Message to the Congress Transmitting the Fiscal Year 1986 Budget

To the Congress of the United States:

In the past 2 years we have experienced one of the strongest economic recoveries of the post-war period. The prospect of a substantially brighter future for America lies before us. As 1985 begins, the economy is growing robustly and shows considerable upward momentum. Favorable financial conditions presage a continuation of the expansion. Production, productivity, and employment gains have been impressive, and inflation remains well under control. I am proud of the state of our economy. Let me highlight a few points:

• The economy expanded at a 6.8% rate in 1984 and at a 6% annual rate over the 2 years since the recession trough at the end of 1982—faster than any other upturn since 1951.

• Confidence in the economy has prompted business firms to expand their capital facilities. Real investment in new plant and equipment has grown 15.4% annually since the end of 1982—faster than in any other post-war recovery.

• The ratio of real investment to real GNP has reached its highest level in the post-war period.

• Industrial production is 23% above its level at the recession trough in November 1982—a greater advance than in any other recovery since 1958.

• Corporate profits have risen nearly 90% since the recession trough in 1982-the fastest 8-quarter increase in 37 years.

• Civilian employment has grown 7.2 million over the past 25 months and the number of unemployed has fallen by 3.7 million. In the last 4 months alone, more than 1.1 million Americans have found jobs.

• Inflation remains well under control. The December 1984 CPI was 4% higher than a year earlier, about a third of the rate of inflation this administration inherited. The GNP deflator, the broadest measure of inflation, increased only 3.5% last year and at only a 2.4% annual rate in the fourth quarter.

• The prime rate of interest is now only half of what it was when I took office.

Contrast our current circumstances with the situation we faced just 4 years ago. Inflation was raging at double-digit rates. Oil prices had soared. The prime rate of interest was over 20%. The economy was stagnating. Unemployment had risen sharply and was to rise further. America's standing in world opinion was at low ebb.

All that, mercifully, is behind us now. The tremendous turnaround in our fortunes did not just happen. In February 1981, I presented the four fundamentals of my economic program. They were:

• Reducing the growth of overall Federal spending by eliminating activities that are beyond the proper sphere of Federal Government responsibilities and by restraining the growth of spending for other activities.

• Limiting tax burdens to the minimum levels necessary to finance only essential government services, thereby strengthening incentives for saving, investment, work, productivity, and economic growth.

• Reducing the Federal regulatory burden where the Federal Government intrudes unnecessarily into our private lives, the efficient conduct of private business, or the operations of State and local governments.

• Supporting a sound and steady monetary policy, to encourage economic growth and bring inflation under control.

Four Years of Accomplishment

These policies were designed to restore economic growth and stability. They succeeded.

The past 4 years have also seen the beginning of a quiet but profound revolution in the conduct of our Federal Government. We have halted what seemed at the time an inexorable set of trends toward greater and greater Government intrusiveness, more and more regulation, higher and higher taxes, more and more spending, higher and higher inflation, and weaker and weaker defense. We have halted these trends in our first 4 years.

• The rate of Federal spending growth was out of control at 17.4% a year in 1980. Under my budget proposals the growth of programmatic spending—that is, total Federal spending except for debt service—will be zero next year—frozen at this year's levels.

• Further, spending will grow only 30% over the 4 years from 1982 to 1986, compared to its record pace of 66% between [977 and 1981, and this despite legislated additions to my program and the needed rebuilding of our defense capabilities.

• The Federal tax system was changed for the better—marginal tax rates were reduced and depreciation reform introduced. These reforms were designed to increase incentives for work, training and education, saving, business growth, and capital expansion. Tax loopholes have been closed, improving the equity of the system.

• Domestic spending, which previously grew faster than any other major part of the budget (nearly four-fold in real terms between 1960 and 1980), will have been virtually frozen from 1981 to 1985.

• Our defense capabilities are now getting back to a level where we can protect our citizens, honor our commitments to our allies, and participate in the long-awaited arms control talks from a position of respected strength.

• Federal credit programs, which had also grown out of control, have been cut back, and their management has been vastly improved.

• The rapid growth of regulations and red tape has also been halted. The number of Federal rules published by agencies has fallen by over 35% during the past 4 years, and many unnecessary old rules have been eliminated. For the first time, the Federal Register of new regulatory actions has grown shorter for 4 consecutive years; it is now 41% shorter than it was in 1980.

• Major management improvement initiatives are underway that will fundamentally change the way the Federal Government operates. The President's Private Sector Survey on Cost Control has completed its report, and many of its recommendations are included in this budget. The President's Council on Integrity and Efficiency has reported $46 billion in improved use of funds through reduction of waste and fraud.

• The Federal nondefense work force has been reduced by over 78,000.

The proposals contained in this budget will build on the accomplishments of the last 4 years and put into action a philosophy of government that is working and that has received the overwhelming endorsement of the American people.

The 1986 Budget Program

If we took no action to curb the growth of spending, Federal outlays would rise to over a trillion dollars in 1986. This would result in deficits exceeding $200 billion in each of the next 5 years. This is unacceptable. The budget I propose, therefore, will reduce spending by $51 billion in 1986, $83 billion in 1987, and $105 billion in 1988. Enactment of these measures would reduce the deficit projected for 1988 to $144 billion-still a far cry from our goal of a balanced budget, but a significant step in the right direction and a 42% reduction from the current services level projected for that year.

Last year my administration worked with Congress to come up with a down payment on reducing the deficit. This budget commits the Government to a second installment. With comparable commitments to further reductions in the next two budgets, and, I hope, other spending reduction ideas advanced by the Congress, we can achieve our goal in an orderly fashion.

