Budget deficits ; Government lending ; Expenditures, Public

Rose McElhattan

English

Research Papers in Economics

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March 6, 1981 
Spending and Borrowing 
The budget deficit this fiscal year will 
probably be close to $55 billion, as estimated 
by both the Carter and Reagan Administra-
tions. However, that figure represents only 
a part of  the total amount which the Federal 
government will have to finance this year. 
In addition to the budget deficit (sometimes 
called the on-budget deficit), financing will 
be needed to cover the government's "off-
budget" deficit of roughly $20 billion. The 
Treasury may finance a small part of  this 
combined $75-billion deficit by reducing its 
cash balance, butthe bulk-about$70billion 
-will have to be obtained from public 
borrowings. 
The Federal presence in the credit markets is 
even greater, however, than the figures repre-
sented in the budget and off-budget deficits. 
Also  operati  ng in the markets are government-
. sponsored enterprises and mortgage pools, 
whose borrowings could boosttotal Federally-
related borrowings to about $112 billion in 
the current fiscal year. 
Off-budget entities 
In the early 1970's, Congress excluded the 
transactions of  certain Federally owned and 
controlled entities from the on-budget totals. 
The total net loans, or outlays; of these lend-
ing agencies represent the off-budget deficit, 
which rose from $1.4 billion in fiscal 1974 to 
$14.0billion in fiscal 1980. In May 1974, the 
Treasury created the Federal Financing Bank 
(FFB) to coordinate the borrowing needs of a 
growing number of  off-budget programs. The 
FFB now finances virtually 100 percent of  the 
off-budget deficit, either by offering its own 
securities to the public or by borrowing 
directly from the Treasury. In either case, the 
off-budget debt is part of  the gross federal 
debt. 
Most of  the FFB's financing involves the 
Farmers Home  Administration, which will be 
responsible for probably half of  the expected 
$20-billion off-budget deficit in fiscal 1981. 
Most of  the remaining off-budget deficit in-
volves foreign military-sales credits, student 
loans, and the Rural Electrification and Tele-
phone Revolving Funds. 
The government, in addition, becomes in-
volved in credit markets by providing assis-
tanceto certain borrowing by the public. That 
assistance includes both borrowing by 
government-sponsored enterprises and 
government-guaranteed borrowing by non-
Federal borrowers. Federally assisted bor-
rowing is now substantially higher than a 
decade ago, rising from a $21-billion annual 
average in the 1971-74 period to a $40-
billion average in the 1977-80 period. 
Government-sponsored enterprises 
Over the years, the Federal government has 
chartered seven government-sponsored 
enterprises to perform specific credit func-
tions, but all are now entirely privately 
owned. Consequently, the transactions of 
these enterprises are not included within the 
Federal budget, although they are still subject 
to Federal supervision. Three of  these entities 
support the housing market-the Federal 
National Mortgage Association (Fannie Mae), 
the Federal Home Loan Banks, and the 
Federal Home Loan Mortgage Corporation 
(Freddie Mac)-and generally account for 
half of total sponsored-agency borrowing. 
Three enterprises are regulated by the Farm 
Credit Administration -Banks for Coopera-
tives, Federal Intermediate Credit Banks, and 
Federal Land Banks-and account for 
another 45 percent of  total borrowing. The 
remaining 5 percent represents loans to 
support higher education through the Student 
Loan Marketing Association. 
The seven sponsored agencies borrow funds 
in private capital markets and lend these 
funds for the specific purposes for which they 
were established. Their total borrowing rose 
from about $1  bi II ion to a record $24 bi"  ion 
between fiscal 1971  and fiscal 1980. Partly in  ti~!is  neVVS!etter do not 
the views of the management 
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because of continued weakness in the hous-
ing market this year, total sponsored-agency 
borrowing could remain high, at about $20 
billion, in fiscal 1981. 
Federally guaranteed loans 
Three Federally-guaranteed mortgage 
pools-the Government National Mortgage 
Association (Ginnie Mae), the Federal Home 
Loan Mortgage Corporation (Freddie Mac) 
and the Farmers Home Administration-
provide further support for the housing 
market. Through Ginnie Mae, the Federal 
government guarantees the payment of 
principal and interest on securities issued by 
private mortgage institutions and backed by 
pools of mortgages insured by the Federal 
Housing Administration or  guaranteed by the 
Veteran's Administration. These pass-
through securities are designed to appeal to 
pension funds and other institutional 
investors that don't wish to originate and 
service mortgage loans themselves. 
As a major counterpart, Freddie Mac's 
mortgage-backed securities finance con-
ventionalloans, which account for four-fifths 
of all home mortgages. Congress created 
Freddie Mac  to develop a national secondary 
market in conventional mortgage loans 
originated by thrift institutions and other 
mortgage-lending institutions. The agency is 
wholly owned by the Federal Home Loan 
Banks. Similarly, in the rural area, Congress 
created the Farmers Home Administration to 
provide direct and guaranteed loans for low-
and moderate-income families in com-
munities of less than 20,000 population. 
Federally guaranteed mortgage pools have 
increased their borroWings substantially, 
from a $4-billion annual average to a 
$22-billion average between 1971-74 and 
1977-80. These entities again could borrow 
