragovernmental debt for the end of calendar years 2009 and
2010. Large federal deficits in recent years have translated into large increases in debt held by the
public. This increase is reflected across all types of marketable debt instruments (i.e., bills, notes,
bonds, and TIPS), although in calendar year 2010 the largest increase was in notes. The U.S.
Treasury chooses a mixture of various debt instruments to manage its cash and debt so that funds
are available to fund outlays and costs of carrying federal debt are minimized. Even when the
federal budget is in balance, Treasury must still issue some debt to balance out seasonal
fluctuations in revenues and outlays.
The marketable portion of the debt held by the public consists of U.S. Treasury securities that are
generally sold at scheduled auctions.3 Treasury securities are available in various maturities.
Shorter-maturity Treasury securities normally have lower yields and provide more flexibility in
cash management. Long maturity bonds, while normally requiring higher interest rates, can
protect borrowers, such as the federal government, against the risk of interest rate increases in the
medium and long term.
The largest components of the nonmarketable portion of debt held by the public are the State and
Local Government Series (SLGS) and U.S. Savings Bonds and other Savings Securities.4 SLGSs
are customized securities available for state and local governments to hold proceeds of bond
sales. SLGSs were designed to limit state and local governments’ ability to deposit proceeds of
tax-exempt bond issues, which generally carry interest rates below non-exempt securities, into
bank accounts earning higher interest rates. This could allow state and local governments to earn
arbitrage profits at the expense of federal taxpayers.5 U.S. Savings Bonds were widely promoted
to fund World War II, but now account for a small portion of federal debt.
The Government Account within the nonmarketable portion of debt held by the public mostly
comprises funds belonging to the Thrift Savings Plan (TSP), a defined contribution plan for
federal employees. The Government Account also includes various escrow, claims, and settlement
funds.

2 At the end of March 1, 2011, total federal debt outstanding was $14,173 billion. Debt held by the public was $9,563
billion and intragovernmental debt as $4,610 billion.
3 CRS Report R40767, How Treasury Issues Debt, by Mindy R. Levit.
4 For more information see U.S. Treasury, “SLGS FAQ,” available at http://www.treasurydirect.gov/govt/resources/
faq/faq_slgs.htm.
5For more information, see CRS Report R41811, State and Local Government Series (SLGS) Treasury Debt: A
Description, by Steven Maguire; and U.S. Treasury, “SLGS FAQ,” available at http://www.treasurydirect.gov/govt/
resources/faq/faq_slgs.htm.
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Table 1. Federal Debt Held by the Public
$Billions

End of 2009 End of 2010
Marketable
Bills
maturity ≤ 1 year
1,788
1,769
Notes
maturity : 1 to 10 years
4,179
5,568
Bonds
maturity > 10 years
715
888
TIPS
Treasury Inflation Protected Securities
568
616
Subtotal 7,250
8,841
Nonmarketable
State & Local Series
214
193
U.S. Savings Bonds
191
188
Government Account
120
133
Domestic 30
30
Foreign 4
4
Other 1
1
Subtotal 561
549
Total Debt Held by Public
7,811
9,390
Source: U.S. Treasury, Treasury Bulletin, December 2010, and Monthly Statement of the Public Debt, January 2011.
Table 2. Federal Intragovernmental Debt
$Billions, end of calendar years 2009 and 2010
Fund Name
Abbreviation
2009
2010
Federal Old-Age & Survivors Insurance Trust Fund (Social Security) OASI
2318.8
2429.5
Federal Disability Insurance Trust Fund (Social Security)
DI
199.8
180.0
Hospital Insurance Trust Fund (Medicare)
HI (Pt. A)
304.6
271.4
Supplementary Medical Insurance Trust Fund (Medicare)
Supp Med (Pt. B)
75.9
71.7
Civil Service Retirement & Disability Fund (OPM)
Civil Service
750.2
777.8
Military Retirement Fund (Defense)
DoD Mil Ret
295.8
335.9
Medicare Eligible Retiree Fund (Defense)
DoD Medicare
144.6
160.0
Nuclear Waste Disposal Fund (Energy)
DOE
45.4
47.8
Postal Service Retiree Health Benefits Fund
USPS
35.9
42.9
Deposit Insurance Fund
FDIC
59.5
39.4
Employees’ Life Insurance Fund (OPM)
ELI
36.7
38.2
Highway Trust Fund
Highway
7.6
22.3
Exchange Stabilization Fund (Treasury)
ESF
19.2
20.4
Employees’ Health Benefits Fund (OPM)
FEHB
15.5
16.8
Foreign Service Retirement & Disability Fund
FS
15.6
16.1
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Fund Name
Abbreviation
2009
2010
Pension Benefit Guaranty Corporation
PBGC
13.9
14.5
Unemployment Trust Fund
Unemployment
16.2
14.3
Miscel aneous Misc
122.0
113.3
Subtotal, Intragovernmental Government Account Series

