Special Message to the Congress on Federal Expenditures and Revenues.

To the Senate and House of Representatives:

In my Budget message of December 5, I laid before the Congress the financial situation of the Government together with proposals for the next fiscal year.

It was pointed out that due to decreasing revenues and despite the efforts of the Congress and the Administration, we were again faced with a deficit during the next fiscal year. I urged upon the Congress the necessity for further drastic reduction in expenditures and increase in revenues.

I now approach the Congress again upon this subject, knowing that the Members are fully possessed of the complete necessity of a balanced Budget as the foundation of economic recovery and to urge that action should be taken during the present session to bring this about.

The great problem before the world to-day is a restoration and maintenance of confidence. I need scarcely repeat that the maintenance of confidence in the financial stability of the United States Government is the first contribution to all financial stability within our borders, and in fact in the world as a whole. Upon that confidence rests the credit of the States, the municipalities, all our financial institutions and industry--it is the basis of recovered employment and agriculture.

The increase in revenues enacted at the last session have not had the results hoped for because of continued economic stagnation. The income of the Government for the next fiscal year nominally estimated at $2,950,000,000 is likely to fall short under present world conditions by anywhere from $100,000,000 to $300,000,000.

Expenditures (and I speak in terms of expenditures rather than appropriations because of the confusion caused by carry-over of appropriations) for the present fiscal year, including post office deficit but excluding debt redemption, are estimated at about $3,771,000,000. If expenditures are continued during the next fiscal year at the present rate there would thus be a deficit of from $920,000,000 to $1,120,000,000 in the next fiscal year exclusive of sinking fund charges.

Obviously the first necessity of a nation of decreasing income is reduction in expenditures. My message of December 5, as supplemented, recommended very large specific reductions of appropriations and economies for the next fiscal year. These proposals (including the effect of previous appropriations and obligations) would reflect an expenditure next year, excluding debt redemption but including post office deficit, of about $3,233,000,000, a decrease as compared to the current year of about $538,000,000.

Assuming that these economies and reductions of appropriations will be adopted, on this basis of calculation there would still be a deficit, exclusive of debt redemption, of about $400,000,000 to $600,000,000. Certainly with the general economic outlook in respect to income and the legislative outlook in respect to recommended economies the latter figure is the most likely of realization.

The first essential is that the maximum appropriations and economies set out in the Budget message as supplemented should be adhered to. The second is that there should be no new authorizations or appropriations brought forward. The third is that even the appropriations recommended should be reduced at every point the Congress is able to find an avenue therefor. So far as appropriation bills as dealt with by the House of Representatives or the committees thereof, the results have been disappointing. Maximum appropriations for the different departments which were recommended in the Executive Budget have not been adhered to. My Executive orders to consolidate some 58 Government functions into a few divisions with resulting economies appears likely of refusal by the Congress with resultant continuing waste. I regret to say that the same forces are at work which thwarted the savings of several hundred millions we sought to effect at the last session of Congress. We are, during the current year and even in the next fiscal year, suffering from that failure.

In the five departmental bills dealt with by the House or by the committees thereof at this session, a total of appropriations were recommended by the Executive which would result in an expenditure (exclusive of debt redemption) of $2,263,000,000, being a decrease of expenditures in these departments of $264,400,000 under the present fiscal year. Some items in these bills have been genuinely decreased by action of the committees or the votes of the House. Others have been increased. Still others have been given the appearance of reduction but in reality must be restored during the next fiscal year by deficiency bills.

The items in which there have been genuine decreases in these appropriations aggregate about $23,500,000, but of this $10,000,000 is reduction in the public buildings for which commitments have been authorized.

Items have been decreased which will in all probability be required through deficiency bills amounting to approximately $41,400,000.

Items have been increased amounting to approximately $58,200,000.

There is thus produced an appearance of slightly greater saving than recommended in the executive Budget, but in reality an actual increase by over $35,000,000. If the Congress would accept the cuts recommended in the executive Budget and also the genuine cuts made by the House Committee on Appropriations or as passed by the House, it would represent a real decrease in Government expenses over those in the Budget in respect to these bills of some $23,500,000.

