MID-SESSION REVIEW - MAXIMUM DEBT RETIREMENT AND PROJECTED SURPLUSES
MAXIMUM DEBT RETIREMENT AND PROJECTED
SURPLUSES
The Mid-Session Review (MSR) estimates that
federal budget surpluses will continue to allow the government to
repay historic amounts of the publicly held debt. Since its peak in
1997 at $3.8 trillion, the debt held by the public has fallen by
$363 billion through the end of 2000. This review projects that
debt held by the public will fall to $3.3 trillion at the end of
the current year. From 2002 through 2011, the MSR estimates that
surpluses will allow a total of $2.0 trillion to $2.2 trillion in
debt repayment. At the end of 2011, the debt will total around $1.1
trillion, or 6.1 percent of gross domestic product (GDP). This will
be the lowest ratio of debt to GDP since 1917.
As in the April Budget, the MSR projects that
before the end of the budget horizon, the large budget surpluses
will exceed the amount of publicly held debt that is available to
be redeemed. While short-term Treasury bills roll over constantly
and hence can be paid down easily, a significant amount of Treasury
debt is longer-term notes and bonds that do not mature for as long
as 30 years. Certain types of outstanding debt, such as savings
bonds, serve other public policy purposes besides financing past
government deficits and are expected to continue to be issued for a
number of years. The amount of non-redeemable debt will depend on
many debt management decisions that have not yet been made and will
not be made until the appropriate future occasions. The MSR
therefore makes a number of simplified assumptions that are not
intended to prejudge future debt management decisions.
As of June 2001, there were $0.5 trillion in
bonds with maturity dates beyond 2011, the end of the current
10-year budget horizon. This review assumes that Treasury will
diminish its auctions of notes and bonds over the next few years,
but that the remaining auctions will add another $0.1 trillion in
securities with post-2011 maturity dates.
The MSR also assumes that nonmarketable
securities will total $0.5 trillion in 2011. About three-quarters
of these securities consist of savings bonds and securities issued
to state and local governments to meet certain tax requirements.
The remainder includes zero-coupon securities issued to foreign
governments and the Resolution Funding Corporation, as well as
securities held by the Federal Thrift Savings Plan on behalf of
federal employees and retirees.
Treasury's current program to repurchase
outstanding bonds before maturity will reduce somewhat the amount
of these long-maturity securities that will remain outstanding in
2011. The MSR assumes that $35 billion in buybacks will be settled
in 2001 and another $40 billion in 2002. While the buyback program
may well continue beyond that year, at some point the remaining
long-maturity Treasury securities would acquire a scarcity premium,
making it financially unwise for Treasury to continue the
program.
The reduction in publicly held debt closely
tracks the size of the unified surplus, but the two are not
identical. Certain transactions create cash requirements that are
not included in the measured surplus. These transactions include
increases in the government's cash balances, issues of student
loans and other federal direct loans, and premiums paid to
repurchase Treasury debt. These cash requirements are usually small
in relation to the surplus.
Because surpluses in 2010 and beyond exceed the
estimated amount of debt that is available to be redeemed, running
larger surpluses does not result in additional debt repayment.
These amounts are instead assumed to accumulate as excess balances.
The Administration opposes investing such balances outside the
federal government on the grounds that this would inevitably lead
to unwarranted government interference in the private economy.
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