The government takes in revenue mainly through taxes, called tax receipts. Unfortunately, revenue collected from taxes is not enough to pay for the government's operating expense or the cost of government sponsored programs. Selling Treasury bonds is one way the U.S. Department of the Treasury borrows money from the public to help pay for its expenses.
About Treasury Bonds
Investors consider Treasury bonds as a safe or relatively risk-free investment. The U.S. government guarantees the principal amount invested on Treasury bonds. The only way for a Treasury bond to lose its principal value is if the U.S. government goes bankrupt. When a bond matures, the Treasury has to pay the bond owner the value of the bond plus interest.
Paying off Mature Bonds
People buy Treasury bonds on a constant basis. As some people are purchasing new bonds, others are cashing in old ones them in because the bonds have reached their maturity date. The government will use some of the proceeds from the sale of new Treasury bonds to pay the owners who are cashing in their older bonds. This payment includes the face value of the bond plus accrued interest.
The government use Treasury bond money, along with tax receipts, to pay for the costs of operating what it refers to as on-budget accounts. On-budget accounts are all government programs and agencies for which their respective revenue and expenses are included in the federal budget. The government allocates money from the federal budget to pay for the costs of operating government programs and agencies. When costs exceed their allocations, the agency or program incurs an on-budget deficit. The federal government may use proceeds from the sale of bonds to pay toward such deficits.
On-Budget Account Examples
On-budget accounts are virtually every government agency except for the Social Security Administration, which is an off-budget account. Federal laws require separate accounting for off-budget accounts. The government includes off-budget accounts on its unified budget deficit and surplus reports. Examples of government agencies that are considered on-budget are the U.S. Departments of Agriculture, Education, Homeland Security, Defense, Energy, Housing and Urban Development, Justice and Labor. Basically, any government agency that begins with "The U.S. Department of" is an on-budget account.