With the advent of surpluses, the United States has begun to make real progress in paying down its debt. During 1998–2000, debt held by the public fell from $3.8 trillion to $3.4 trillion—a $363 billion drop. By the end of this year, more than $200 billion in additional reduction is due to be achieved.

The President's plan will accelerate this trend to record rates by retiring an historic $2 trillion in debt over the next 10 years. Under the President's budget, the national debt will be only seven percent of Gross Domestic Product (GDP) in 2011, its lowest share in more than 80 years. (See Chart 1–1.)

Indeed, the President's Budget pays down the debt so aggressively that it runs into an unusual problem—its annual surpluses begin to outstrip the amount of maturing debt starting in 2007. This means that the United States will be effectively unable to retire any more debt than what is assumed in the Administration's Budget over the next 10 years—the President achieves "maximum possible debt retirement" in his budget. (See Chart 1–2.)

The roughly $1 trillion remaining debt in 2011 is viewed by markets as "non-retireable" or "non-redeemable." It consists of marketable bonds that will not have matured, savings bonds, and special bonds for State and local governments, among others. (See Table 1–1.)

Some may wonder why it is not possible to simply buy these debt issues back, thus allowing the United States to run its debt down to zero. In the short term, it is possible to buy back a small amount of non-matured marketable debt. The Treasury Department bought back $30 billion in calendar year 2000 and has committed to buying back another $18 billion in the first half of 2001. However, this strategy is not viable in the long-term or on a large scale. As the stock of Treasuries rapidly shrinks, it will dwindle to the point where the remaining holders of Treasury debt will not be willing to give up their securities prematurely without exorbitant penalty payments. In testimony before the Senate Budget Committee on January 25, 2001, Federal Reserve Chairman Greenspan noted that: "Inducing such holders, including foreign holders, to willingly offer to sell their securities prior to maturity could require paying premiums that far exceed any realistic value of retiring the debt before maturity."

OMB estimates that it would cost between $50–$150 billion in bonus payments to entice these holders to give up their bonds. It makes more sense to let this debt mature naturally, leaving the Nation on a glide path to zero debt after 2011.

In addition to these financial limitations, there are other reasons for expecting that a small amount of debt may remain over time. Some of the non-marketable debt issues have roles beyond just financing our Nation's fiscal position. For instance, many observers believe that the U.S. Savings Bond Program encourages household saving and should be preserved.

Surpluses Will Lead to Government Purchases of Private Assets Absent Policy Changes

Absent policy changes, OMB and the Congressional Budget Office (CBO) assume that the Government will begin to accumulate so-called "excess cash balances" by the middle of this decade. (An excess balance occurs when surpluses exceed maturing debt. The excess funds are assumed to be held in cash—an impractical assumption.) By law, these balances can be invested only in collateralized bank deposits or held in accounts at the Federal Reserve. However, the sheer size of these balances would soon overwhelm the ability of these institutions to house this excess cash. As such, the Government would be forced to begin investing its "excess cash" in private assets. Such Government involvement in private financial markets is unacceptable to many, including the Administration.

Absent policy changes, the Government is projected to accumulate $3.5 trillion in excess cash balances by 2011. If this were all invested in equities, the Government could own 10 percent of the total stock market by that time. Even after the President's tax cut and spending priorities are addressed, the Government is still projected to have nearly $1.3 trillion in excess cash balances remaining in 2011. Given the amounts involved, the Government would be in a position to directly influence decisions of private industry.

Chairman Greenspan has warned against such Government involvement in private financial markets: "Having the Federal Government hold significant amounts of private assets would risk suboptimal performance by our capital markets, diminished economic efficiency, and lower overall standards of living than would be achieved otherwise."

He went on to recommend that the U.S. Government should consider cutting taxes and setting up a system of personal savings accounts within Social Security to pre-empt such a development. He stressed that such a strategy should begin early, well before the date of impending "excess cash" accumulation, so that drastic action is not needed in any one given year.

The Administration's Budget does just what Chairman Greenspan recommends. It continues to pay down a historic amount of debt at a record rate as long as practicable. However, it also lays out an agenda for gradually reducing the on-budget surplus in order to minimize the risks of a build-up in excess cash and Government purchase of private assets in the future. Even with its tax cut, the Administration still projects that $1.3 trillion in excess cash will remain in 2011. This cash would be available for Social Security reform and other priorities.

Thus, the Administration's Budget shows that it is possible to effectively pay off the debt, deliver meaningful tax relief and address needed priorities, while preserving nearly a trillion dollars as protection against uncertainties. Such policies will help to shore up the Nation's long-run economic and fiscal outlook, and will allow the Nation to translate today's good news into good news for future generations as well.

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