2000) “The Tax Smoothing Implications of the Federal Debt Paydown.” Brookings Papers on Economic Activity Vol 2

AFTER NEARLY THIRTY straight years of deficit spending, the fiscal posi-tion of the U.S. government has experienced a dramatic turnaround. In fiscal years 1998 and 1999, for the first time since the 1950s, the federal government ran back-to-back budget surpluses. With the government no longer a net borrower, the Treasury has started paying down the federal debt: debt held by the public fell from $3.5 trillion in March 1998 to $3.0 trillion in July 2000. And both the Office of Management and Bud-get (OMB) and the Congressional Budget Office (CBO) are forecasting that these surpluses will continue over the next decade,1 in amounts large enough that the public debt will be fully redeemed in 2012. Although these official forecasts may prove too optimistic, it is reasonable to expect that the quantity of publicly held debt will shrink considerably over the next decade.2 The pending debt paydown has several implications for macroeconomic policy. This paper focuses on only one of these. All types of debt allo