How Budget Surpluses Change Federal Debt

Publication Date: January 2001

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

Type:

Abstract:

The federal government had a surplus of $237.0 billion in fiscal year (FY) 2000, while total federal debt increased by $22.9 billion. Why did the debt increase even though the government had a surplus? The answer involves understanding what drives changes in the two components of total federal debt, debt held by the public (which includes debt held by individuals, pension funds, banks, and insurance companies, among other entities) and debt held by government accounts (almost all in federal trust funds, such as Social Security). A total or unified surplus, meaning that the government receives more dollars from the public than it spends on the public, generally will reduce debt held by the public. A surplus in federal trust fund accounts, meaning that their income (from both the public and other parts of the government) is greater than their outgo (to both the public and other parts of the government), increases their holdings of federal debt. The trust funds are required to invest surpluses in government debt. If debt held by the trust funds increases faster than debt held by the public decreases, total federal debt rises.

For the next decade, the projected overall surpluses will reduce the amount of debt held by the public. The Congressional Budget Office (CBO) even expects that, by late in the decade, the government will need to find something to do with its accumulating cash balances other than reducing the publicly held debt. Debt held in government accounts will continue increasing since these accounts will continue to run surpluses. Total federal debt is projected to fall through much of the decade and then rise as debt held by the public is eliminated while debt held by government accounts continues to increase.

This report will be updated as events warrant.