NCPA - National Center for Policy Analysis

Paying Down The National Debt

January 18, 1999

As a result of last year's budget surplus, Treasury officials have a new and interesting problem with which to contend: how to pay off the national debt. The answer may have a significant impact on financial markets and could affect taxpayers for years to come.

In 1993, when the federal government consumed half the $588 billion borrowed in U.S. financial markets, private borrowers had to pay higher interest rates to get a share of the remaining funds.

  • Between March and September 1998, however, the federal government took not one penny of the $927 billion raised in U.S. financial markets.
  • Indeed, the federal government actually contributed significantly to the pool of national saving by reducing the outstanding amount of privately-held federal debt by a whopping $154.2 billion.
  • Thus this much additional capital was injected into financial markets during this period.

However, because Treasury securities are so safe, sellers of other securities use Treasuries as benchmarks from which to price -- that is, set the interest rate -- on their bonds. Consequently, it is essential to them for the Treasury to continue offering new securities across the spectrum of maturities, even as it runs a surplus.

In September 1998, about 29 percent of outstanding Treasury securities were to mature within one year. The U.S. cannot just pay off its securities as they mature. Otherwise the supply of 3- month Treasury bills would severely shrink, creating problems for private investors and money market funds. Nor can it just pay off long-term bonds, since the market wants a fresh supply for pricing and investment purposes. So the Treasury has to issue new bonds while paying off old ones.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, January 18, 1999.


Browse more articles on Tax and Spending Issues