Special Message to the Congress: The State of the Budget and the Economy

To the Congress of the United States:

THE HARD AND INESCAPABLE FACTS

Behind the accounts that make up the Nation's budget lies the pursuit of America's responsibility and purpose at home and abroad.

As we enter this new Fiscal Year, the Congress and the American people should have an up-to-date report on the state of the budget, and on the steps that must be taken to protect the national security and to sustain the health and vitality of this Nation.

Last January we submitted our budget for Fiscal 1968. In that budget we estimated:

--Expenditures of $135 billion.

--Revenues of approximately $127 billion, including income from a 670 surcharge on corporate and individual taxes effective July 1.

--A resulting deficit of about $8 billion.

Since then much has happened to change these prospects.

For several weeks, I have reviewed with my advisers the entire economic and budgetary situation. I have consulted with leaders of the labor, farm and business communities. As a result of that review I am submitting today a financial plan for America's continued economic well-being.

No President likes to report a significant revision in the Nation's budget estimates. Treasury, budget and economic experts tried to be as realistic as possible in the estimates they made late last year. Yet, no task is more formidable than to try to predict--over 18 months in advance--a budget of around $135 billion and its related revenues for 200 million Americans.

The Nation now faces these hard and inescapable facts for fiscal 1968: --Expenditures are likely to be between the January budget figure of $135 billion and $143.5 billion--as much as $8.5 billion higher--depending upon the determination and ability of the Congress and the Executive to control expenditures.

--Revenues are now estimated some $7 billion lower than in January, even with a 6% tax surcharge.

--These changes in the January budget estimates would result in a deficit of $23.6 billion.

--Without a tax increase and tight expenditure control, the deficit could exceed $28 billion. And that does not include an estimated $700 million higher cost of interest on the public debt that such a deficit would involve.

A deficit of that size poses a clear and present danger to America's security and economic health.

If left untended, this deficit could cause:

--A spiral of ruinous inflation which would rob the poor, the elderly, the millions with fixed incomes.

--Brutally higher interest rates and tight money which would cripple the home builder and home buyer, as well as the businessman. Interest rates have already turned up sharply despite the relatively easy money policy of the Federal Reserve System.

--An unequal and unjust distribution of the cost of supporting our men in Vietnam.

--A deterioration in our balance-of-payments by increasing imports and decreasing exports.

This Congress and this Administration must not accept so large a deficit.

Under these circumstances, we must choose between two alternatives:

1. The deficit could be accepted and totally financed by additional borrowing, which itself would drive up interest rates, or

2. The deficit could be reduced by rigidly controlling expenditures, raising as much money as possible through increased taxes, and then borrowing the difference.

The first alternative would be fiscally and financially irresponsible under present conditions. The second alternative is the only way to maintain a strong and healthy economy.

America in its strength and wisdom must choose to travel a responsible fiscal and budgetary course.

That is why I present for your judgment and action a fiscal program that is sensible and sound. There are two essential elements to this program:

--expenditure restraint, to which this Administration is committed and which I urge upon the Congress.

--tax measures to increase our revenues.

FISCAL 1968 EXPENDITURES

The budget for Fiscal 1968, submitted six months ago, estimated expenditures at $75.5 billion for the Defense Department and Atomic Energy Commission, and $59.5 billion for our civilian programs.

These estimates may now have to be revised upward by as much as $8.5 billion:

--$2.5 billion for civilian programs.

--$2 billion for reduced sales of participation certificates.

--$4 billion for defense.

1. Civilian Expenditures

The estimate of non-defense spending for Fiscal 1968 has already increased by $1.5 billion. This increase stems from two sources:

--First, a number of essential activities were temporarily deferred in Fiscal 1967 as part of our fight against inflation. Early this year inflationary pressures had been brought under control. Some of these deferred funds already voted by Congress were released in late February, and again in March and April, particularly to help homebuilding. This added $600 million to Fiscal 1968 expenditures. These releases included funds for the purchase of low cost home mortgages ($500 million), construction grants for health and education facilities ($30 million), and the construction of dams, flood control projects, and other public works ($20 million).

--Second, the January estimate of expenditures is up by $900 million primarily because of increases in programs whose payments are fixed by law and over which the President has no discretion-such as payments to the States for public assistance and health programs ($250 million), farm price supports ($400 million), and Federal contributions to Medicare ($150 million).

In addition, the Congress is still considering important legislative measures which will vitally affect Fiscal 1968 expenditures. Although we are already a month into the new fiscal year, 10 of the 13 regular appropriation bills have not yet been enacted. No one knows what the total of those appropriations to be voted by Congress for this fiscal year will be.

