Letter to the Speaker of the House of Representatives and the President of the Senate Transmitting the Fiscal Year 1990 Budget

To the Speaker of the House of Representatives and the President of the Senate:

Eight years ago many in this country were concerned about the future of our economy, our government and, indeed, the Nation itself. Unemployment was high and rising. Inflation and interest rates were reaching record levels. Our Nation's defense capabilities had been weakened by neglect. The international prestige of the U.S. was at low ebb.

To resolve the economic problems then facing us, our administration proposed a recovery program centering on four fundamental principles:

• Reduce personal and business tax rates.

• Reduce the rate of growth of Federal spending.

• Reduce the Federal regulatory burden by eliminating unnecessary restrictions while protecting the public's interest and safety.

• Support a moderate and steady monetary policy to bring inflation under control.

To rebuild our defense capabilities and restore America's standing in the world we proposed expanded national security and international programs.

We also initiated the largest management improvement program ever attempted in order to restore the proper relationships among the Federal, State and local governments, and the private sector; to eliminate waste in Federal programs; and to introduce management controls and efficiencies, while improving services.

Today, the American people can be proud of the progress that has been made on each of these fronts. As a result of this progress, America is internally stronger, internationally more secure, and stands taller in the eyes of the world than it did eight years ago.

EIGHT YEARS OF ACCOMPLISHMENT

Working together, we have accomplished much over the last eight years.

The Economy

• The current economic expansion, now in its seventy-fourth month, has outlasted all previous peacetime expansions in U.S. history. Business investment and exports are rising, and economic growth is expected to continue into the 1990's.

• Since this expansion began, 19 million new jobs have been created, while the unemployment rate has fallen by more than 5 percentage points—to 5.4 percent, the lowest level in 14 years.

• Inflation, which averaged 10.4 percent annually during the four years before our administration began, has averaged less than a third of that during the past six years.

• Real after-tax personal income has risen 24 percent since 1982, increasing our overall standard of living.

Taxes and Regulations

• Between 1981 and 1987, changes in the Federal tax code have made the tax laws more equitable, cut income tax rates, and eliminated Federal income taxes for 4.3 million low-income individuals and families.

• Since 1981, the time spent by the public filling out forms required by the Federal Government has been cut by 600 million hours annually, and the number of pages of regulations published annually in the Federal Register has been reduced by over 45 percent.

Budget

• The growth in domestic spending has been slowed, and the budget priorities have been shifted to those functions the Federal Government should provide, such as national defense, basic scientific research, and protecting the rights of all citizens.

• The social security system has been rescued from the brink of insolvency and made sound into the next century.

• The runaway growth of spending for means-tested entitlement programs that occurred in the 1970's has been curbed. Eligibility rules have been tightened to retarget benefits to the needy. Basic benefits for the poor, the elderly, and others in need of Federal assistance have been maintained.

• We have begun the process of putting other entitlement programs on a more rational basis, including medicare hospital insurance, which was converted to a system that encourages efficiency and lower costs.

Defense and International Affairs

• Our defenses have been strengthened. Weapons systems have been modernized and upgraded. We are recruiting and retaining higher caliber military personnel. The readiness, training, and morale of our troops have been improved significantly.

• As a result of our greater strength, we were able to negotiate with the Soviet Union a verifiable treaty that completely eliminates an entire class of nuclear missiles.

• We began the Strategic Defense Initiative research and technology program that offers our best hope of a safer world in which our security, and that of our allies, no longer rests on deterrence through the threat of nuclear retaliation, but on defenses that threaten no one.

• Our willingness to defend freedom throughout the world has met with success in the spread of democracy and in turning back the tide of communist expansion.

Management of the Government

• Federal agencies undertook a major management improvement program, "Reform '88," to carry out the cash, credit, and financial operations of the Federal Government in a more business-like manner, and to reduce waste, fraud, and abuse. • Functions that were pre-empted by the Federal Government are being transferred back to the private sector or to State and local governments.

• Greater use is being made of cost sharing and user fees, shifting the cost of projects and programs where appropriate to those who benefit from them.

The Federal Deficit

The one area in which I have been persistently disappointed throughout my term of office has been in the efforts to bring the budget under control. Time and again I have proposed measures to help curb Federal domestic program spending. Time and again these proposals have been rejected by Congress.

