Federal Debt:

Debt Management in a Period of Budget Surplus

T-AIMD-99-300: Published: Sep 29, 1999. Publicly Released: Sep 29, 1999.

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Paul L. Posner
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Pursuant to a congressional request, GAO discussed managing debt in a time of budget surpluses.

GAO noted that: (1) the federal budget is about to record the first back-to back budget surpluses in more than 40 years; (2) as a result, federal debt held by the public has declined and, if projected surpluses materialize, it will continue to fall throughout the next 10 years; (3) the Department of the Treasury faces the challenge of managing the surplus rather than financing a deficit; (4) to support its management goals, the Treasury has concentrated its borrowing into fewer but larger debt offerings, and targeted its reductions to offset the trend toward generally more costly long-term debt; (5) in August the Treasury published proposed rules for advanced repurchase of outstanding debt held by the public--a debt buy back; (6) these repurchases could require the Treasury to pay a premium since most of the older securities have interest rates higher than those issued today; (7) since the Treasury has the authority for these repurchases, any premiums would not require an offset under the Budget Enforcement Act, but the payment of a premium would affect the size of the surplus; (8) as debt declines, the Treasury will face more difficult trade-offs in achieving broad and deep markets for its securities and lowest cost financing for the government; (9) there will be greater pressure on the Treasury to further concentrate debt in fewer issues to maintain deep and liquid markets in benchmark securities; and (10) although markets tend to adjust over time, these changes may not be seamless or without cost.

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