We do know, however, that the Congress is considering a bill which would raise civilian and military pay by more than $1 billion above the Administration's 4.5 percent pay proposal. The $1 billion extra pay raise is equivalent to the yield of a 2 percent tax surcharge and comes directly out of the pockets of American taxpayers.

These items alone would increase civilian expenditures by $2.5 billion above the budget submitted in January.

Moreover, the Congress, in actions by one or the other House, has reduced by over $2 billion the authorizations I requested for the sale of participation certificates. Failure to restore these authorizations as appropriations bills move to final passage would add still further to the budget deficit.

Therefore, I urge the Congress to exercise the utmost restraint and responsibility in the legislative decisions which are yet to come and to make every effort not to exceed the January budget estimates.

The Executive Branch pledges to take every proper action within its power to reduce expenditures in the January budget. But our discretion is limited.

Of the $61 billion now estimated for nondefense expenditures, more than two-thirds is not subject to an Executive reduction. Consider these facts:

--More than $30 billion will be spent on programs under which payments are definitely fixed by law or otherwise mandatory--such as interest on the public debt (over $14 billion), veterans' compensation and insurance pensions ($5 billion), public assistance ($4 billion), farm price supports ($2 billion), medical payments out of the general revenues (over $1 billion), legislature and judiciary (over $350 million).

--More than $15 billion will be spent to complete contracts or obligations entered into in prior years, such as the purchase of mortgages under earlier commitments and the completion of construction begun in 1966 or 1967.

--An additional $8 billion is spent for the pay of Federal employees in civilian agencies other than the Post Office. Substantial reductions are not possible in these expenditures without bringing to a halt many essential activities such as law enforcement and the Nation's air navigation system. Another $1 billion will be spent if the 4.5 percent civilian and military pay increase I recommended is enacted.

After taking account of these items, and allowing for a reduction of more than $5 billion in total expenditures--achieved through the sale of financial assets--this leaves only $12 billion of outlays over which the President has discretion in the year ahead. Even here, many indispensable programs are involved: for example, medical supplies and equipment for veterans' hospitals, equipment for the U.S. Coast Guard, grants for construction of civilian hospitals.

Reductions in spending will not be easy, for the budget submitted in January was already lean. But I pledge to the Country and the Congress that I will make every possible expenditure reduction--civilian and military--short of jeopardizing the Nation's security and well-being.

As the Congress completes each appropriation bill for Fiscal 1968 expenditures, we will examine at once, very, very carefully, the results of those actions, and determine where, how, and by how much expenditures under these appropriations can be reduced.

I am directing each Department and Agency head to review every one of his programs, to identify reductions which can be made and to report to the Director of the Budget in detail on the actions he is taking to put those reductions into effect.

But action by the Executive Branch alone is not enough.

It will achieve nothing if every time the Executive Branch saves a dollar, the Congress adds another dollar--or more--to the expenditures recommended in my January budget.

All actions we take to reduce Federal spending must--and will--be carefully and compassionately weighed. For we cannot turn our backs on the great programs that have been begun, with such promise, in the last three and one-half years. And we cannot now postpone--at a much higher economic and human cost later--the urgent task of making the streets of America safe from crime and chaos and rooting out the underlying causes of unrest and injustice in our land.

Nevertheless, we must move with determination to assure that those for whom these programs were begun are not robbed by the inflation that would accompany an unacceptable deficit.

2. Defense Expenditures

I have concluded, after considering the recommendations of Secretary McNamara, the Joint Chiefs of Staff and General Westmoreland, that I should authorize an increase of at least 45,000 in the number of men to be sent to Vietnam this fiscal year.

This Nation has taken a solemn pledge-that its sons and brothers engaged in the conflict there shall never lack all the help, all the arms, and all the equipment essential for their mission and for their very lives.

America must--and will--honor that pledge. It is for this reason that expenditures for Vietnam--subject as they are to the variable demands of military operations__ may now exceed our earlier estimates.

The Department of Defense has been a pace-setter in the Federal Government for efficiency and economy. Still, any organization that has so greatly expanded in so short a time is bound to have some areas in which further economies can be achieved or less essential expenditures stretched out.

I have asked Secretary McNamara, therefore, to conduct a searching review of all defense expenditures and to withhold all such expenditures that are not now essential for national security.

By such action we will try to hold total defense expenditures as near as possible to the level budgeted in January. However, the history of war teaches one clear lesson: the costs of conflict can never be precisely estimated nor fully foreseen. Thus, the possibility remains that defense spending in Fiscal 1968, based on present plans, may exceed the January budget by up to $4 billion

FISCAL 1968 REVENUES

The Fiscal 1968 budget submitted in January projected revenues of approximately $127 billion, including income from the tax measure I proposed at that time.

