The Debt Limit: Why It Rose After Four Years of Surpluses and the Debt Changes Since

The Debt Limit: Why It Rose After Four Years of Surpluses and the Debt Changes Since

Order Code RS21111
Updated May 16, 2003
CRS Report for Congress
Received through the CRS Web
The Debt Limit: Why It Rose After Four Years
of Surpluses and the Debt Changes Since
Philip D. Winters
Analyst in Government Finance
Government and Finance Division
Summary
Increases in total federal debt are driven by government deficits (which increase
debt held by the public) and by the surpluses credited to (and the accounting for) debt-
holding federal accounts, mostly federal trust funds such as the Social Security,
Medicare, Transportation, and Civil Service trust funds, which increase debt held by
government accounts.
Surpluses generally reduce debt held by the public. The surpluses over the four
fiscal years (1998-2001) reduced debt held by the public by $448 billion. The surpluses
credited to debt-holding government accounts (which generally must invest the
surpluses in federal debt), increased their holdings by $853 billion over the same period.
The combination ($853 billion minus $448 billion) raised total federal debt by $405
billion.
In December 2002, the Administration began warning Congress that the debt limit
($6.4 trillion) would be reached in the first half of 2002. As the limit was approached
in February 2003, the Administration resorted to suspension of certain internal fund
investments to avoid a default. The adoption of the budget resolution (H.Con.Res. 95;
April 11, 2003) for FY2004 generated legislation (H.J.Res. 51) — deemed passed by the
House — that would increase the debt limit to $7.4 trillion. (This report will be updated
as events warrant.)
The statutory debt limit applies to almost all federal debt.1 It applies to federal debt
held by the public, that is debt held outside the federal government itself, and to federal
debt held by the government’s own accounts, almost all of which are federal trust funds
such as Social Security, Medicare, Transportation, and Civil Service. The government’s
1 Less than one percent of total the debt is excluded from debt limit coverage. On May 7, 2003,
total debt was $6,460,345 million; debt subject to limit was $6,399,975 million, 99.1% of total
debt.
Congressional Research Service ˜ The Library of Congress

CRS-2
overall surplus or deficit effectively determines the change in debt held by the public.
Debt held in government accounts, on the other hand, is unaffected by the government’s
overall budget balance. The increases or decreases in debt held by government accounts
are the product of government accounting practices and the reported surpluses (or deficits)
of these accounts themselves.
Table 1. Components of Debt Subject to Limit, FY1996-FY2002
(in billions of dollars)
Debt Subject to Limit
End of Fiscal Year
Debt Limit
Held by
(or period)
Held by the
Total
Government
Public
Accounts
1996
$5,500.0
$5,137.2
$1,432.4
$3,704.8
1997
5,950.0
5,327.6
1,581.9
3,745.8
1998
5,950.0
5,439.4
1,742.1
3,697.4
1999
5,950.0
5,567.7
1,958.2
3,609.5
2000
5,950.0
5,591.6
2,203.9
3,387.7
2001
5,950.0
5,732.6
2,435.3
3,297.3
2002
6,400.0
6,161.4
2,644.2
3,517.2
April 2003
6,400.0
6,399.975
2,731.0
3,668.9
Change, FY1997 to FY2001
405.0
853.4
-448.5
Source: U.S. Department of the Treasury, Financial Management Service, Treasury Bulletin, June 2001
and March 2002. Bureau of the Public Debt Monthly Statement of Public Debt, April 2003. CRS
calculations.
Note: For the fiscal years 1996 through 2000, the amounts held by government accounts and held by the
public are approximations. The Treasury began producing the split into holders of debt subject to limit in
its publications in 2001. The numbers in the table showing this split for 1996 through 2000 were calculated
by subtracting Federal Financing Bank debt (an arm of the Treasury; its debt is not subject to limit) from
total debt held by government accounts to approximate the amount of that debt subject to limit (a second
subtraction, for unamortized discount, is unavailable, leaving the approximate amount too large by billions
of dollars). This adjusted amount was then subtracted from total debt subject to limit to produce an
approximate measure of debt held by the public subject to limit. Because the amount held by government
accounts is too large, the resulting measure of debt held by the public subject to limit is too small. The
approximations provide adequate information to reveal the pattern of change in the two categories over the
seven years shown.
Nearing or reaching the debt limit interferes with the Treasury’s normal ability to
finance federal activities or meet government obligations. The government’s income and
outlay vary over the course of the year, producing monthly surpluses and deficits that
affect the level of debt, whether there is a surplus or deficit for the entire year. If the
Treasury cannot issue new debt (the effect of reaching the limit), the government may be
unable to obtain the cash needed to pay its bills (under a short-term cash flow problem or
from an annual deficit) or it may be unable to invest the surpluses of designated
government accounts (the federal trust funds) in federal debt as generally required by law.
In either case, the Treasury is in a bind; it is required by law to continue meeting the
government’s legal obligations, but the debt limit may prevent it from issuing the debt
that would allow it to do so.

