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Monday, February 4, 2013

Federal Debt Basics: What is the difference between the two types of federal debt?

source: the U.S. Government Accountability Office

Debt held by the public essentially represents the amount the federal government has borrowed to finance cumulative cash deficits. Debt held by the public represents a burden on today's economy as borrowing from the public absorbs resources available for private investment and may put upward pressure on interest rates. The cost of borrowing or the price paid for the rental of funds (usually expressed as a percentage). Moreover, the interest paid on this debt may reduce budget flexibility because, unlike most of the budget, it cannot be controlled directly.

Debt held by government accounts represents the cumulative surpluses, including interest earnings, of these accounts that have been invested in Treasury securities. The special Treasury securities held in these government accounts represent legal obligations of the Treasury and are guaranteed for principal and interest by the full faith and credit of the U.S. government. This debt reflects a burden on taxpayers and the economy in the future.

Whenever a government account needs to spend more than it takes in from the public, the Treasury must provide cash to redeem debt held by the government account. The government must obtain this cash by increasing taxes, cutting spending, borrowing more from the public, retiring less debt (if the budget is in surplus), or some combination thereof.

Debt held by the trust funds, such as Social Security and Medicare, is not equal to the future benefit costs implied by the current design of the programs and, therefore, does not fully capture the government's total future commitment to these programs. For additional information about trust funds, see GAO, Federal Trust and Other Earmarked Funds: Answers to Frequently Asked Questions.

Only debt held by the public is reported as a liability on the consolidated financial statements of the United States government. Debt held by government accounts is an asset to those accounts but a liability to the Treasury; they offset each other in the consolidated financial statements.

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