	How Is Federal Debt Measured? There are two main measures of federal debt—gross debt and debt held by the public. Figure 1 in the attachment shows the gross debt. It captures all of the federal government’s outstanding debt, and totaled $5.4 trillion at the beginning of fiscal year 1998. The debt held by the public is the measure used to reflect how much wealth has been used by the federal government to finance its obligations and best represents the cumulative effect of past federal borrowing on the economy. Treasury estimated that as of September 1997, foreign investors held about 33 percent of debt held by the public. Social Security and civil and military retirement trust funds comprise 72 percent of the total debt held by government accounts. Federal Debt: Context and Measures

Federal debt held by the public was $3.8 trillion at the beginning of fiscal year 1998, an amount more than five times greater than it was in 1980, without adjusting for inflation. To get a better sense of its burden, debt should be viewed in relation to the nation’s income, which often is measured by its gross domestic product (GDP). At the beginning of the current fiscal year, debt held by the public was about 47 percent of GDP. The unified budget is the most comprehensive measure of annual fiscal policy and represents the net amount of all federal spending and revenue. With some minor exceptions, it generally approximates the amount of annual federal borrowing from the public. The only way to actually reduce the nominal level of debt held by the public would be to run a unified budget surplus. Balancing the budget would not reduce the amount of debt because the government does not retire a portion of its principal each year, as individuals do with a typical home mortgage. Rather, it pays only the interest costs of its debt. The main economic effect is the impact of federal deficits/surpluses on national saving and private investment. A low national saving rate can have serious implications for the long-term growth of the economy. To service its debt, the federal government pays interest to holders of Treasury securities. A large interest burden can significantly reduce budgetary flexibility because, unlike any other part of the budget, it is not directly controlled by policymakers. Soon after 2013, when Social Security’s tax revenues no longer exceed Social Security benefit payments, the budget will turn from surplus to deficit. Without additional action by policymakers, the deficits will reemerge leading to higher debt levels and higher interest expenditures.
Why GAO Did This Study

Pursuant to a congressional request, GAO discussed issues related to federal debt, focusing on: (1) how debt is defined in its various forms; (2) how it is measured; (3) how much it has grown up to now and could be reduced in the future; (4) who holds federal debt; and (5) why is it important to the national economy.

What GAO Found

GAO noted that: (1) there are two main measures of federal debt--gross debt and debt held by the public; (2) the gross debt captures all of the federal government's outstanding debt, and totalled $5.4 trillion at the beginning of fiscal year (FY) 1998; (3) the debt held by the public is the measure used to reflect how much wealth has been used by the federal government to finance its obligations and best represents the cumulative effect of past federal borrowing on the economy; (4) the Department of the Treasury estimated that, as of September 1997, foreign investors held about 33 percent of debt held by public; (5) Social Security and civil military retirement trust funds comprise 72 percent of the total debt held by government accounts; (6) federal debt held by the public was $3.8 trillion at the beginning of FY 1998, an amount more than five times greater than it was in 1980, without adjusting for inflation; (7) to get a better sense of its burden on taxpayers, debt should be viewed in relation to the nation's income, which is often measured by its gross domestic product (GDP); (8) at the beginning of the current fiscal year, debt held by the public was about 47 percent of GDP; (9) the unified budget is the most comprehensive measure of annual fiscal policy and represents the net amount of all federal spending and revenue; (10) with some minor exceptions, it generally approximates the amount of annual federal borrowing from the public; (11) the only way to actually reduce the nominal level of debt held by the public would be to run a unified budget surplus; (12) balancing the budget would not reduce the amount of debt because the government does not retire a portion of its principal each year, as individuals do with a typical home mortgage; (13) rather, it pays only the interest costs of its debt; (14) the federal debt's main economic effect is the impact of federal deficits/surpluses on national saving and private investment; (15) a low national saving rate can have serious implications for the long-term growth of the economy; (16) to service its debt, the federal government pays interest to holders of Treasury securities; (17) a large interest burden can significantly reduce budgetary flexibility because it is not directly controlled by policymakers; (18) soon after 2013, when social security's tax revenues no longer exceed social security benefit payments, the budget will turn from surplus to deficit; and (20) without additional action by policy makers, the deficits will reemerge leading to higher debt levels and higher interest expenditures.