The reasons for the rise in the Federal deficit in the early 1980's are simple. First, we experienced one of the most severe recessions of the post-war period. It has been estimated that 81 percent—over $640 billion—of the growth of the deficit over the 1981-1986 levels originally projected in my March 1981 budget was attributable to that recession. The second reason is that, even after including necessary increases for defense, my March 1981 budget called for net spending reductions totalling $331 billion over five years; but Congress approved less than 40 percent of those reductions. Wasteful programs continued to be funded. The necessary reductions have still not been made.

If the deficit is not curbed by continuing to limit the appetite of government, we put in jeopardy all that we worked so hard over the years to achieve. Large deficits brought on by excessive domestic spending undercut the incentives to work and save by absorbing the savings that would otherwise lead to productive investment. We cannot allow this to happen.

I am proud of America's accomplishments. Our economy is booming, our defenses are stronger, and our standing in the world is again second to none.

THIS BUDGET REDUCES THE 1990 DEFICIT BELOW THE G-R-H TARGET

AND ACHIEVES BALANCE IN 1993

The fiscal year 1990 budget, my last, represents a continuation of my efforts to reduce the Federal budget deficit through restraint in domestic spending.

The budget I am submitting today complies with the deficit targets set in the Gramm-Rudman-Hollings (G-R-H) Act, by proposing measures that meet the 1990 deficit target of $100 billion and assure a steady reduction in the deficit leading to a balanced budget in 1993.

Under my proposals, the deficit would decline to less than 2 percent of GNP in 1990, and the Federal debt held by the public would also decline as a proportion of GNP.

BUDGET SUMMARY

[dollar amounts in billions]

1988 1989 1990 1991 1992 1993 1994

Receipts 909.0 975.5 1,059.3 1,140.5 1,212.2 1,281.4 1,345.0

Outlays 1,064.0 1,137.0 1,151.8 1,207.3 1,244.4 1,279.0 1,311.6

Surplus or deficit (-) -155.1 -161.5 -92.5 -66.8 -32.2 2.4 33.4

Surplus or deficit (-) with-

out asset sales - 155.1 -161.5 -98.6 -69.2 -34.3 1.6 32.6

G-R-H deficit targets -144.0 -136.0 -100.0 -64.0 -28.0 0.0 NA

Difference 11.1 25.5 - 1.4 5.2 6.3 -1.6 NA

ADDENDUM

Surplus or deficit (-) as a

percent of GNP -3.2 -3.2 - 1.7 - 1.1 -0.5 0.0 0.5

NOTE.—Totals include social security, which is off-budget.

NA: Not available.

This budget shows that a gradual elimination of the deficit is possible without raising taxes, without cutting into essential social programs, without devastating defense, and without neglecting other national priorities. It can be done in a reasonable, responsible way—with discipline and fairness. New taxes are not required. Receipts will grow dramatically between 1989 and 1990 because our economy is growing. This budget simply proposes to increase spending by less than the increase in revenues, and therefore, reduce the deficit. The proposed reforms will yield additional deficit reductions in future years. We have an opportunity this year to put the worst of the deficit problem behind us and enable the next Administration to begin its term of office with a clean slate and with the promise of continuing prosperity.

FUNDING NATIONAL PRIORITIES

To address urgent national priorities within the deficit limit set by the C,-R-H Act, my budget proposes that some programs—such as those for AIDS research and prevention, drug enforcement, and technology development—receive significant funding increases, while others are reduced, reformed, or, in some cases, terminated.

Defense

Maintaining peace and protecting our country are the foremost responsibilities of the Federal government. Defense budget authority declined in real (inflation-adjusted) terms for the fourth straight year with funding of $299 billion for 1989. This trend cannot continue without severe impact on combat readiness. Therefore, my budget requests defense funding of $315 billion in budget authority and $303 billion in outlays for 1990, and $331 billion in budget authority and $314 billion in outlays in 1991. These amounts provide 2 percent annual real growth in budget authority over the 1989 level, bringing it back up to the 1984 level in inflation-adjusted terms by 1991. The budget also projects 2 percent real growth in these programs in future years.

We must continue to maintain our nuclear deterrent. For 1990, the budget proposes $9.0 billion for atomic energy defense programs, a $0.9 billion increase over 1989. A total of $2.8 billion is dedicated to the modernization of the nuclear materials production complex and to increase environmental clean-up and waste management efforts.