CRS-3
The federal debt held by the government’s own accounts grew by $853 billion over
the four years of overall surplus, FY1998 through FY2001, and continues growing; debt
held by the public fell by $448 billion over the same period, but, with the return of deficits
in FY2002 and expected in FY2003, is once again growing (see Table 1).
The Situation in 2002
The continuing increases in debt held by government accounts over the four years
of surplus (FY1998-FY2001) produced almost all of the pressure on the debt limit early
in 2002. The re-emergence of deficits in FY2002, which led to increases in debt held by
the public, added to the pressure on the debt limit later in the first six months of 2002.2
At the beginning of FY2002 (October 1, 2001), debt subject to limit was within $220
billion of the then existing $5.95 trillion debt limit.3 Between October 1, 2001, and the
end of May 2002, debt subject to limit increased by another $217 billion, divided between
a $100 billion increase in debt held by government accounts and a $117 billion increase
in debt held by the public, putting the debt subject to limit at the then existing limit.
Table 2 shows debt by month for FY2002 and FY2003 with the size of the monthly
changes.
Congress took action over May and June 2002, that eventually led to an increase in
the debt limit. The House-passed supplemental appropriations for FY2002 (H.R. 4775;
May 24, 2002) included, after extended debate, language allowing any eventual House-
Senate conference on the legislation to add an increase in the debt limit. The Senate did
not add debt-limit-increase language to its version of the supplemental appropriations bill,
S. 2551 (incorporated as an amendment to H.R. 4775, June 3, 2002). The Senate
leadership indicated a strong reluctance to include a debt limit increase in the
supplemental appropriation bill. Instead, the Senate adopted a bill, S. 2578, raising the
debt limit by $450 billion (to $6.4 trillion) without debate on June 11. At that time, a
$450 billion increase in the debt limit was thought to provide enough borrowing authority
to help fund government operations through at least the rest of calendar year 2002 and
possibly into the summer of 2003. With the warning of possible imminent default
looming over it, the House passed the $450 billion increase in the debt limit (by one vote)
on June 27. The President signed it the next day, June 28, 2002 (P.L. 107-199), ending
the 2002 debt limit crisis.
The Situation in 2003
The growth in debt subject to limit since the June 2002 adoption of the last increase
in the limit (to $6.4 trillion) has again brought the debt up against the limit. On Christmas
Eve, 2002, the Treasury sent a letter to Congress requesting an increase, unspecified, in
the debt limit by late February 2003. The 108th Congress, just getting organized early in
2003, did not focus on the near-term need to raise the limit. Through the winter and into
2 Until 2001, government publications did not divide debt subject to limit into the portions held
by the public and held by government accounts. This discussion and the table use CRS
calculated amounts that approximate the amounts of debt subject to limit held in these two
categories for fiscal years prior to 2001.
3 The previous increase in the debt limit was on August 5, 1997, as part of the Balanced Budget
Act of 1997 (P.L. 105-33). The limit was raised from $5.5 trillion to $5.95 trillion.

CRS-4
the spring, the Treasury repeatedly requested that the debt be raised to avoid a serious
financial problem. By February 20, 2003, the Treasury had resorted to the extraordinary
methods used in 2002 — using authority provided through existing legislation to suspend
investment of government securities in the G-Fund of the federal employees’ Thrift
Savings Plan and in the Civil Service Retirement and Disability fund — that allowed the
Treasury to issue additional debt to the public to acquire the cash it needed to pay for the
government’s commitments.4
Table 2. Components of Debt Subject to
Limit by Month in FY2002-FY2003
(in millions of dollars)
Held by
End of
Held by the
Total
Change from Government Change from
Change from
Month
Previous
Public
Accounts
Previous
Previous
Period
Period
Period
Sept. 2001
$5,732,581
$2,452,844
$3,279,736
Oct. 2001
5,744,523
$11,942
2,451,815
$-1,029
3,292,709
$12,973
Nov. 2001
5,816,823
72,300
2,469,647
17,832
3,347,176
54,467
Dec. 2001
5,871,413
54,590
2,516,012
46,365
3,355,401
8,225
Jan. 2002
5,865,892
-5,521
2,525,755
9,743
3,340,138
-15,263
Feb. 2002
5,933,154
67,262
2,528,494
2,739
3,404,659
64,521
March 2002
5,935,108
1,954
2,528,318
-176
3,406,789
2,130
April 2002
5,914,816
-20,292
2,549,438
21,120
3,365,378
-41,411
May 2002
5,949,975
35,159
2,553,350
3,912
3,396,625
31,247
June 2002
6,058,313
108,338
2,630,646
77,296
3,427,667
31,042
July 2002
6,092,050
33,737
2,627,980
-2,666
3,464,070
36,403
Aug. 2002
6,142,835
50,785
2,620,946
-7,034
3,521,890
57,820
Sept. 2002
6,161,431
18,596
2,644,244
23,298
3,517,187
-4,703
Oct. 2002
6,231,284
69,853
2,680,812
36,568
3,550,472
33,285
Nov. 2002
6,294,480
63,196
2,680,788
-24
3,613,692
63,220
Dec. 2002
6,359,412
64,932
2,745,787
64,999
3,613,625
-67
Jan. 2003
6,355,696
-3,716
2,753,301
7,514
3,602,395
-11,230
Feb. 2003
6,399,840
44,144
2,750,471
-2,830
3,649,369
46,974
March 2003
6,399,825
-15
2,722,812
-27,659
3,677,012
27,643
April 2003
6,399,798
-27
2,731,042
8,230
3,668,756
-8,256
Change in FY2002
$428,850
$191,400
$237,451
Change in FY2003,
$238,367
$86,798
$151,569
year to date
Change, Sept 01-Apr 03
$667,217
$278,198
$389,020
Source: U.S. Treasury, Bureau of the Public Debt, Monthly Statement of the Public Debt, September
2001-April 2003.
Through the rest of February and continuing into May, the Treasury maintained debt
subject to limit close to $25 million below the limit. The adoption of the conference
report on the FY2004 budget resolution (H.Con.Res. 95) on April 11, 2003, in the House
4 The losses to these funds from the suspension of investments is made whole with the adoption
of a new debt limit.