close to $22 billion this fiscal year. 
Total borrowing 
We can obtain a measure of  tota  I Federal and 
Federally-assisted borrowing in credit mar-
kets by add i  ng the net borrowi  ng needed to 
2 
finance the budget deficit ($59.6 billion in 
fiscal 1980), the off-budget deficit ($14.2 
billion), government-sponsored enterprises 
($23.9 billion), and government-guaranteed 
mortgage pools ($24.7 billion). Of  the total 
$122.4 billion in net borrowing last year, 
$119.1 billion was financed by borrowing 
from the public and $3.3 billion by a decrease 
in the Treasury's cash balances. 
The government's participation in credit 
markets:-the proportion offunds raised by 
the Federal government and its assisted 
entities -has  trended upwards over the past 
decade. That proportion increased from a 
15.9-percent average during the 1971-74 
period to 25.6 percent during 1977-80. This 
fiscal year, the government might again 
account for more than one-fourth of  total 
borrowings. 
By some estimates, the Federal participation 
rate is even higher than the figure cited here, 
because we include only mortgage-pool 
securities in the guaranteed-loan category. In 
addition, the government guarantees certain 
other types of loans, such as those made to 
Chrysler Corporation and New York City, as 
well as loans made through the Small 
Business Administration. A number of  these 
other loans, unlike the mortgage pools, 
provide for less than 1  OO-percent guarantees 
of principal and/or interest. The Office of 
Management and Budget estimates that tota)' 
Federal and Federally-assisted borrowing 
would have averaged 26.3 percent, rather 
than 25.6 percent, of the 1977-80 period's 
total borrowing if all guaranteed loans were 
included in the total (assuming 1  OO-percent 
loan guarantees). 
On the other hand, some analysts argue that 
both these estimates are on the high side. 
According to this argument, some part of  the 
loans provided by government-sponsored 
enterprises and through mortgage pools 
would have been made regardless of the 
government's assistance-so that only that 
amount resulting from Federal assistance 
should be included in an estimate of  the .... -. 
1.  r  r  r 
I 
government's innuence on credit markets. 
The amount to be included represents a 
subsidy to the borrower, resulting from the 
fact that the Federal government can obtain 
more favorable credit terms and lower 
interest costs than other borrowers. Although 
the subsidy provided by Federal assistance is 
not an observable quantity, we might still 
conclude that the government's involvement 
in credit markets is somewhat less than the 
estimates provided above. 
Nonetheless, it remains true that Federal and 
Federally-assisted borrowing has increased 
overtime as a proportion of  total funds raised 
in credit markets (see chart). Consequentiy, 
we have witnessed an increasing allocation 
of these funds  toward Federal and Federally-
related programs, and thus away from private 
demands. 
According to the new Administration's esti-
mates, the budget deficit in fiscal 1982 will 
again be quite high, while off-budget and 
Federally-assisted borrowing will continue 
close to 1981  levels. Consequently, credit 
markets may remain under pressure as public 
and private demands compete for avai lable 
funds. 
Rose McElhattan 
Federal  and Federally-Assisted Borrowing  as  a 
Percent  of  Total  Funds  Raised 
Percent 
40 
Fiscal  years 
30 
20 
10 
o 
1970  1972  1974  1976  1980  1981e  1978 
Publication-Monetary Policy Objectives 
Copies are now available of  the publica-
tion, Monetary Policy Objectives far 
J98J-a summary of  the report made by 
Federal Reserve Chairman Valcker to 
Congress on FebruarY 25-26, 1981. Free 
3 
copies of  this publication can be obtain-
ed by calling or writing the Public In-
formation Section, Federal Reserve Bank 
of  San Francisco, P.O. Box 7702, San 
Francisco 94120. Phone (415) 544-2184. BANKING DATA-TWELFTH FEDERAL RESERVE DISTRICT 
(Dollar amounts in millions) 
Selected Assets and liabilities 
large Commercial Banks 
Loans (gross, adjusted) and investments* 
Loans (gross, adjusted) -total# 
Commercial and industrial 
Real estate 
Loans to individuals 
Securities loans 
U.s. Treasury securities* 
Other securities* 
Demand deposits - total# 
Demand deposits - adjusted 
Savings deposits - total 
Time deposits - total# 
Individuals, part. &  corp. 
(Large negotiable CD's) 
Amount 
Outstanding 
2/18/81 
146,762 
124,373 
36,711 
51,066 
23,564 
1,492 
6,699 
15,690 
42,776 
28,469 
29,501 
76,898 
67,416 
30,086 
Change 
from 
2/11/81 
497 
698 
167 
107 
22 
101 
205 
4 
513 
-1,671 
94 
401 
395 
259 
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Change from 
year ago 
Dollar  Percent 
8,177  5.9 
8,216  7.1 
2,509  7.3 
6,509  14.6 
855  - 3.5 
272  22.3 
- 223  - 3.2 
184  1.2 
- 2,312  5.1 
- 2,337  - 7.6 
1,370  4.9 
17,902  30.3 
17,076  33.9 
9,180  43.9 
Weekly Averages  Weekended  Weekended  Comparable 
of Daily figures 
Member Bank Reserve Position 
Excess Reserves (+  )/Deficiency (-) 
Borrowings 
Net free reserves (+  )/Net borrowed( - ) 
* Excludes trading account securities. 
#  Includes items not shown separately. 
2/18/81 
n.a. 
119 
n.a. 
2/11/81  year-ago period 
n.a.  79 
28  291 
n.a.  212 
Editorial comments may be addressed to the editor (William Burke) or to the author ...• Free copies of this 
and other federal Reserve publications can be obtained by calling or writing the Public Information Section, 
Federal Reserve Bank of San francisco, P.O. Box 7702, San francisco 94120. Phone (415) 544-2184. 

Spending and borrowing

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Spending and borrowing

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Research Papers in Economics