When the Congress makes budgetary decisions, it is also indirectly making decisions about the level of debt held by the public. The yearly change in debt held by the public is approximately equal to the budget surplusThe amount by which the government’s revenues exceed outlays in a given period. or deficitThe amount by which the government’s spending exceeds its revenues for a given period, usually a fiscal year.. The budget surplus or deficit is the difference between total federal revenue and spending in a given year. When the budget is in deficit, the government borrows from the public. Alternatively, when the budget is in surplus, the government can reduce debt held by the public. Thus, debt held by the public generally represents the total of all cash deficits minus all cash surpluses accumulated over time.

Trust fund total surpluses add to debt held by government accounts, but only cash surpluses reduce the need for the federal government to borrow from the public. The Social Security program has historically run large cash surpluses that helped reduce the government’s need to borrow from the public to finance other federal government activities. But in fiscal year 2010, the program paid more in benefits than it received in taxes, thereby contributing to the government’s borrowing needs. While the program’s cash deficit in fiscal year 2010 was largely due to the economic slowdown, the Social Security Trustees project that the program will run persistent cash deficits beginning in 2015.

The federal government has carried debt through virtually all of U.S. history. The ratio of debt held by the public to gross domestic product (GDP)A commonly used measure of domestic national income. GDP is the value of all goods and services produced within the United States in a given year and is conceptually equivalent to incomes earned in production. It is a rough indicator of the economic earnings base from which the government draws its revenues. is a measure of the debt burden on the current economy. Short deficit periods have caused increases in debt that lingered long after annual deficit levels declined. For example, the federal budget deficit increased sharply from about 4 percent to about 30 percent of the economy from 1941 through 1943, and correspondingly, federal debt held by the public increased sharply until it reached its largest percentage of GDP in calendar year 1945. It then took seventeen years until 1962, for the debt-to-GDP ratio to return to its 1941 level.

Various events in history have affected trends in deficit and debt. For example, debt held by the public rose during periods surrounding the Civil War, World War I, the Great Depression, World War II, and the most recent financial crisis and recession.

Source: Congressional Budget Office. Notes: Data from 1797 through 1969 available through CBO, Long-Term Budget Outlook June 2009 (see Additional Info). Data from 1970 through 2009 available through CBO, Long-Term Budget Outlook June 2010 (See Supplemental Material). Data for 2010 available through CBO, Budget and Economic Outlook: Fiscal Years 2011 Through 2021. For 1797-1969, year refers to calendar year. From 1970-2010, year refers to fiscal year. For the years prior to 1929, CBO notes they estimated GDP from several sources. Historical Events Affecting Federal Debt Held by the Public data: txt pdf

The federal government—like other borrowers—pays interest on its debt. The federal debt affects the federal budget through the level of interest spending. Interest spending—a function of both the amount of debt and the interest rate on that debt—cannot be changed directly. At any given interest rate, additional borrowing will drive up interest payments. Similarly, at any given level of debt, higher interest rates increase the amount of interest paid. Interest spending can absorb resources that could otherwise be used for other national priorities.

Spending on net interestPrimarily interest on debt held by the public. In addition to interest on debt held by the public, the government also earns some interest from various sources and pays interest for purposes other than borrowing from the public. These amounts are only a small portion of net interest and, taken together, slightly reduce its total. as a percentage of federal spending has fluctuated over time, peaking in the late 1940s and in the mid 1990s. In the past, interest payments contributed to deficits and helped fuel a rising debt burden. Rising debt, in turn, raised interest costs in the budget, and the federal government increased debt held by the public to finance these interest payments. This has been called the "vicious cycle."

Today’s relatively lower interest rates have lessened the pressure debt service places on the budget, despite the recent increase in the debt held by the public. However, interest rates are expected to increase as the economy recovers, resulting in increasing pressure on the budget.

Treasury regularly refinances portions of the government's outstanding debt and issues more debt at market interest rates to finance new deficit spending. Consequently, the amount that the federal government spends for interest on its debt is directly tied to those interest rates. Under CBO's January 2011 baseline budget projections, debt held by the public will increase to almost 77 percent of GDP in 2021 and spending on net interest would rise from $225 billion in 2011 to $792 billion (or 3.3 percent of GDP) in 2021. CBO has assessed how changes in interest rates can affect federal spending. CBO notes that if interest rates are 1 percent higher than the rates assumed in CBO’s baseline budget projections, the government’s higher interest costs would add $1.3 trillion to the cumulative budget deficit over the 10-year period.

Just as there are two main categories of debt, there are two categories of interest in the budget:

• Gross interestEssentially represents interest on all Treasury debt securities, including interest on debt held by the public and interest credited to government trust funds and other government accounts that hold federal debt. essentially represents interest on all outstanding federal debt—both debt held by the public and debt held by government accounts.
• Net interestPrimarily interest on debt held by the public. In addition to interest on debt held by the public, the government also earns some interest from various sources and pays interest for purposes other than borrowing from the public. These amounts are only a small portion of net interest and, taken together, slightly reduce its total. is primarily interest paid on debt held by the public. This interest is part of current outlays by the government and represents the burden of servicing the debt.