Gary Gensler

English

Research Papers in Economics

FRBNY Economic Policy Review / April 2000 83
Keynote Address
Fiscal Policy in an Era 
of Surpluses
ood afternoon. I want to thank Peter Fisher for inviting 
me to speak here today. I am particularly pleased to talk 
about debt management in this new era of budget surpluses. 
The fiscal year 1999 unified surplus was $123 billion, almost 
twice the size of the previous year’s $69 billion. These surpluses 
capped seven consecutive years of improvements in the federal 
budget since the deficit peaked at $290 billion in fiscal year 
1992. This represents the longest series of improvements in 
budget outcomes in the history of the United States.
This progress has had a significant effect on Treasury 
financing. In 1993, federal debt held by the public was 
projected to rise to $5.4 trillion by 1999. Fortunately, the 
stock of publicly held debt outstanding now stands at only 
$3.6 trillion, more than $1.7 trillion lower than it otherwise 
would have been.
As a result, Treasury debt is taking up an ever smaller share 
of the economy and the capital markets. Treasury debt held by 
the public has fallen from 50 percent of GDP in 1994 to less 
than 40 percent today. This string of six consecutive years of 
declining debt as a share of GDP is the longest since the period 
ending in 1967 more than thirty years ago. The decline in 
outstanding debt is expected to continue, dropping to 
26 percent of GDP within five years.
The change is even more marked in relation to the capital 
markets. The Treasury’s share of gross new issuance in the 
market has dropped from 38 percent in 1995 to 16 percent 
through the third quarter of 1999. Since the start of the Clinton 
administration, the Treasury’s share of outstanding debt in 
U.S. markets has fallen from more than 33 percent six years ago 
to less than 25 percent today.
Reducing Treasury debt held by the public greatly benefits 
the economy and all Americans. It also brings with it new 
challenges for Treasury debt managers in achieving our three 
main goals: (1) to ensure that adequate cash balances are 
available at all times, (2) to achieve the lowest cost financing 
for taxpayers, and (3) to promote efficient capital markets. In 
pursuing these goals, we have sought to promote market 
liquidity and finance across the yield curve.
Debt Management Responses 
to Declining Debt 
To date, the Treasury has managed the declining debt by 
refunding our regularly maturing debt with smaller amounts of 
new debt. To accomplish this, we have used the financing tools 
of modifying issue sizes, offering schedules, and the types of 
securities offered. 
First, while maintaining the frequency of Treasury bill 
auctions, we reduced their average size. In 1996, the average 
size of our weekly bill auctions was close to $20 billion. By 
1998, the average size of weekly bill offerings had dropped 
28 percent, to just over $14 billion. This year, the size has 
increased modestly to an average of just over $15 billion.
Gary Gensler
These remarks were also presented in a Treasury News press release, 
December 3, 1999. The views expressed are those of the author and do not 
necessarily reflect the position of the Federal Reserve Bank of New York or 
the Federal Reserve System.
Gary Gensler is the under secretary for domestic finance at the 
U.S. Department of the Treasury.
G84 Fiscal Policy in an Era of Surpluses
Next, we reduced the number of regular coupon issuances 
by one-third, from thirty-nine to twenty-six a year. We 
accomplished this by discontinuing the three-year, moving 
the five-year to quarterly offerings, and discontinuing the 
November thirty-year bond offering. This has allowed us to 
continue to issue large, liquid benchmark securities. While 
average auction size has declined modestly, by 6 percent since 
1996, we have been able to maintain it at just under $14 billion 
for 1999.
We continue to consider whether further revisions to our 
auction schedule would be appropriate. Particularly, we 
continue to consider the frequency of issuance of one-year bills 
and two-year notes. Reducing the frequency of these auctions 
would give us some additional leeway in maintaining the size of 
our benchmark issues. 
Debt Management Challenges 
While we have been able to meet our debt management goals 
through these adjustments, we face additional challenges going 
forward. 
First, debt held by the public is forecasted to shrink further, 
by $720 billion over the next five years and by over $2 trillion 
in ten years. 
Second, the effect of seven years of fiscal discipline is already 
showing up in our maturing debt. There will be a great deal less 
maturing debt to be redeemed in the very near future. This 
fiscal year, $476 billion of coupon debt will mature, down from 
a peak of $510 billion in 1998. Over the next eighteen months, 
the last of the old seven-year and three-year notes will mature. 