4477.2
4612.4
Hope Bonds

0.5
0.5
Subtotal, Intragovernmental Nonmarketable

4477.7
4612.9
Treasury Securities

10.7
11.6
Federal Financing Bank

11.9
10.2
Subtotal, Intragovernmental Marketable

22.6
21.8
Total, Intragovernmental

4500.3
4634.7
Source: U.S. Treasury, Monthly Treasury Statement and Monthly Statement of Public Debt, December 31, 2009 and
2010, available at http://www.fms.treas.gov/mts/backissues.html and http://www.treasurydirect.gov/govt/reports/
pd/mspd/mspd.htm respectively.
Notes: Abbreviation column shows labels for boxes in Figure 1. See source for other notes.
Intragovernmental Debt6
Nearly all intragovernmental debt is held by trust funds and other accounts held at the U.S.
Treasury on behalf of various government programs.7 These funds receive interest payments from
the U.S. Treasury, generally in the form of additional Treasury securities. For the largest trust
funds, these interest payments occur twice a year, once at the end of June, and again at the end of
December. The Social Security Old Age and Survivors’ Insurance (OASI) account is the federal
trust fund with the largest holdings of Treasury securities. The largest 20 trust funds account for
about 98% of intragovernmental debt.8
Nearly all intragovernmental debt is nonmarketable. Debt held by the Federal Financing Bank
(FFB), which is limited to $15 billion, is nonmarketable and is not generally subject to the debt
limit. The Federal Financing Bank was created to increase the efficiency of the federal
government’s budgetary and financial operations.
How Federal Trust Funds Work
For illustrative purposes, the interactions between the Social Security trust funds, the general
fund, and the debt limit are described here. The Old Age and Survivors’ Insurance (OASI) and the
Disability Insurance (DI) trust funds are the two Social Security trust funds. Other government
trust funds may interact with revenue streams and the general funds in somewhat different ways.

6 Alison Shelton (CRS/Domestic Social Policy Division) contributed to the discussion of Social Security finance.
7 For details of federal trust funds and federal fund accounts, see U.S. Office of Management and Budget, FY2011
Budget of the U.S. Government, Analytic Perspectives, ch. 27. See also U.S. Congressional Budget Office, Budget and
Economic Outlook, Appendix C, January 2011, available at http://www.cbo.gov/ftpdocs/120xx/doc12039/01-
26_FY2011Outlook.pdf.
8 CRS Report R41328, Federal Trust Funds and the Budget, by Thomas L. Hungerford.
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Social Security collects revenues from payroll taxes paid by workers and employers, as well as
federal income taxes paid by some beneficiaries on a portion of their benefits. In addition, Social
Security earns interest income from trust fund investments, which the U.S. Treasury credits to the
trust funds in the form of additional government securities.
By law, the Social Security trust funds must be invested in interest-bearing obligations of the
United States or in obligations guaranteed as to both principal and interest by the United States.9
Investing the payroll tax revenues for even a few days ensures that the trust funds maximize
interest income. Under the terms of this exchange, when Treasury credits payroll tax and other
revenues to Social Security in the form of certificates of indebtedness (CIs), the revenues
themselves become available in the general fund for other government operations. The securities
that the Treasury issues to the Social Security trust funds count toward the federal debt limit.10
Social Security benefits are paid by the Treasury using cash from the general fund. If Treasury
lacks sufficient cash on hand to pay benefits, it must borrow by issuing new public debt. When
Treasury pays Social Security benefits, it redeems an equivalent amount of Treasury securities
held by the trust funds in order to reimburse the general fund.
The Social Security program is projected to run a cash deficit in FY2011. That is, Social
Security’s outlays for benefit payments and administration are projected to exceed its tax
revenues. In a year when Social Security runs a cash flow deficit, the Treasury redeems additional
government securities held by the trust funds.
Social Security financial operations have been slightly modified to accommodate a temporary
reduction in Social Security payroll taxes for employees and the self-employed. The Tax Relief,
Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312, signed on
December 17, 2010), among other provisions, provides a temporary two percentage point
reduction in the Social Security payroll tax for employees and the self-employed in 2011,
resulting in a tax rate of 4.2% for employees and 10.4% for the self-employed. To protect the
Social Security trust funds from a loss of payroll tax revenues, P.L. 111-312 appropriates to the
Social Security trust funds amounts equal to the reduction in revenues to the Treasury.11
The Social Security trust funds receive interest payments in the form of additional securities from
the U.S. Treasury each June 30 and December 31.12 In other words, Treasury is obligated to issue
additional debt, that is subject to limit, twice a year in order to pay interest to the Social Security
and certain other trust funds. When federal debt is near its statutory limit, making those interest
payments could pose a challenge to Treasury debt and cash management operations.
The Social Security trust funds were designed to provide financial resources to pay future
benefits. The federal government, however, must raise revenues, cut spending, or borrow in order

