Official Debt and Public Debt
- From: William F Hummel <wfhummel@xxxxxxxxxxx>
- Date: Tue, 23 Aug 2005 08:13:37 -0700
Official Debt and Public Debt
Congress has divided government spending into two classes, depending
on whether it is accounted for on-budget or off-budget. Most
spending, including interest paid on the debt, is on-budget. Spending
on programs with dedicated taxes is considered off-budget, the largest
being Social Security. The term unified budget refers to the combined
on-budget and off-budget items. The unqualified terms, budget deficit
or budget surplus, refer to the unified budget.
Accounting Systems for Federal Debt
The budget deficit is the difference between total government spending
and total tax revenues. The difference is covered by the sale of
Treasury securities to the public: bills, notes and bonds. The
cumulative total of Treasury securities held by the public is the
public debt. This is the debt on which real interest payments must be
made. The public debt may therefore be regarded as the real debt.
The official debt is the public debt plus what the Treasury owes to
government trust funds like the Social Security Trust Fund. That
trust fund has been growing because the inflow from FICA taxes plus
the interest credited on the trust fund bonds exceeds the outflow for
Social Security benefit payments.
How Off-Budget Programs Affect the Debt
Any spending by the government not covered by tax revenues is financed
out of receipts from debt securities sold by the Treasury to the
public. That means the increase in public debt is the net deficit
from both on-budget and off-budget spending.
However the official debt is not affected by off-budget spending if
there is a positive balance in the off-budget accounts. The official
debt rises or falls depending only on the on-budget imbalance. To
understand why this is so, consider the following:
Assume an on-budget balance, and determine the effect of an off-budget
surplus. That surplus will increase the intra-government debt in the
form of special purpose bonds which the Treasury issues to the
appropriate trust funds. Since the Treasury has no other use for
funds received, the funds will be spent to redeem some public debt.
Thus the increase in intra-government debt will be balanced by an
equal decrease in the public debt, leaving the official debt
unchanged.
Conversely, an off-budget deficit will draw down intra-government
debt. With no other source of funds, the Treasury must borrow from
the public to redeem trust fund bonds as required to cover the
off-budget deficit. Thus the increase in public debt will be balanced
by an equal decrease in intra-government debt, again leaving the
official debt unchanged.
We have assumed here that all trust funds have positive balances.
However when a trust fund is depleted, any further payments on that
program can no longer be covered by drawing on the fund. In that case
an off-budget deficit will cause an increasing official debt as the
Treasury borrows from the public to cover the payments.
The Brief Period of Budget Surplus
For many years prior to 1997, the deficit in the on-budget programs
was far larger than the surplus in the off-budget programs. That
meant the unified budget was at times in substantial deficit, which
was covered by the sale of Treasury bonds to the public.
As the economy improved in the late 1990s, the on-budget programs
moved into near budget balance. With the continued surplus in the
off-budget programs, the unified budget thus moved into surplus. That
allowed some of the Treasury debt to be retired. The recession of
2001 again moved the on-budget programs into large enough deficit to
result in unified budget deficit, which is now growing at an
unprecedented rate.
William F Hummel
http://wfhummel.net/officialdebt.html
.
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