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 testimony summarizes the September 1999 GAO report, GAO/AIMD-99-270, which discusses the steps taken by the Treasury to manage the marketable debt held by the public during the recent period of budget surpluses.

GAO noted that: (1) the federal budget is about to record the first back-to back budget surpluses in more than 40 years; (2) as a result, federal debt held by the public has declined and, if projected surpluses materialize, it will continue to fall throughout the next 10 years; (3) the Department of the Treasury faces the challenge of managing the surplus rather than financing a deficit; (4) to support its management goals, the Treasury has concentrated its borrowing into fewer but larger debt offerings, and targeted its reductions to offset the trend toward generally more costly long-term debt; (5) in August the Treasury published proposed rules for advanced repurchase of outstanding debt held by the public--a debt buy back; (6) these repurchases could require the Treasury to pay a premium since most of the older securities have interest rates higher than those issued today; (7) since the Treasury has the authority for these repurchases, any premiums would not require an offset under the Budget Enforcement Act, but the payment of a premium would affect the size of the surplus; (8) as debt declines, the Treasury will face more difficult trade-offs in achieving broad and deep markets for its securities and lowest cost financing for the government; (9) there will be greater pressure on the Treasury to further concentrate debt in fewer issues to maintain deep and liquid markets in benchmark securities; and (10) although markets tend to adjust over time, these changes may not be seamless or without cost.