9 42 U.S.C. § 401(d).
10 U.S. Government Accounting Office, Treasury’s Management of Social Security Trust Funds During the Debt
Ceiling Crises (GAO/HRD-86-45), December 5, 1985, available at http://archive.gao.gov/d12t3/128621.pdf.
11 The law specifies that these appropriated amounts “shall be transferred from the general fund at such times and in
such manner as to replicate to the extent possible the transfers which would have occurred to such Trust Fund had such
amendments not been enacted.”
12 The Medicare trust funds, specifically the Hospital Insurance (HI; Part A) and Supplemental Medical Insurance
(Parts B and D) trust funds, as well as the Civil Service Retirement and Disability Fund (CSRDF) also receive interest
payments on the June/December schedule.
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to obtain funds that will allow the U.S. Treasury to redeem the trust fund securities in the future.
If Treasury obtained funds to redeem trust fund securities by borrowing an equivalent amount
from the public, then intragovernmental debt would in effect be converted into debt held by the
public, so that the net impact on total federal debt would be zero.13
If the federal government were running a budget surplus, and therefore had a positive cash
balance in Treasury’s general fund, Treasury could redeem the trust fund assets by using surplus
cash. Trust fund balances would fall, but there would be no increase in debt held by the public.
The net impact would be to reduce total federal debt. If those future redemptions of securities
held by the Social Security trust funds were financed by cutting support for federal programs or
raising taxes, then program beneficiaries and taxpayers at that time would bear an indirect burden
of supporting Social Security benefits.
Debt Limit14
Nearly all federal debt is subject to a statutory limit.15 The current debt limit was set in February
2010 (P.L. 111-139) at $14,294 billion. The federal debt limit has been raised 16 times since
1993. On April 29, 2011, debt subject to the debt limit was $14,236 billion, about $58 billion
below the current statutory debt limit.
The U.S. Treasury projects the federal debt will reach its statutory limit before May 16, 2011.
Treasury Secretary Timothy Geithner, in a letter to Congress dated May 2, 2011, wrote that he
would declare a debt issuance suspension period on May 16, unless Congress acted beforehand,
which would allow certain extraordinary measures to Treasury’s borrowing capacity until early
August 2011.16 That letter, the third sent by the Treasury Secretary since January 2011, noted that
funding federal operations could soon become complicated without a debt limit increase. Certain
measures that rely on the Treasury Secretary’s existing authority, such as the draw-down of the
Supplementary Financing Program, are underway.
New issues of State and Local Government Series (SLGS) Treasury securities, according to the
May 2 letter, were scheduled for suspension on May 6, 2011. On that date, Treasury announced
that it had suspended issue of SLGSs until further notice. SLGSs help state and local governments
satisfy federal requirements designed to prohibit tax arbitrage of proceeds of bond issues enjoying
certain exemptions from federal taxation.17

13 In a situation where there is a budget surplus and therefore a positive cash balance in Treasury’s general fund,
Treasury could redeem the trust fund assets by using surplus cash, and then the trust fund balance would fall but there
would be no increase in debt held by the public. The net impact would be to reduce total federal debt.
14 For details, see CRS Report RL31967, The Debt Limit: History and Recent Increases, by D. Andrew Austin and
Mindy R. Levit.
15 The total debt outstanding data available at the U.S. Treasury’s Bureau of the Public Debt “Debt to the Penny”
website is not the debt subject to limit (http://www.treasurydirect.gov/NP/BPDLogin?application=np). Debt subject to
limit, and its relation to total debt outstanding, is shown in Table III-C of the Daily Treasury Statement, available at
http://fms.treas.gov/dts/index.html.
16 Secretary of the U.S. Treasury Timothy Geithner, letter to Speaker John Boehner, dated May 2, 2011, available
http://www.treasury.gov/connect/blog/Documents/FINAL%20Debt%20Limit%20Letter%2005-02-
2011%20Boehner.pdf. The same text was sent to all Members.
17 For more information, see CRS Report R41811, State and Local Government Series (SLGS) Treasury Debt: A
Description, by Steven Maguire; and U.S. Treasury, “SLGS FAQ,” available at http://www.treasurydirect.gov/govt/
resources/faq/faq_slgs.htm.
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The U.S. Treasury had previously estimated the debt limit would be reached between April 15
and May 31, 2011, with extraordinary measures projected to extend Treasury’s ability to borrow
until about July 8, 2011.18 The U.S. Treasury may face severe difficulties in funding federal
operations in late July or early August without a debt limit increase.19
Deficits, Debt, and Interest Costs
This section discusses the relationships among federal deficits, debt, and interest costs. A deficit
or surplus is the annual flow of revenues minus the flow of outlays, which accumulates into a
stock of debt. Net interest costs are the flow of payments that compensate investors and non-
federal organizations for holding federal debt.
Deficits and the Accumulation of Federal Debt
Federal debt held by the public is essentially the sum of federal budget deficits over time. The
annual federal deficit, however, will not exactly equal the year-over-year increase in federal debt
due to certain technical adjustments.20 Over the long term, however, the cumulative size of
deficits determines the magnitude of the federal debt.
Each year, the U.S. Office of Management and Budget (OMB) provides a reconciliation between
the federal deficit and the increase in the federal debt. The first major adjustment reflects the
treatment of federal credit programs. The Federal Credit Reform Act (FCRA) requires that the net
subsidy costs (rather than year-by-year cash flows) be used to assess the budgetary costs of
federal loan and loan guarantee programs.21 Troubled Asset Relief Program (TARP) costs are
scored on a FCRA basis, but include risk adjustments.22 While many budget experts consider
FCRA a step toward sound accrual accounting of federal credit programs, the year-by-year cash
flows are what affect federal borrowing requirements. Thus, an adjustment is needed to account
for the difference between the FCRA-mandated accrual treatment of loan and loan guarantee
programs and the year-by-year actual cash flows that affect Treasury debt management
operations. The second major adjustment reflects gains from seniorage, which results from the
difference between the cost of minting coins and their face value.
The federal government also may face other potential liabilities not reflected in current federal
budget concepts. For example, federal credit accounting may understate the costs of financial