Since January, revenue estimates have been revised downward by a total of about $7 billion:

--$800 million as the result of Congressional action in restoring the investment credit and accelerated depreciation earlier than the budget had assumed and more generously than the Administration had requested.

--$1.3 billion because of lower corporate profits and $300 million because of lower personal income than projected six months ago.

--$3 billion because of a decrease in estimated yield from existing income tax rates and $200 million because of a decrease in the estimate yield of gift and estate taxes and customs.

--$600 million because of a reduced estimate of miscellaneous receipts such as stockpile sales ($450 million) and offshore oil revenues ($80 million).

--$800 million because of a later effective date for the surcharge on personal income taxes than recommended last January.

A PROGRAM TO INCREASE OUR REVENUES

Just as we must take determined action to control expenditures, so we must take action to increase our revenues if we are to avoid an unsafe and unmanageable deficit in the fiscal year ahead.

The three point tax program here presented is shaped to provide the fairest and least disruptive means of sustaining--without inflation--America's unprecedented period of uninterrupted prosperity, now in its seventy-eighth month.

1. A speed-up of corporate tax collections, as recommended last January.

Beginning January 1, 1968, corporations would pay their estimated taxes on the basis of 80% of their liability, rather than 70%.

Over a 5-year period, small corporations, as well as large, would become current in their tax payments, in the same way as individual proprietors already are.

This acceleration in collections should yield $800 million in additional revenues for Fiscal 1968, somewhat more in subsequent years.

2. Continuation of excise taxes for the immediate future.

The 7% manufacturer's excise tax on automobiles is now scheduled to fall to 2% on April 1, 1968, and to 1% on January 1, 1969.

The drop to 2% should be postponed to July 1, 1969, and the drop to 1% should be postponed to January 1, 1970.

The 10% excise tax on telephone service is now scheduled to fall to 1% on April 1, 1968, and to be eliminated on January 1, 1969.

The drop to 1% should be postponed to July 1, 1969, and the tax should be eliminated on January 1, 1970.

Extending these excise taxes would provide additional revenues of $300 million for Fiscal 1968 and more than $2 billion for Fiscal 1969.

3. Surcharges on corporate and personal income taxes.

--A temporary surcharge of 10% should be placed on corporate income tax liabilities, effective July 1, 1967.

--A temporary surcharge of 10% should be placed on individual income tax liabilities, effective October 1, 1967.

These are surcharges on taxes, not on incomes. They would expire on June 30, 1969, or continue for so long as the unusual expenditures associated with our efforts in Vietnam require higher revenues.

These surcharges are four percentage points higher than recommended in January. But they are vitally necessary to provide some of the additional revenues this Nation must have. Altogether, the new surcharges will yield $6.3 billion in revenues for Fiscal 1968, and somewhat more in Fiscal 1969.

Under this proposal:

--A family of four with an income of $10,000, now ordinarily paying a tax of about $1,100 will pay at most an added tax of $9.25 a month.

--Those American families whose incomes are below $10,000--3 out of every 4--will pay less than this amount.

--The 16 million taxpayers in the lowest income brackets would be completely exempt from the surcharge. For example, a married couple with 2 children, with an income of less than $5,000 a year, would pay no surcharge.

--The one out of every four American families who now pay no income tax would be unaffected by the surcharge.

Let us be clear about the significance of this tax surcharge.

If Americans today still paid taxes at the rates in effect when I became President, a little over three and one-half years ago, they would be paying this year over $23 billion more than they are paying now.

Now your Government is asking for a return of substantially less than half of those tax cuts that I recommended and the Congress overwhelmingly passed in the last three years. This is necessary to give American fighting men the weapons, equipment and the help they need, to hold the budget deficit within limits and to continue our education, health, poverty, urban and other vital programs.

For three out of every four American families, the burden of this increase will be between a few cents and $9 a month. That is a small burden, a small inconvenience, compared to what is borne by our men in arms who put their lives on the line in Vietnam.

A SOUND AND HEALTHY ECONOMIC ADVANCE

These tax recommendations, taken together, would raise $7.4 billion in Fiscal 1968. These added revenues--combined with the steps that the Congress and the Executive can and should take to control expenditures-will reduce the deficit to manageable proportions. If, working together, we can avoid an excessive pay increase, and provide the recommended authorization for sale of participation certificates, the deficit could be reduced to a range between $14 and $18 billion, depending upon our ability to hold down expenditures.

Last January, we concluded that higher taxes in Fiscal 1968 would safeguard our prosperity. Present economic prospects reaffirm that judgment.

It is the unanimous judgment of the President's advisers that the fiscal program we are recommending is consistent with a sound and healthy economic advance during the year ahead, without tight money and soaring interest rates.

