LegiStorm

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.