International

To consolidate and build on the foreign policy gains of the past eight years, additional funds are needed for international affairs that would promote our foreign policy and national security interests in the Middle East, Central America, and elsewhere. A special program is proposed to foster strong economic growth in the Philippines to support that country's return to democracy. Other increases in foreign aid would pay arrearages on contributions to multilateral lending institutions and make payments to the United Nations and related agencies.

Drug Abuse and Law Enforcement

Our fight against drug abuse must continue, as well as our efforts to protect the individual against crime:

• For drug law enforcement, prevention, and treatment programs, I propose $5.7 billion in 1990, an increase of $164 million over 1989. This funding, together with the new authorities and sanctions contained in the Anti-Drug Abuse Act of 1988, will enable us to move toward our goal of a drug-free America.

• To relieve prison overcrowding and adequately house a growing inmate population, I would provide $1.6 billion for prison construction and operation, $193 million more than was devoted to this purpose in 1989.

AIDS Research and Education

This budget reflects my belief that addressing the problem of AIDS must remain a top priority:

• Preventing and alleviating suffering from the Human Immunodeficiency Virus (HIV), which causes AIDS, is our highest public health priority. Federal support for research, prevention, and treatment exceeds $2.1 billion in 1989, and will approach $2.8 billion in 1990. This budget asks for $1.6 billion, or 24 percent over 1989, for Public Health Service HIV funding.

Research

One of our highest priorities is to strengthen U.S. technology and make America more competitive. For example:

• I propose a continued increase in federally supported basic research aimed at longer-term improvements in the Nation's productivity and global competitiveness. This budget continues the commitment to double National Science Foundation support for academic basic research by 1993, increases support for training future scientists and engineers, and expedites transfer of the results of Government-funded basic research to industry.

• Our space program will provide $13.1 billion for continued development of America's first permanently manned space station; for increased support for improving the performance and reliability of the space shuttle; for initiation of two major new international planetary space science missions; and for support to encourage the commercial development of space.

• Also included in the budget is $250 million in 1990 as the Federal share of support for initiating construction of the Superconducting Super Collider (ssc). Non-Federal cost sharing arrangements will be required to support one-third of the project's costs. The SSC as currently envisaged will be the largest pure science project ever undertaken. It will help keep this country on the cutting edge of high energy physics research well into the next century.

Other Priorities

Other areas of Federal responsibility receive priority funding in this budget:

• To continue the Federal Aviation Administration's multi-year program to increase its controller and inspector work forces and to modernize the Nation's air traffic control systems, the budget provides $7.7 billion—a 17 percent increase over the 1989 level.

• To alleviate the problems facing our savings institutions, I propose that the Federal Savings and Loan Insurance Corporation (FSLIC) spend $16 billion in 1989 and $9 billion in 1990 to address the most serious thrift institution problems. The Secretary of the Treasury is developing a comprehensive plan to resolve the savings industry's problems, and reform the financial institution regulatory structure and deposit insurance system to prevent a reoccurrence of these problems. I expect the Secretary to submit his proposals to the new President shortly.

• To improve coordination of Federal rural development programs and to redirect funding toward needy rural areas and program recipients, I am continuing support of the rural development initiative coordinated by the Secretary of Agriculture.

• By emphasizing housing vouchers, I would provide housing assistance to 132,000 additional low-income households in 1990, 5 percent more than the 126,124 additional households receiving housing subsidies in 1989. Housing vouchers can serve more low-income households at a lower Federal cost and provide greater opportunity for these families to rent housing of their own choosing.

• To maintain the progress we have been making in fostering State and local education reform, I would sustain the present level of spending on discretionary education programs at $18.5 billion, but refocus those funds to put more money where the needs of the disadvantaged and students with handicaps are greatest.

• To continue the significant progress we have made in cleaning up the environment, I recommend a $153 million increase for the Environmental Protection Agency's regulatory, research and enforcement programs. I also recommend an increase of $315 million for the Superfund hazardous waste clean-up program in order to maintain the program's momentum and support a stronger enforcement role.

• Because changes in the earth's natural systems can have tremendous economic and social effects, global climate change is becoming a critical concern. Our ability to understand and predict these changes is currently limited, and a better understanding is essential for developing policies. The budget proposes a coordinated and effective Federal research program on global change. This budget is accompanied by a report by the Committee on Earth Sciences that describes this program and its strategy.

