Official Debt and Public Debt

Congress has divided government spending into two classes, depending on whether it is accounted for on-budget or off-budget.  Most spending, including interest on the debt, is on-budget.  Spending on programs with dedicated taxes is considered off-budget, the largest being Social Security.  The term unified budget refers to the combined on-budget and off-budget items.  The unqualified terms budget deficit or budget surplus refer to the unified budget.

Accounting Systems for Federal Debt

The budget deficit is the difference between total government spending and total tax revenues in a given time period, usually one year.  The difference is covered by the sale of Treasury securities to the public, i.e. bills, notes, and bonds.  The cumulative total of Treasury securities held by the public is the public debt.  This is the debt on which real interest payments must be made.  The public debt may therefore be regarded as the real debt.

The official debt is the public debt plus what the Treasury owes to government trust funds like the Social Security Trust Fund.  That trust fund has been growing because the inflow from FICA taxes plus the interest credited on the trust fund bonds exceeds the outflow for Social Security benefit  payments.

How Off-Budget Programs Affect the Debt

Any spending by the government not covered by tax revenues is financed out of the receipts from debt securities sold by the Treasury to the public.  That means the increase in public debt is the net deficit from both on-budget and off-budget spending.  However the official debt is not affected by off-budget spending if there is a positive balance in the relevant off-budget account.  The official debt rises or falls only on the on-budget imbalance.  To understand why this is so, consider the following:

Assume an on-budget balance and determine the effect of an off-budget surplus.  That surplus will increase the intra-government debt in the form of special purpose bonds which the Treasury issues to the appropriate trust funds.  Since the Treasury has no other use for those funds, it will spend them to redeem some of the public debt.  Thus the increase in intra-government debt will be balanced by an equal decrease in the public debt, leaving the official debt unchanged.

Conversely, an off-budget deficit will draw down intra-government debt.  With no other source of funds, the Treasury must borrow from the public to cover the off-budget payments.  Thus the increase in public debt will be balanced by an equal decrease in intra-government debt, again leaving the official debt unchanged.

We have assumed here that all trust funds have positive balances.  However when a trust fund is depleted, any further payments on that program can no longer be covered by drawing on that fund.  In that case an off-budget deficit will cause an increasing official debt as the Treasury borrows from the public to cover the payments.

The Brief Period of Budget Surplus

For many years prior to 1997, the deficit in the on-budget programs was far larger than the surplus in the off-budget programs.  That meant the unified budget was at times in substantial deficit, which was covered by the sale of Treasury securities to the public.

As the economy improved in the late 1990s, the on-budget programs moved into near budget balance.  With the continuing surplus in the off-budget programs, the unified budget moved briefly into surplus.  That allowed the Treasury to retire some of the outstanding debt.  That ended when the recession of 2001 drove the on-budget programs into large enough deficit to exceed the off-budget surplus.  Since then the budget deficit has grown at an unprecedented rate.