18 Secretary of the U.S. Treasury Timothy Geithner, letter to Majority Leader Harry Reid, dated April 4, 2011, available
at http://www.treasury.gov/connect/blog/Documents/FINAL%20Letter%2004-04-
2011%20Reid%20Debt%20Limit.pdf; U.S. Treasury, “Treasury Issues Updated Debt Limit Projections,” March 1,
2011, available at http://www.treasury.gov/press-center/press-releases/Pages/tg1084.aspx.
19 See CRS Report R41633, Reaching the Debt Limit: Background and Potential Effects on Government Operations,
coordinated by Mindy R. Levit.
20 See Table 6-2 “Federal Government Financing and Debt” in the Analytic Perspectives volume (p. 62) of the
President’s FY2012 budget submission, available at http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/
assets/econ_analyses.pdf.
21 FCRA was established by Title V of the Omnibus Budget Reconciliation Act of 1990 (P.L. 101-508). See CRS
Report RL30346, Federal Credit Reform: Implementation of the Changed Budgetary Treatment of Direct Loans and
Loan Guarantees, by James M. Bickley.
22 Section 123 of the Emergency Economic Stabilization Act of 2008 (EESA; Division A of P.L. 110-343).
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risks to the federal government. In particular, the deprivatization of the mortgage giants Fannie
Mae and Freddie Mac may expose the federal government to significant financial risks.23
The Federal Debt Over Time
For most of the history of the United States, federal debt was closely linked to war finance. In
more recent decades, the growing costs of federally financed health care and other entitlement
spending have played an important role in the government’s fiscal situation. Higher spending on
defense and other security costs, as well as tax cuts and other tax policy decisions, have also
influenced the size of federal deficits and the accumulation of debt. Figure 2 shows federal
deficits and surpluses since 1929 as a percentage of GDP.
The federal government ran very large deficits during the 1940s—hitting 30% of GDP in 1943—
to finance military activities during World War II. Deficit finance, however, played little role in
funding the Korean War or the early stages of the Vietnam War.24 In the 1970s, deficits as a share
of GDP grew as economic growth slowed due to sharp increases in oil and other commodity
prices, slower productivity growth, turmoil in the international financial system, expanded
regulatory activity, and stiffer competition in international product markets, while federal
spending due to health care and other domestic programs grew faster than federal revenues. In the
1980s, cuts in domestic programs were too small to offset large tax cuts and increases in military
spending, which led to large increases in federal deficits.25
In 1985, Congress passed the Balanced Budget and Emergency Deficit Control Act of 1985 (P.L.
99-177), informally known as Gramm-Rudman-Hollings (GRH), which introduced triggers for
automatic budget cuts called sequesters if certain deficit targets were not met, along with other
budget enforcement mechanisms. The GRH framework was modified several times in the late
1980s. In the fall of 1990, congressional leaders and President George H.W. Bush engaged in a
series of budget negotiations at Andrews Air Force Base that set the framework for the Omnibus
Budget Reconciliation Act of 1990 (P.L. 101-508). That measure included discretionary spending
caps, modifications to entitlement programs, and tax increases, along with changes in the
budgetary treatment of loan and loan guarantee programs (see discussion of FCRA above) among
other provisions.26
The collapse in 1989 of most of the Warsaw Pact governments in Central and Eastern Europe and
the 1990-1991 disintegration of the Soviet Union was followed by a reduction in federal defense
spending, allowing a “peace dividend” that relaxed fiscal pressures.27 In addition, strong

23 Deborah J. Lucas and Marvin Phaup, “Reforming Credit Reform,” Public Budgeting & Finance, vol. 28, no. 4
(winter 2008), pp. 90-110.
24 For a history of deficit finance and American wars, see Robert D. Hormats, The Price of Liberty, (New York: Times
Books, 2007). Also see CRS Report RL31176, Financing Issues and Economic Effects of American Wars, by Marc
Labonte and Mindy R. Levit.
25 For one view of budgetary politics in the early 1980s, see David Stockman, The Triumph of Politics, (New York:
Harper & Row, 1986).
26 President George H.W. Bush, “Statement on Signing the Omnibus Budget Reconciliation Act of 1990,”
November 5, 1990, available at http://www.presidency.ucsb.edu/ws/index.php?pid=19000.
27 The Warsaw Treaty Organization, established in 1955, included Albania, Bulgaria, Czechoslovakia, the German
Democratic Republic, Hungary, Poland, Romania, and the Soviet Union.
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economic growth, further modifications of certain entitlement programs, and tax increases led to
four years of federal budget surpluses from FY1998 through FY2001.
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Figure 2. United States Government Budget Surplus or Deficit
FY1929-FY2021, as a percentage of GDP

