Federal Debt

Although the U.S. government has carried debt throughout its entire history, the large annual budget deficits of the last 20 years sharply increased the overall federal debt and its associated annual interest payments. Deficit reduction measures, along with economic growth, have helped to shrink annual deficits. At the end of fiscal year 1998, the federal budget was in surplus for the first time in nearly 30 years, and surpluses were projected to continue for the next decade. This report answers frequently-asked questions about the federal debt, deficits and surpluses, and interest rates. It also answers questions about debt in a time of surplus.

GAO noted that: (1) gross debt is the measure that captures all of the federal government's outstanding debt; (2) gross debt, which totalled about $5.5 trillion at the end of fiscal year (FY) 1998, is comprised of debt held by the public plus debt held by certain government accounts; (3) the level of debt held by the public, about $3.7 trillion at the end of FY 1998, is a useful measure because it reflects how much of the nation's wealth is absorbed by the federal government to finance its obligations; (4) thus, it best represents the cumulative effect of past federal borrowing on today's economy and the federal budget; (5) to get a better sense of the burden represented by the federal debt, debt is often measured in relation to a nation's income; (6) gross domestic product (GDP) is a commonly used measure of national income; (7) the ratio of debt held by the public as a share of GDP is a good measure of the burden on the economy; (8) in these terms, the federal debt grew in all but two years from 1980 through the mid 1990s and has decreased steadily from then to the present; (9) the federal debt primarily affects the federal budget through the level of interest spending; (10) the federal government pays interest to holders of Treasury securities; (11) interest spending is a function of interest rates and the amount of debt on which interest must be paid; (12) at any given interest rate, additional borrowing will drive up interest rates; (13) similarly, at any given level of debt, higher interest rates increase the amount of interest paid; (14) borrowing has both benefits and costs; (15) many believe that borrowing is appropriate under certain circumstances; (16) however, borrowing can reduce the funds available for private investment and exert an upward pressure on interest rates; (17) the federal government borrows by issuing securities, mostly through the Department of the Treasury; (18) the federal debt held by the public is owed to a wide variety of investors, including individuals, banks, and businesses, pension funds, the Federal Reserve, state and local governments, and foreign governments; (19) these buyers are attracted by the securities' perceived freedom from credit risk, ready marketability, exemption from state and local taxes, and wide range of maturities; and (20) Treasury has three principal goals for debt management: (a) to ensure the government has sufficient cash at all times to pay its obligations; (b) to ensure the government finances its debt at the lowest cost; and (c) to promote efficient capital markets.