FROM THE OFFICE OF PUBLIC AFFAIRS

In just the next few weeks, the federal government is projected to reach the statutory debt limit. An immediate permanent increase in the debt limit is crucial to preserve the confidence of our global allies in the US Government as we lead the effort to end terrorism, and an immediate permanent increase is essential to prevent uncertainty that could damage our economic recovery. The Full Faith and Credit of the United States is a unique asset that underlies the leadership position of our nation. People here and around the world can count on the US government to pay its bills on time, no matter what, and that certainty is an invaluable part of our economic strength. America is and must remain a safe haven for investors around the world. Any delay in raising the statutory debt limit could create uncertainty that would raise the cost of financing essential government services for US taxpayers. We should not play politics with the full faith and credit of the United States.

Treasury will be forced to take actions to preserve cash balances even before we actually reach the debt limit, in order to preserve a cushion to ensure we stay within the law. Even before we reach the actual limit, Treasury could be forced to cancel the sale of Patriot Bonds and State and Local Government Securities. As we approach the ceiling and are unable to issue more debt, Treasury must take other steps to provide cash balances so that the government can pay its bills. In the past, inaction on the debt ceiling has forced Treasury to disinvest or delay the investment of federal employees 401(k) and retirement fund contributions in order to have cash on hand to meet our obligations.

A failure to increase the debt limit threatens our very ability to meet our fundamental priorities. A lack of cash on hand in the Treasury would endanger our ability meet our obligations - including our obligations to pay Social Security benefits, make Medicare payments, and purchase the tools necessary to protect our homeland and prosecute the war on terrorism.

The current debt ceiling is $5.95 trillion. The President's budget projects that debt subject to limit will rise to $6.099 trillion at the end of fiscal year 2002 and to $6.489 trillion at the end of fiscal year 2003.

Last August, the Office of Management and Budget projected that the debt ceiling would not be reached until late 2003. The recession and the response to the September 11 attacks have moved that projection forward, and today we expect to reach the debt ceiling in March of this year.

The Secretary of the Treasury has requested a $750 billion increase in the debt ceiling. That amount would simply restore the debt limit time horizon to where it was just prior to September 11. Since November 1983, there have been four increases in the debt limit that were larger than the current request when measured relative to GDP, as a percentage of total debt, as a percentage of the federal budget. The current request is the same size as the last increase enacted during the Clinton Administration in 1997 ($755 billion).

While the timing of the need to increase the statutory ceiling is sooner than we had anticipated just six months ago because of untoward events, we've always known it would need to be raised at some point. The growth of the Social Security trust fund is - and will continue to be - the most significant contributor to the increase in the level of the government's debt subject to limit. The President's budget forecasts a $158 billion Social Security surplus in 2002. That is, Social Security payroll taxes and other receipts coming in to the Social Security trust fund will exceed payments from the trust fund by $158 billion. That surplus is, by law, immediately invested in Treasury securities, and therefore increases the government debt that is subject to limit. In 2003, the President's budget forecasts the Social Security surplus will be $177 billion. Thus, over two years, the surplus revenues to the Social Security Trust Funds will add more than $335 billion to the debt subject to the statutory limit.

There are nearly 200 trust funds of this kind maintained by the federal government (although no other as large as Social Security.) Other federal government trust funds similarly bring in more revenues than are spent each year, including the Medicare Part A trust fund, the civil service retirement trust fund and the military retirement trust fund. Similarly, these surplus revenues to those trust funds are invested in Treasury securities and therefore increase the government debt.

Overall, the expected growth in government trust funds alone is over $400 billion over the next two years. According to an OMB summary table in the fiscal year 2003 budget: The trust fund total surpluses total $212.6 billion for fiscal year 2002, $257.3 billion in fiscal 2003, and $289.5 billion in fiscal 2004; or $759.7 billion over fiscal years 2002-04.

Even as trust fund surpluses increase total government debt, publicly held debt as a share of our economy is declining, and continues to fall under the President's budget. In 1995, publicly held debt amounted to 49% of GDP. By 2001 that had fallen to 33% of GDP, and by 2007, that percentage will fall to 25%.

Similarly, net interest on the debt is consuming a smaller share of federal government outlays (Table 8.3 in Historical Tables for fiscal 2003 budget). In 1995, interest payments consumed 15.3% of the federal outlays. As the economy grew and the budget returned to surpluses, interest payments as a share of outlays fell. In 2001, interest payments consumed 11.1% of federal spending, and the President's budget projects that interest will consume just 7.5% of federal spending in 2007, leaving more resources available for priority programs.