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Wednesday, August 4, 1999 Published at 16:54 GMT 17:54 UK

Business: The Economy

US to buy back national debt

For the first time in 25 years, the US Government plans to reduce the size of the national debt.

The news represents a transformation of the US budget position, after struggling with huge deficits for most of the last decade.

[ image: US Treasury Secretary Summers wants to cut the debt]
US Treasury Secretary Summers wants to cut the debt
And it comes as a riposte to Republican plans to use the budget surplus to fund more tax cuts.

The last time the US tried to reduce its debt was in 1972.

It now says it will begin repurchasing Treasury bonds before they fall due, as early as next February, cutting back on the $3.6 trillion (£2.4 trillion) it owes to the public.

Larry Summers, US Treasury Secretary talking on the BBC's Newsnight
Treasury Secretary Lawrence Summers said that "reducing the supply of Treasury debt held by the public brings enormous benefits for our economy".

He argued that savings could be used instead for more productive investment in factories, while reducing the total amount of debt would help cut interest rates.

But the repurchase scheme will not begin until after a consultation to consider "a number of complex issues that will need to be worked out".

Surplus squabble

The proposal comes as Democrats and Republicans squabble over what to do with the growing US budget surplus.
[ image: US government debt peaked during World War II]
US government debt peaked during World War II

Last year, the government had a surplus of $69.2 billion, a total which is likely to be exceeded this year. It is the first time since 1957 that the US has had two consecutive years of budget surplus.

Official projections suggest trillions of dollars in budget surpluses over the next 15 years, boosted by a strong economy and strict controls on spending.

But there is no agreement on what to do with the money.

The Republicans are proposing a $792bn tax cut, while President Clinton and the Democrats want to add funds to the social security retirement programme and Medicare, which provides health care for older people.

But in a change of tack last month, the Clinton administration indicated that it was also prepared to consider using some of the surplus to reduce the overall government debt.

Such a course of action has long been advocated by Alan Greenspan, the influential chairman of the US central bank, the Federal Reserve.

He argues that reducing government debt should take priority over tax cuts, as the move will free funds for private investment and lower government spending.

Less debt to sell

The government surplus means that it needs to sell fewer bonds to the public.

It is going to reduce the number of times it sells 30-year Treasury bonds, from three times a year to twice a year.

The government hopes that by making repurchases, rather than just selling less debt in the future, it can better manage its portfolio to save money.

By retiring longer term debt, while issuing more cheaper short-term bonds, it will keep the cost of the debt repayments lower.

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