Source: CRS analysis of OMB and CBO data and projections. Administrative budget concepts used for pre-1933 data, rather than Unified budget concepts.
Notes: Data for FY2011 are estimated and later years are projected. Transition quarter (1976) omitted.
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The attacks on the World Trade Center towers in New York and on the Pentagon on September
11, 2001, were followed by sharp increases in homeland security spending. Defense spending
also increased dramatically with the start of the Afghanistan war in October 2001 and the Iraq war
in March 2003.28 Major tax cuts in 2001 and 2003 reduced federal receipts below baseline
levels.29 Federal surpluses, which had been predicted to last throughout the decade, quickly
turned to deficits in the face of the “dot-com” recession of 2000-2001, large tax cuts, the
expiration of certain budget enforcement mechanisms in 2002, homeland security and defense
costs, and the creation of new federal benefits (i.e., Medicare Prescription Drug, Improvement,
and Modernization Act of 2003; P.L. 108-173).30 In addition, rising health care costs and rising
numbers of retirees continued to push up costs for federal programs such as Medicare.
The financial crisis of 2007-2008 and the subsequent recession led to major decreases in federal
receipts and sharp spending increases for many federal programs, some due to “automatic
stabilizer” effects. As incomes of many families shrank, more became eligible to receive help
from federal and state income security programs. In addition, the American Recovery and
Reinvestment Act of 2009 (P.L. 111-5), which was designed to stimulate the economy by
increasing the deficit, provided support for state and local governments, increased spending on
certain federal programs, and reduced tax revenues.
Deficits over the next few years are expected to drop sharply as the economy recovers. Many
economists remain concerned that economic growth may be slow for several years, and that the
retirement of baby boom cohorts combined with persistent increases in per-beneficiary medical
costs will continue to present daunting fiscal challenges to policymakers.
Interest Costs
Interest rates on federal debt have fallen to extremely low levels by historical standards, in large
part due to the effects of the 2007-2008 financial crises and subsequent recession.31 Thus, even
though total federal debt as well as federal debt held by the public has increased sharply, interest
costs as a proportion of the budget have remained relatively low for the past few years.32 Figure 3
shows federal net interest costs as a proportion of gross domestic product (GDP).
Payments from one part of the federal government to another net to zero for government-wide
totals. Thus, most analyses of the budgetary effects of federal interest costs ignore
intragovernmental interest payments, and focus on net interest payments.

28 CRS Report RL33110, The Cost of Iraq, Afghanistan, and Other Global War on Terror Operations Since 9/11, by
Amy Belasco.
29 CRS Report R41393, The Bush Tax Cuts and the Economy, by Thomas L. Hungerford.
30 For details, see CRS Report R41134, The Impact of Major Legislation on Budget Deficits: 2001 to 2009, by Marc
Labonte.
31 Congressional Budget Office, Federal Debt and Interest Costs, Dec. 2010, available at http://www.cbo.gov/doc.cfm?
index=11999&zzz=41471.
32 See CRS Report RS22354, Interest Payments on the Federal Debt: A Primer, by Thomas L. Hungerford.
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Figure 3. Federal Net Interest Costs as a Percentage of GDP
FY1976-FY2016
35%
30%
25%
20%
of GDP
% 15%
As
10%
5%
0%
1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015
Fiscal Year

Source: OMB, Budget for FY2012, Historical Tables.
Notes: Transition quarter omitted. FY2011 costs are estimated, FY2012-FY2016 reflect President’s proposals.
Net federal interest costs are projected to rise rapidly. As business activities return to normal
levels, demand for loans increases, pushing up interest rates—a typical consequence of economic
recovery. For this reason, most forecasters expect interest rates to rise over the next few years.
Federal debt levels, according to CBO, OMB, and private forecasts, will continue to increase in
coming years. Federal debt service costs, which can be expressed as the total federal debt held by
the public multiplied by the average interest rate on that debt, are therefore expected to rise
sharply over the next decade. According to April 2011 CBO baseline projections, net interest
costs will rise from $213 billion in FY2011 to $534 billion in FY2016, and are projected to reach
$807 billion in FY2021. Because interest rates are currently at low levels, the percentage increase
in future interest rates will probably exceed the percentage increase in debt levels.33 Growing
interest payments would put pressure on public resources, requiring either spending reductions,
revenue increases, or higher borrowing levels, or some combination of those. Financing interest
payments by borrowing, rather than through spending reductions or revenue increases, accelerates
the accumulation of debt, which would lead to higher interest costs and could result in heightened
rollover risks—that is, the risk that bond markets become reluctant to buy new debt instruments
issued to finance the redemption of old or maturing debt instruments.
Rising interest rates affect the federal government’s finances in several ways. Higher interest rates
translate into higher debt service costs to compensate private investors for holding government
debt, as well as higher interest payments to federal trust funds. U.S. Treasury interest payments to
federal trust funds generally net out, as interest owed by the U.S. Treasury (counted as a liability)
is counterbalanced by the income due (counted as an asset) to the trust funds. Higher interest
income earned by the federal trust funds, however, would tend to strengthen the financial

