Federal Debt:

Answers to Frequently Asked Questions--An Update

OCG-99-27: Published: May 28, 1999. Publicly Released: May 28, 1999.

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Paul L. Posner
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Pursuant to a congressional request, GAO updated its report on frequently asked questions on the federal debt, focusing on: (1) how debt is defined and measured; (2) who holds federal debt; (3) how much it has grown in recent years; and (4) its significance to the national economy.

GAO noted that: (1) gross debt is the measure that captures all of the federal government's outstanding debt; (2) gross debt, which totalled about $5.5 trillion at the end of fiscal year (FY) 1998, is comprised of debt held by the public plus debt held by certain government accounts; (3) the level of debt held by the public, about $3.7 trillion at the end of FY 1998, is a useful measure because it reflects how much of the nation's wealth is absorbed by the federal government to finance its obligations; (4) thus, it best represents the cumulative effect of past federal borrowing on today's economy and the federal budget; (5) to get a better sense of the burden represented by the federal debt, debt is often measured in relation to a nation's income; (6) gross domestic product (GDP) is a commonly used measure of national income; (7) the ratio of debt held by the public as a share of GDP is a good measure of the burden on the economy; (8) in these terms, the federal debt grew in all but two years from 1980 through the mid 1990s and has decreased steadily from then to the present; (9) the federal debt primarily affects the federal budget through the level of interest spending; (10) the federal government pays interest to holders of Treasury securities; (11) interest spending is a function of interest rates and the amount of debt on which interest must be paid; (12) at any given interest rate, additional borrowing will drive up interest rates; (13) similarly, at any given level of debt, higher interest rates increase the amount of interest paid; (14) borrowing has both benefits and costs; (15) many believe that borrowing is appropriate under certain circumstances; (16) however, borrowing can reduce the funds available for private investment and exert an upward pressure on interest rates; (17) the federal government borrows by issuing securities, mostly through the Department of the Treasury; (18) the federal debt held by the public is owed to a wide variety of investors, including individuals, banks, and businesses, pension funds, the Federal Reserve, state and local governments, and foreign governments; (19) these buyers are attracted by the securities' perceived freedom from credit risk, ready marketability, exemption from state and local taxes, and wide range of maturities; and (20) Treasury has three principal goals for debt management: (a) to ensure the government has sufficient cash at all times to pay its obligations; (b) to ensure the government finances its debt at the lowest cost; and (c) to promote efficient capital markets.

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