The budget proposes a 1-year freeze in total spending other than debt service. This will be achieved through a combination of freezes, reforms, terminations, cutbacks, and management improvements in individual programs. For a number of reasons, a line-by-line budget freeze is not possible or desirable. Further, such an approach would assume that all programs are of equal importance. Taken together, the specific proposals in this budget hold total Federal spending excluding debt service constant in 1986 at its 1985 level.

The budget proposals provide for substantial cost savings in the medicare program, in Federal payroll costs, in agricultural and other subsidies to business and upperincome groups, in numerous programs providing grants to State and local governments, and in credit programs. A freeze is proposed in the level of some entitlement program benefits, other than social security, means-tested programs, and programs for the disabled, that have hitherto received automatic "cost-of-living adjustments" every year. The budget proposes further reductions in defense spending below previously reduced mid-year levels.

Despite the reforms of the past 4 years, our Federal tax system remains complex and inequitable. Tax rates are still so high that they distort economic decisions, and this reduces economic growth from what it otherwise could be. I will propose, after further consultation with the Congress, further tax simplification and reform. The proposals will not be a scheme to raise taxes—only to distribute their burden more fairly and to simplify the entire system. By broadening the base, we can lower rates.

THE BUDGET TOTALS

[In billions of dollars]

1984 1985 1986 1987 1988

actual estimate estimate estimate estimate

Receipts--------------------------------------- 666.5 736.9 793.7 861.7 950.4

Outlays---------------------------------------- 851.8 959.1 973.7 1,026.6 1,094.8

Deficit (-)-------------------------------------- —185.3 —222.2 —180.0 —164.9 —144.4

Note: Totals include outlays that are off-budget under current law, proposed to be included on-budget.

There will be substantial political resistance to every deficit reduction measure proposed in this budget. Every dollar of current Federal spending benefits someone, and that person has a vested self-interest in seeing these benefits perpetuated and expanded. Prior to my administration, such interests had been dominant and their expectations and demands had been met, time and time again.

At some point, however, the question must be raised: "Where is the political logrolling going to stop?" At some point, the collective demands upon the public Treasury of all the special interests combined exceed the public's ability and willingness to pay. The single most difficult word for a politician to utter is a simple, fiat "No." The patience of the American people has been stretched as far as it will go. They want action; they have demanded it.

We said "no" frequently in 1981, and real spending for discretionary domestic programs dropped sharply. But we did not accomplish enough. We now have no choice but to renew our efforts with redoubled vigor. The profusion of Federal domestic spending programs must be reduced to an acceptable, appropriate, and supportable size.

It will require political courage of a high order to carry this program forward in the halls of Congress, but I believe that with good faith and goodwill on all sides, we can succeed. If we fail to reduce excessive Federal benefits to special interest groups, we will be saddled either with larger budget deficits or with higher taxes—either of which would be of greater harm to the American economy and people.

1986 Management and Regulatory Program

Not only must both the scope and scale of Federal spending be drastically cut back to reduce the deficit: we must also institute comprehensive management improvements and administrative reforms to make sure that we use available funds as efficiently as possible.

Tough but necessary steps are being taken throughout the Federal Government to reduce the costs of management and administration. Substantial savings in overhead costs have been achieved under provisions of the Deficit Reduction Act of 1984. A 5% Federal civilian employee salary cut has been proposed; a 10% reduction in administrative overhead has been ordered; termination of programs that have outlived their usefulness is proposed; outmoded, inefficient agency field structures that have evolved over the past half-century are being consolidated and streamlined to take advantage of efficiencies made possible by modern transportation, communication, and information technology.

Administration of Federal agencies is being made more efficient through the adoption of staffing standards, automation of manual processes, consolidation of similar functions, and reduction of administrative overhead costs. A program to increase productivity by 20% by 1992 in all appropriate Government functions is being instituted, as are improved cash and credit management systems and error rate reduction programs.

This management improvement program will result in a leaner and more efficient Federal structure and will be described in a management report that I am submitting to the Congress for the first time shortly after my annual budget submission.

We have also made a great deal of progress in reducing the costs imposed on businesses and State and local governments by Federal regulations. These savings are estimated to total $150 billion over a 10-year period. We have reduced the number of new regulations in every year of my first term and have eliminated or reduced paperwork requirements by over 300 million hours each year. In addition, the regulations are more carefully crafted to achieve the greatest protection for the least cost, and wherever possible to use market forces instead of working against them.

A recent Executive Order will strengthen the executive branch coordination that has made these accomplishments possible. For the first time, we will publish an annual program of the most significant regulatory activities, including those that precede the publication of a proposed rule. This will give Congress and the public an earlier opportunity to understand the administration's regulatory policies and priorities.

Conclusion

The key elements of the program I set out 4 years ago are in place and working well. Our national security is being restored; so, I am happy to report, is our economy. Growth and investment are healthy; and inflation, interest rates, tax rates, and unemployment are down and can be reduced further. The proliferation of unnecessary regulations that stifled both economic growth and our individual freedoms has been halted. Progress has been made toward the reduction of unwarranted and excessive growth in domestic spending programs.

But we cannot rest on these accomplishments. If we are to attain a new era of sustained peace, prosperity, growth, and freedom, Federal domestic spending must be brought firmly under control. This budget presents the steps that I believe must be taken. I do not exclude other economies that Congress may devise, so long as they do not imperil my fundamental constitutional responsibilities to look after the national defense and the general welfare of the American people.

Let us get on with the job. The time for action is now.

RONALD REAGAN

February 4, 1985.