33 U.S. Congressional Budget Office, An Analysis of the President’s Budgetary Proposals for Fiscal Year 2012, April
15, 2011, Table 1-5, available at http://www.cbo.gov/doc.cfm?index=12130.
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situation of federal programs linked to trust funds such as Medicare and Social Security. On the
other hand, when higher interest rates or other income increase trust fund balances, the sums that
the U.S. Treasury will ultimately be obliged to redeem also increase. Finally, higher interest rates,
other things equal, may affect surpluses generated by the Federal Reserve System, which are then
transferred to the U.S. Treasury. The magnitude of the Federal Reserve’s balance sheet, which
expanded substantially in the wake of the 2007-2008 financial crisis, and the non-traditional
nature of some items on that balance sheet, could complicate efforts to estimate how interest rate
changes would affect the Federal Reserve’s finances.
CBO has recently run some sensitivity analyses of federal interest costs. In January 2011, CBO
estimated that a 1-point increase in interest rates above baseline projection levels would increase
federal net interest costs by $15 billion in FY2011 and $438 billion over the FY2012-FY2016
budget window, assuming other economic variables were held equal.34 CBO also projected that a
0.1-point increase in interest rates above baseline levels would lead to a relatively small change in
interest costs for FY2011 and a $5 billion increase in debt service costs over the FY2012-FY2016
period. In February 2011, CBO calculated how projected federal interest costs would respond in
three scenarios. In each scenario, interest rates would rise above CBO baseline levels, and thus
would lead to higher projected interest costs.35
Interest Rates on Short-Term and Long-Term Debt
Yields on fixed income securities, such as Treasury securities, are tied to market interest rates.
Interest rates on short-term variable-rate securities are typically lower than interest rates on long-
term fixed-rate securities, because investors usually require compensation to bear interest-rate
risks embedded in long-maturity assets.36 From a borrower’s point of view, raising funds using
longer-term securities is more expensive, but in effect provides some insurance against future
interest rate increases. Figure 3 shows interest rates for 3-month, 1-year, and 10-year Treasury
securities.
The relationship between interest rates and maturities is often called the yield curve. The yield
curve normally slopes upward, reflecting the need to compensate holders of longer-term securities
with higher interest rates. In some unusual circumstances, the yield curve may flatten or even
invert.

34 CBO, Budget and Economic Outlook, January 2011, Appendix B, available at http://www.cbo.gov/ftpdocs/120xx/
doc12039/01-26_FY2011Outlook.pdf.
35 Douglas W. Elmendorf, CBO Director, letter to House Budget Committee Chairman Paul Ryan, dated February 24,
2011, available at http://www.cbo.gov/ftpdocs/120xx/doc12081/Ryan_Letter_Interest_Rates_2-24-2011.pdf.
36 An investor who buys a long-term security cannot react to changing circumstances until the security matures or is
sold. In financial terms, when an investor buys a long-term asset, she forgoes “option value,” which is the value of
being able to react to new information or conditions. In a competitive market, the asset’s yield relative to a short-term
alternative will reflect the expected value of that forgone option value.
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Figure 4. Interest Rates for Selected Treasury Securities by Maturity
January 1995-March 2011

Source: St. Louis Federal Reserve Bank.
Notes: Top line is 10-year rate, bottom is 3-month rate.
Holdings of Federal Debt
This section describes the maturity structure of the federal debt, that is, the mix of short-,
medium-, and long-term Treasury securities. This section also looks at what types of investors
hold federal debt.37
Maturity Structure of the Federal Debt
Figure 4 shows trends in the average maturity of federal securities over the second half of the 20th
century. Long-term securities financed a large proportion of the costs of military operations
during World War II. As the federal debt was paid down during the 1950s and 1960s, however,
average maturity of Treasury debt fell. In the 1970s, rising inflation rates made longer-term
securities less attractive, and average maturity of Treasury securities fell to two years and five
months in December 1975. Average maturities then rose to about six years by the late 1980s. In
2001, average maturities began to fall, in part due to the discontinuance of the 30-year bond,
colloquially known as the “long bond.” The U.S. Treasury, however, brought the long bond back
in 2006, in part due to demand by institutional investors with long-term liabilities, such as

37 See also CRS Report RL34682, Federal Debt Management: Concepts, Options, and Policies (1945-2008), by James
M. Bickley.
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insurers, and in part due to reduced yields on long-term securities, which made them a more
attractive means of financing debt.38
Figure 5. Average Maturity of Privately Held U.S. Marketable Debt, 1945-2001

Source: Treasury Bul etin, December 2001, Charts FD-A.
Figure 5 shows trends in the maturity composition of privately held marketable Treasury debt
and Figure 6 shows trends in its average maturity since 1999. After 2001, when average maturity
of Treasury securities reached six years, the average maturity of Treasury debt held by the public
fell gradually until 2008, signaling an increased reliance on shorter-term securities to finance
federal deficits.
The financial crisis and subsequent recession increased federal borrowing requirements sharply,
as the proportion of short-term Treasury securities rose more quickly than longer-term securities.
Issuing short-term securities, rather than longer-term securities, may have provided an
operationally less complex way to meet borrowing requirements in tumultuous financial
conditions. In addition, those tempestuous financial conditions of late 2008 may have reduced
demand for longer-term securities, which could have helped push down the average maturity of
Treasury securities. In late 2008, average maturity for Treasury debt shortened to less than four
years. The maturity composition and average maturity of Treasury debt, however, have rebounded
to more normal levels by 2010, as Treasury rebalanced its security offerings.
Some market observers expressed concerns about the shortening of average Treasury debt
maturities and applauded the lengthening of average Treasury maturity in 2010.39 Shorter average
Treasury maturities could raise three concerns. Many institutional investors, such as pension and