Thus, by 2002, debt maturing will decline significantly. 
Depending upon the decisions we make this fiscal year about 
issuance of two-year notes, debt maturing in 2002 is likely to be 
less than $400 billion.
Third, we face the challenge of how to continue to issue 
sufficient longer term debt without an unacceptable 
lengthening of our maturity structure. For instance, if we 
maintain the current level of long-term financing (ten-year 
and thirty-year debt), the average maturity is forecasted to 
lengthen from about five and three-quarter years currently to 
eight years by the end of 2004. Over the long term, this would 
impose additional cost on the taxpayers to finance 
our debt. 
To meet these challenges, new tools will be needed. By the 
end of the year, we will have in place two new debt 
management tools. This will provide us with important new 
means of managing the government’s debt and responding to 
our improved fiscal condition.
First, we have issued a rule that will make it much easier for 
the Treasury to reopen its benchmark securities. The new rule 
allows the Treasury to reopen its benchmark securities within 
one year of issuance without creating concerns under the 
original issue discount (OID) rules. Under the previous rules, 
the Treasury generally could reopen an issue only if the price of 
the issue had not fallen by more than a de minimus amount. 
This significantly constrained our ability to reopen benchmark 
securities. The new rules will enable us to reopen issues more 
easily. This important new debt management tool will improve 
our ability to maintain the size and liquidity of our benchmark 
securities.
Second, we are putting in place a new rule that will permit 
us to conduct debt buybacks. This new rule will permit us to 
buy back Treasury debt in advance of its maturity date. Buying 
back outstanding debt in advance of maturity will enable us to 
maintain larger, more liquid auction sizes for our benchmark 
securities. Debt buybacks also will give us the ability to manage 
the maturity structure of our debt by selectively targeting the 
maturities to be repurchased. This will provide us with 
additional flexibility to continue issuing our long-end 
maturities without unduly lengthening the maturity structure 
of our debt. Finally, debt buybacks could be used as a cash 
management tool, absorbing excess cash in periods such as 
late April when tax revenues greatly exceed immediate 
spending needs.
Looking Ahead
Treasury securities currently play an important role in the 
global capital markets. They are actively used for hedging 
purposes. They provide a risk-free pricing benchmark across 
the yield curve. The Federal Reserve uses transactions in 
Treasury securities to affect the supply of reserves in the 
banking system.
As the Treasury market declines in size, other markets are 
likely to take on these roles. We believe that the financial 
markets should be able to make a smooth adjustment to these 
changes. Investors and hedgers will switch to trading other 
securities and derivatives. 
This transition is already taking place. Market participants 
today use Eurodollar futures more actively than Treasury bills 
to hedge in the short end of the market. In addition, the role of 
Treasury securities as a pricing benchmark in the investment-
grade bond market is changing. While high-grade corporates 
are still priced relative to Treasuries, growing weight is being 
given to the value of other high-grade corporates. We are FRBNY Economic Policy Review / April 2000 85
already seeing underwriters pricing new issues relative to the 
value of similar recently issued securities in addition to 
Treasury yields.
Most important, the benefits of reducing our nation’s debt 
far surpass the issues that arise for the capital markets from this 
reduction. As less savings flow into government bonds, more 
will flow into investment in businesses and housing. There will 
be less pressure on interest rates, reducing the borrowing costs 
for businesses and families alike. While debt reductions present 
challenges to the financial markets and to the Treasury’s ability 
to manage the remaining debt, I think we can all agree that the 
enormous benefits for our economy make these challenges 
worth meeting.
The views expressed in this paper are those of the author and do not necessarily reflect the position of the Federal Reserve Bank 
of New York or the Federal Reserve System. The Federal Reserve Bank of New York provides no warranty, express or 
implied, as to the accuracy, timeliness, completeness, merchantability, or fitness for any particular purpose of any 
information contained in documents produced and provided by the Federal Reserve Bank of New York in any form or 
manner whatsoever.

Fiscal policy in an era of surpluses

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Fiscal policy in an era of surpluses

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