CRS-5
triggered the “Gephardt rule” (House Rule XXVII) that deems passed (for the House only)
legislation (H.J.Res. 51) raising the debt limit by enough — roughly $980 billion — to
meet the financing needs for the policies contained in the budget resolution.5 As of May
16, the Senate had not considered the increase in the debt limit. With increasingly dire
warnings about the imminent exhaustion of the Treasury’s continuing ability to avoid
default, the Senate leadership has indicated that it will act soon on the debt limit increase.
The Senate can accept the bill as it came from the House, which would send it on to the
President. Or the Senate can modify the legislation (increasing or decreasing the size of
the increase or adding other provisions), which would send it to a conference with the
House, generally requiring another vote on the debt limit increase in both chambers.
Without an increase in the debt limit by Congress sometime in the relatively near
future, the government eventually will be unable to acquire the resources, financial or
budgetary, that it will need to operate. The Daily Treasury Statement for May 7, 2003
(from the Financial Management Service in the Department of Treasury), reported that
debt subject to limit, $6,399,975 million, is $25 million below the existing limit.
Concluding Comments
Between the August 2001, increase in the debt limit (to $5.95 trillion) and the
beginning of fiscal year 2002, the government’s four years of surpluses reduced debt held
by the public. Since the beginning of FY2002 (and through April 2003), the reappearance
of deficits increased debt held by the public by $364 billion. Debt held by government
accounts has grown steadily over the entire period and increasing by $289 billion between
the beginning of FY2002 and the end of April 2003. These increases have pushed debt-
subject-to-limit against current $6.4 trillion limit adopted in late June 2002.
The 10-year budget forecasts produced in 2001 of large and growing surpluses
through FY2011 expected the related rapid reduction in debt held by the public. The
same 2001 forecasts expected continued, steady growth in debt held by government
accounts. The combination of the shrinkage in debt held by the public and growth in debt
held by government accounts moderated the forecast growth in total debt. These
estimates indicated that the moderate growth in total debt delayed the need to increase the
debt limit late into the decade (the continued increases in debt held by government
accounts would eventually overwhelm the reductions in debt held by the public). When
the expectations of large surpluses collapsed, late in the fall of 2001, so did the
expectations of continued reductions in debt held by the public. Total debt resumed a
fairly rapid rate of growth, making an increase in the debt limit necessary much sooner
than previously thought.
The persistent deficits over the last 30 to 50 years that required the government to
borrow from the public increased debt held by the public. This increase periodically put
pressure on Congress to raise the debt limit. Growth in debt held by government accounts
over the same period, particularly before the 1983 changes to Social Security, was usually
a relatively minor, but not insignificant factor in the growth of total debt subject to limit.
5 See CRS Report 98-453, Debt-Limit Legislation in the Congressional Budget Process, by Bill
Heniff Jr. and CRS Report RS21519, Legislative Procedures for Adjusting the Public Debt Limit:
A Brief Overview, by Robert Keith and Bill Heniff Jr.

CRS-6
The need to raise the debt limit in FY2002 was driven primarily by increases in debt held
by government accounts over the years in which debt held by the public fell (FY1998
through FY2001). The return of budget deficits in FY2002 added to the pressure on the
debt limit in 2002 (although the increased debt holdings of the public at the end of
FY2002 remained smaller than they had been at the beginning of fiscal year 1998 by $230
billion). The financing of the deficit (that is expected in FY2003) through the sale of debt
to the public, plus the continuing rise in debt held by government accounts, have driven
total debt subject to limit up to the June 2002 adopted current $6.4 trillion limit.