38 U.S. Treasury, TreasuryDirect, “Treasury Reintroduces 30-Year Bond,” January 2006, available at
http://www.treasurydirect.gov/indiv/research/articles/res_invest_articles_30yearbondarticle_0106.htm.
39 Report to the Secretary of the Treasury from the Treasury Borrowing Advisory Committee of the Securities Industry
and Financial Markets Association (SIFMA), February 1, 2011, available at http://www.treasury.gov/press-center/
press-releases/Pages/tg1047.aspx.
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Overview of the Federal Debt

insurance companies, demand long-term debt instruments that help them manage long-term
liabilities. A reduction in the share of long-term Treasury debt instruments relative to short-term
instruments might complicate portfolio management of such investors. Second, borrowers who
depend more on longer-term debt instruments are less vulnerable to the risk of rising interest
rates. Third, using a greater proportion of long-term debt instruments reduces rollover risks.
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Figure 6. Composition of Privately Held U.S. Marketable Interest-Bearing Public Debt By Maturity Class
Monthly averages, September 1998-September 2010

Source: CRS analysis of U.S. Treasury data (Treasury Bulletin, Table FD-5, various issues). Figure by Andrew Austin, CRS.
CRS-18

Figure 7. Average Maturity of Privately Held U.S. Marketable Interest-Bearing Public Debt
Monthly averages, September 1998-September 2010

Source: CRS analysis of U.S. Treasury data (Treasury Bulletin, Table FD-5, various issues). Figure by Andrew Austin, CRS.
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Overview of the Federal Debt

Ownership of Publicly Held Debt
A growing proportion of the federal debt is held by foreign investors and governments.40 Figure 7
shows how holdings of interest-bearing Treasury debt are distributed among investors and
organizations around the world according to January 2011 U.S. Treasury estimates.41 At the end
of February 2011, the U.S. Treasury issued revised figures, which showed larger holdings of
Treasury securities by the People’s Republic of China and smaller holdings in some other
countries, such as the United Kingdom.42 Figure 8 shows changes in ownership of the publicly
held federal debt by country since 1990.
Foreign holdings of federal debt have increased for several reasons. First, global capital markets
have become more international since the 1970s, when regulatory controls on the capital flows
were common. In addition, many international investors have diversified their portfolios by
including assets from many different countries. Second, some countries, especially in East Asia,
have had very high savings rates that have financed significant accumulations of federal debt. By
contrast, savings rates for the United States have been relatively low in recent decades, although
savings rates have increased in the wake of the 2007-2008 financial crisis. Third, trade and
budget deficits that emerged in the 1980s implied that the flow of goods to the United States was
in part financed by the flow of assets, public and private, to countries with trade surpluses.
Some concerns have been expressed that large federal debt holdings by the People’s Republic of
China (PRC) could be used to exert political or financial leverage to influence international
capital markets or U.S. foreign policy. The Chinese government has sought to allay such concerns
by stating that it would not dump holdings of Treasury securities.43 Some China analysts,
however, have expressed concern about rising inventories of U.S. Treasury debt.44 Shifts in the
PRC’s exchange rate policies could affect its demand for U.S. Treasury securities.45

40 CRS Report RS22331, Foreign Holdings of Federal Debt, by Justin Murray and Marc Labonte. See also the U.S.
Treasury International Capital System website at http://www.treasury.gov/resource-center/data-chart-enter/tic/Pages/
index.aspx.
41 For details on estimation methods, see Carol C. Bertaut, William Griever, and Ralph W. Tryon, “Understanding U.S.
Cross-Border Securities Data,” in Federal Reserve Bulletin, May 4, 2006, pp. A59-75, available at
http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/frbul2006.pdf.
42 U.S. Treasury, “Preliminary Report on Foreign Holdings of U.S. Securities at End-June 2010,” February 28, 2011,
available at http://www.treasury.gov/press-center/press-releases/Pages/tg1079.aspx.
43 Geoff Dyer and Peter Garnham, “Beijing Rules Out ‘Nuclear Option’ of Dumping Holdings of U.S. Bonds,:”
Financial Times, July 6, 2010, p. 1.
44 Howard Schneider, “China’s $3 Trillion Dilemma: What to Do With All That Cash?” Washington Post, April 20,
2011, p. A7, available at http://www.washingtonpost.com/business/economy/chinas-3-trillion-dilemma-what-to-do-
with-all-that-cash/2011/04/15/AFngE75D_story.html.
45 CRS Report RL34314, China’s Holdings of U.S. Securities: Implications for the U.S. Economy, by Wayne M.
Morrison and Marc Labonte.
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Figure 8. Holdings of Interest-Bearing U.S. Treasury Securities by Country
$Billions, as of September 2010

Source: CRS, based on data obtained from Treasury International Capital System (http://www.treasury.gov/resource-center/data-chart-center/tic/Pages/index.aspx), January
2011 release.
Notes: Color reflects increases (blue) and decreases (pink) in holdings since November 2009. United Kingdom includes Channel Islands and Isle of Man. Oil Exporters
includes Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates, Algeria, Gabon, Libya, and Nigeria. Caribbean
Banking Centers include Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Netherlands Antilles and Panama. China (PRC) excludes Hong Kong and Macau, which
are reported separately. See source for additional notes.
CRS-21

Figure 9. Holdings of U.S. Treasury Securities By Type of Investor
$Billions

Source: CRS, based on data from U.S. Treasury, Treasury Bul etin, various issues, Table OFS-2.
Notes: Other investors category includes individuals, government-sponsored enterprises, brokers and dealers, bank personal trusts and estates, corporate and non-
corporate businesses, and other investors.

