Federal Debt

The Treasury Department's stated goals for debt management--to have enough operating cash to meet the government's obligations, to achieve the lowest financing cost, and to promote broad and deep capital markets--have remained the same, regardless of whether the federal budget was in surplus or deficit. However, surpluses raise different debt management challenges. The smaller amount of outstanding debt reduces the Treasury's flexibility to sustain efficient markets across a wide range of instruments in demand by potential investors. Balancing debt management goals in a time of surplus has prompted the Treasury to consider new approaches affecting the type and the maturity of debt held by the public, the management of cash balances, and the development of strategies to actively change the characteristics and the volume of outstanding debt. This report discusses the steps taken by the Treasury to manage the marketable debt held by the public during the recent period of budget surpluses. GAO summarized this report in testimony before Congress; see: Federal Debt: Debt Management in a Period of Budget Surplus, by Paul L. Posner, Director of Budget Issues, before the House Committee on Ways and Means. GAO/T-AIMD-99-300, Sept. 29 (nine pages).

GAO noted that: (1) the transition from annual unified budget deficits to surpluses has had consequences for both the profile of outstanding federal debt held by the public as well as the Treasury's strategies for achieving its debt management objectives; (2) the effect of better-than-expected fiscal outcomes in 1997 and 1998 initially resulted in reductions in short-term debt; (3) the "April surprise" that occurred in fiscal years 1997 and 1998 created a situation in which the Treasury suddenly and quickly absorbed unexpectedly high tax revenue; (4) since some bills mature each week, the unexpected cash inflows were used to redeem bills; (5) according to a Treasury official, bills were redeemed at such high levels that the liquidity of the bill market was adversely affected and the average life of marketable debt increased modestly; (6) the Treasury took steps subsequent to April 1998 to position itself better to reduce debt while promoting market liquidity for its securities, keeping its costs low, and achieving cash management goals; (7) rather than across-the-board reductions in all issues, the Treasury decided to concentrate its borrowing in fewer but larger debt offerings, eliminating the 3-year note and reducing the frequency of the 5-year note from monthly to quarterly in May 1998; (8) to better prepare for the possibility of another larger-than-expected influx of April tax receipts in fiscal year (FY) 1999, the Treasury operated with a lower cash balance and issued cash management bills to ensure adequate cash balances; (9) this cash management strategy increased the Treasury's flexibility and permitted the Treasury to more quickly apply the surplus to debt reduction in FY 1999 than in FY 1998; (10) in the first 10 months of FY 1999, the Treasury rebalanced its debt portfolio by shifting its debt reduction efforts from Treasury bills to Treasury notes; (11) the Treasury chose to reduce the volume of notes outstanding even during months when spending exceeded receipts, issuing more bills during this period; (12) these actions shortened the average maturity of outstanding debt while improving liquidity in the bill market; (13) the Treasury may use other tools like selling more of the most recent issue rather than opening a new issue, repurchasing outstanding debt before it matures, and redeeming callable securities as they become callable; and (14) if implemented, these initiatives could enhance the Treasury's ability to maintain a broad, deep market for Treasury securities and lowest cost financing, while at the same time ensuring adequate cash balances.