Question

Differentiate the types of federal government debt​

Answer 1

1.Debt held by the public essentially represents the amount the federal government has borrowed to finance cumulative cash deficits. Debt held by the public represents a claim on today’s taxpayers and absorbs resources from today’s economy. In addition, the interest paid on this debt may reduce budget flexibility because, unlike most of the budget, it cannot be controlled directly.

2.Debt held by government accounts represents the cumulative surpluses, including interest earnings, of these accounts that have been invested in Treasury securities. The special Treasury securities held in these government accounts represent legal obligations of the Treasury and are guaranteed for principal and interest by the full faith and credit of the U.S. government. This debt reflects a claim on future taxpayers and the economy. Whenever a government account needs to spend more than it takes in from the public, the Treasury must provide cash to redeem debt held by the government account. The government must obtain this cash by increasing taxes, cutting spending, borrowing more from the public, retiring less debt (if the budget is in surplus), or some combination thereof.

3.Debt held by the trust funds, such as Social Security and Medicare, is not equal to the future benefit costs implied by the current design of the programs and, therefore, does not fully capture the government's total future commitment to these programs.