There are yet remaining to be reported appropriation bills in which reductions have been recommended by the Executive which would secure reductions on those agencies of $249,000,000 less than those of the current year.

In consideration of reductions I realize the pressures upon the Congress. I also recognize many organizations advocating economy do not fully understand the limitations under which the Congress works in reduction of expenditures. In order to clarify this I may classify the Government expenditures proposed for the next fiscal year into six groups (excluding debt redemption but including post office deficit).

It will be seen that about 86 per cent of the whole expenditure of the Government lies in the first five items.

No matter how rigid economies may be it is obvious that the Budget can not be balanced without a most substantial increase in revenues. But the progress of appropriation bills, however, would indicate that the executive recommendations on which all these calculations are based will not be realized by $100,000,000 or more and, therefore, it is more likely that the deficit will amount to from $500,000,000 to $700,000,000.

In canvassing the three major fields of possible income, that is, income taxes, customs and excise taxes, I believe that inquiry by the Congress will develop that income taxes under the act of 1932 have been developed to the point of maximum productivity unless we are prepared to abandon our American system of fairly high exemption and reasonably low rates applicable to the smaller incomes and, in any event, by keeping to these principles no further burdens in this direction would substantially increase revenues and solve the questions. One of the first economic effects of the increases already made is the retreat of capital into tax exempt securities and the denudation of industry and commerce of that much available capital.

The customs revenues and other miscellaneous revenues are not likely to be increased except through recovery in trade. In my view, therefore, the field for substantial increase in Federal Government revenues resolves itself to the exploration of the possibilities of so-called excise or sales taxes. In the estimated revenues for the next fiscal year nearly $700,000,000 is comprised of so-called excise taxes which are levied on a few score different manufactured commodities. These taxes are in fact manufacturers sales taxes. Any attempted distinction between "excise" taxes on manufactured commodities, or "sales" taxes on manufactured commodities is mere juggling with words. Of the taxes now levied, nearly $200,000,000 are upon essentials as distinguished from so-called nonessentials. The Congress has thus already established a "sales tax" as the basis for one-quarter of the whole public revenues, and has already adopted "sales" taxes upon essentials as distinguished from nonessentials. To extend this form of taxation is neither new nor revolutionary. Instead of spreading it over a few scores of commodities and services at irregular rates which cause discrimination and hardship between industries, it would seem the essence of good statesmanship to apply such a tax generally at a low rate upon all manufacturers except upon food and cheaper grades of clothing, and thereby give to the Federal Government a stable basis of income during the period of depression.

The balancing of the Budget is one of the essential steps in strengthening the foundations for recovery. Capital expenditures are a very important item in our economic life. There can be no doubt that there is an enormous accumulated demand for capital funds that would be expended for equipment and replacements of all kinds if long-time funds could be obtained cheaply and if confidence were restored. For some time now long-time funds have not been available for the public at reasonable rates. The retirement of the Federal Treasury from the market as a constant borrower, the balancing of the Federal Budget and the refunding operations necessary to bring the Government debt into better balance would have a stimulating effect, would vitalize our entire credit structure and produce one of the conditions essential to continued recovery.

It is essential that the Government undertake at an early moment the refunding of outstanding high interest-bearing Liberty bonds into bonds bearing a lower rate of interest. It is essential, too, that a portion of our short-term borrowing should be converted into longer term issues. A balanced Budget would greatly facilitate such an operation.

Every principle of sound governmental management and wise economic policy call for the prompt balancing of the Federal Budget. This all-important objective is definitely within reach, and more determined effort will bring us to the goal we have been striving to reach in the face of unparalleled difficulties.

One of the most helpful contributions which the Congress and this administration could give to the next administration would be to enable them to start with the Federal Budget in balance and the Federal finances in order.

HERBERT HOOVER

The White House,

January 17, 1933.