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Overview of the Federal Debt

What Is the “Best” Measure of Federal Debt?
Measures of federal debt, because they represent accumulated deficits over time, are backward-
looking measures of the government’s fiscal condition. Some forward-looking measures of the
federal debt may more accurately reflect the federal government’s fiscal condition and its ability
to face future budgetary challenges.46
Factors expected to affect future federal outlays and receipts, including demographic structure,
design of major mandatory spending programs such as Medicare and Medicaid, and the growth of
health care costs, may all have important consequences on future budgets. Federal debt and the
costs of servicing in some projection scenarios generate feedback effects that could reduce the
sustainability of debt burdens. For example, higher debt servicing requirements could put upward
pressure on interest rates, which could crowd out private investment, which, in turn, would slow
economic growth, thus reducing the economy’s ability to finance government activities.
Some contend that commonly used measures of federal debt within the current system of budget
concepts have some important limitations.47 Federal budget concepts generally adhere to a cash
basis, rather than an accrual basis used by many firms. Accrual accounting, in which liabilities
and assets are recognized when taken on, rather than when funds are acquired or disbursed, has
some advantages for medium- and long-term financial planning. The federal government does use
a modified form of accrual accounting for loan and loan guarantee programs since passage of the
Federal Credit Reform Act (FCRA) as well as for certain federal retirement programs.48
A wider use of accrual accounting could pose thorny problems for federal financial management,
however. Accrual accounting methods necessarily involve complex judgments of future cost and
revenue streams. Because the information and knowledge to make those decisions often resides
deep within federal agencies, the ability to make such accrual accounting decisions could give
agencies greater flexibility to shift budgetary resources among programs and time periods, which
could undermine the OMB’s ability to exercise tight budgetary controls and Congress’s ability to
control spending,49
Federal debt concepts such as total debt and debt held by the public are not netted against assets
held by the federal government. In the wake of financial interventions undertaken in 2007-2008,
the U.S. government acquired substantial assets. For example, the federal government acquired
financial assets in return for support from the Troubled Asset Relief Program (TARP), through the
deprivatization of mortgage giants Fannie Mae and Freddie Mac, and in other ways. OMB and
CBO in recent years have presented calculations of federal debt net of financial assets to reflect
those holdings. Recent financial statements of the U.S. government issued by the U.S. Treasury

46 For more information, see CRS Report RL33623, Long-Term Measures of Fiscal Imbalance, by D. Andrew Austin.
47 President’s Commission on Budget Concepts, Report of the President’s Commission on Budget Concepts, October
1967.
48 CRS Report RL30346, Federal Credit Reform: Implementation of the Changed Budgetary Treatment of Direct Loans
and Loan Guarantees, by James M. Bickley.
49 For details of federal budgetary control measures, see CRS Report R40610, Federal Financial Management Reform:
Past Initiatives and Future Prospects, by Virginia A. McMurtry.
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also present some estimates of the value of “heritage assets,” as well as certain unfunded
liabilities not reflected in current federal budget concepts.50
One forward-looking measure of fiscal condition is the fiscal gap. A fiscal gap represents the size
of fiscal adjustment, either though spending reductions or revenue increases or a combination of
both, that would stabilize the ratio of debt to GDP. CBO, as well as other organizations, computes
fiscal gap estimates for the federal government. The latest CBO long-term calculations estimated
the 75-year fiscal gap at about 0.7% of GDP under an “Extended Baseline” scenario and at 8.7%
of GDP under an “Alternative Fiscal Scenario.”51 Many budget analysts consider the more
optimistic “Extended Baseline” projections less realistic than the more pessimistic “Alternative
Fiscal Scenario.”
Conclusion
The federal government’s ability to borrow at relatively low interest rates allows it to shift buying
power backwards and forwards through time, in order to support macroeconomic policy goals and
lessen financial shocks borne by citizens.52 The reputation of federal debt as one of the safest
investments possible allows Treasury securities to play a central role in financial markets. On the
other hand, a growing federal debt could place a high burden on future generations and hinder
economic growth. Rapid growth of federal debt could also increase the probability of a financial
crisis or fears of a sovereign default.53
The future trajectory of federal spending and revenues implied by current law and expected
economic conditions, according to many respected organizations, implies that the federal
government will face increasingly difficult fiscal challenges. Finding ways to stabilize the federal
growth has therefore become a prominent concern of policymakers.

Author Contact Information

D. Andrew Austin

Analyst in Economic Policy
aaustin@crs.loc.gov, 7-6552

50 U.S. Treasury, Financial Report of the U.S. Government FY2010, available at http://www.gao.gov/financial/
fy2010financialreport.html.
51 CBO, Long-Term Budget Outlook, June 2010, available at http://www.cbo.gov/doc.cfm?index=11579.
52 CRS Report RL33657, Running Deficits: Positives and Pitfalls, by D. Andrew Austin.
53 CBO, Federal Debt and the Risk of a Fiscal Crisis, issue brief, July 27, 2010, available at http://www.cbo.gov/
doc.cfm?index=11659.
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