THE COSTS OF INACTION

Failure to act promptly on these tax proposals and to restrain unnecessary spending could have the most serious consequences:

--The Nation could face a return of strong inflationary pressures and an intensified wage-price spiral--which could rob the poor, the elderly, the millions with fixed incomes. We would lose our opportunity to make progress this year toward one of our most urgent objectives: price stability.

--An excessive expansion of domestic markets could again quicken the flow of imports to the United States, while rising costs and prices cut into our exports. The position of the dollar as the key element in the world's financial system could be impaired.

--The resulting distortions in our economy could ultimately endanger the prosperity that generates the jobs and opportunities our men returning from Vietnam have the right to expect.

--Spiraling interest rates and severely tight money would return.

What the Government does not raise through taxes the Government must borrow.

That additional borrowing would be imposed on financial markets already strained by the unprecedented demands of private borrowers and State and local governments. Long term interest rates are already near their peaks of late last summer, and short term rates have begun to climb.

Without a tax increase, I am informed by Chairman Martin that nothing the Federal Reserve System could responsibly do could avoid the spiraling of interest rates.

As interest rates rose, a starvation of mortgage funds would throw housing into a new depression before it had even recovered from the last one. Every other borrower-but most of all the small businessman and farmer--would bear the cost of our fiscal irresponsibility.

A failure to raise taxes would not avoid the burdens of financing a war. For these burdens are inescapable. But, instead of sharing those burdens equitably and responsibly-as an income tax surcharge would do-inflation, tight money, and shortages would tax the American people cruelly and capriciously. The consequences of that irresponsibility would haunt America and its people for years to come.

CONCLUSION

Some may hear in this message a call to sacrifice.

In truth, it is a call to the sense of obligation felt by all Americans.

Americans in Vietnam stand in, and brighten, the light of a proud tradition. They give their service, and some give their lives, for their country--and for us.

To this point, America has served them well by supporting them unstintingly to the last of their needs while building a strong and prosperous Nation at home.

I urge you to remember the following. Last year:

--Real wages were the highest in history-and the unemployment rate reached the lowest point in 13 years;

--Total after-tax real income of American families rose 5 percent;

--Corporate profits after taxes reached an all-time peak, up 9 percent last year;

--Net income per farm increased more than 9 percent, even after adjusting for the higher prices farmers paid;

--Our Gross National Product, valued in constant prices, advanced 5.8 percent.

These gains were achieved without either runaway inflation, or the imposition of the wage and price controls which have been the condition of American life in every conflict of this century.

In significant part, this was the result of responsibility and restraint exercised by the business, farm, and labor communities.

The current situation summons those groups as never before to maintain that responsibility in their wage and price decisions.

It summons all Americans to respond with that same responsibility in the challenge of their own lives.

The inconveniences this demand imposes are small when measured against the contribution of a Marine on patrol in a sweltering jungle, or an airman flying through perilous skies, or a soldier ten thousand miles from home, waiting to join his outfit on the line.

There are times in a Nation's life when its armies must be equipped and fielded, and the Nation's business must still go on. For America that time is now.

The Nation's unfinished agenda here at home must be pursued as well. The poor must be lifted from the prisons of poverty, cities must be made safe and livable, sick and undernourished bodies must be restored, our air and water must be kept clean, and every hour of our future must see new opportunities unfold.

This, then, is the story behind the facts and forecasts, and the recommendations I submit today.

Last January I told the Nation:

"I wish I could report to you that the conflict in Vietnam is almost over. This I cannot do. We face more cost, more loss, and more agony. For the end is not yet. I cannot promise that it will come this year-or come next year. Our adversary still believes, I think tonight, that he can go on fighting longer than we can, and longer than we and our allies will be prepared to stand up and resist.

"Our men in that area--there are nearly 500,000 now--have borne well the 'burden and the heat of the day.' Their efforts have deprived the Communist enemy of the victory that he sought and that he expected a year ago. We have steadily frustrated his main forces. General Westmoreland reports that the enemy can no longer succeed on the battlefield.

"I must say to you that our pressure must be sustained--and will be sustained--until he realizes that the war he started is costing him more than he can ever gain.

"I know of no strategy more likely to attain that end than the strategy of 'accumulating slowly, but inexorably, every kind of material resource'--of 'laboriously teaching troops the very elements of their trade. That, and patience--and I mean a great deal of patience."

Those words are even more true today.

The test before us as a people is not whether our commitments match our will and our courage; but whether we have the will and the courage to match our commitments.

I urge the Congress to respond to the fiscal challenge that faces the Nation. I hope that in the National interest you will act promptly and favorably upon these recommendations.

LYNDON B. JOHNSON

The White House

August 3, 1967