• Last year's fires on Federal forestlands indicated the need for more timely funding for annual fire-fighting costs. I therefore propose that two new Federal wild land firefighting accounts be established in the Departments of Agriculture and Interior.

• To further strengthen our energy security, I propose legislation authorizing the sale of the naval petroleum reserves to the private sector in exchange for cash and oil to be added to the strategic petroleum reserve. I also propose the establishment of a separate 10 million barrel defense petroleum inventory.

• To provide for the timely completion of my Reform '88 management improvement program I propose an additional $103 million for 1990, to further improve our management and credit systems.

MAJOR PROGRAMS ARE REFORMED TO ACHIEVE DEFICIT REDUCTION

The program structure and incentives underlying many domestic Federal programs need to be altered to promote greater efficiency and cost-effectiveness.

• Current farm price support programs are far too costly. For the period 1986-89 an estimated $130 billion in Federal spending for farm-related assistance programs provided an average of nearly $600,000 per farmer. Much of this assistance goes to farmers with high incomes—more than twice the U.S. family average. I therefore propose outlay reductions for the price and income support programs of $2 billion in 1990 and additional annual reductions of between $2 and $2.5 billion in each year from 1991 through 1994. In addition, I urge reform of the counterproductive sugar price support program.

• The rapidly rising costs of the medicare program need to be moderated. I propose a reasonable increase in the medicare prospective payment system rate and reductions in hospital capital payments and special graduate medical education payments. Also, in an effort to restrain excessive growth in supplementary medical insurance (SMI) costs, I propose extension of the current law SMI premiums, limitations on physician payments, reductions in payments for certain overpriced procedures, and reforms in the durable medical equipment payment system. Medicare spending would still grow by 9 percent between 1989 and 1990 under these proposals—but not by the 13 percent that would occur under current law.

• I also propose reforms in the medicaid program to reduce spending growth between 1989 and 1990 to $1.7 billion, or 5 percent, rather than the $3.3 billion, or 9 percent, that would occur under current law. These reforms reinstate successful incentives employed in the early 1980's. My budget also proposes restructuring Federal financing of administrative expenses to give States greater incentives to operate their administrative systems as efficiently as possible.

• The Government often continues programs at the Federal level that are either duplicative or are no longer needed, or more appropriately undertaken by other levels of government or the private sector. This is the case with the Economic Development Administration, Amtrak, urban mass transit discretionary grants, and most operating subsidies for the Postal Service. Efforts to reverse this situation have been undertaken by prior administrations as well as my own. These programs should be eliminated. The budget proposes termination of 82 programs that are not needed to satisfy national priorities.

• Under current law, outlays for Federal employee retirement and health benefits are estimated to grow from $51.3 billion in 1989 to $55.9 billion in 1990. I propose freezing retirement cost-of-living allowances (COLAs) and other reforms to hold the 1990 level to slightly above that for 1989, reducing the growth that would otherwise occur by $4.4 billion.

ACHIEVING A PROPER FEDERAL ROLE AND IMPROVING MANAGEMENT

As the Federal Government grew, it took on improper responsibilities, and managed its programs inefficiently. We undertook to return the Federal Government to its proper role. We also initiated a major program to improve the management of the remaining programs. These priorities are continued and expanded in this budget.

Privatization.—The Government and the private sector should each do what it does best. The Federal Government should not be involved in providing goods and services where private enterprise can do the job cheaper and better.

Accordingly, my budget proposes that a number of Federal enterprises be opened to the private sector, through public offerings or outright sales. Following our success in the sale of Conrail and the sale of $21 billion in selected loan portfolios, I am proposing sale of the naval petroleum reserves, the Alaska Power Administration, and the Southeastern Power Administration. I also propose sale of the Federal Government's helium-processing assets, excess real property, and a further $4.3 billion in loan portfolios. In addition, my budget proposes legislation to establish a government corporation for the uranium enrichment enterprise, as the first step towards eventual privatization.

The Federal Government should also depend more on the private sector to provide ancillary and support services for activities that remain in Federal hands. Therefore, I propose a number of pilot projects and studies in areas such as the private delivery of advertising materials and urgent mail, and the Department of Justice's prison hospitals.

Improved Management

In 1981, I made a promise to the American people "to limit Government to its proper role and make it the servant, not the master, of the people." My "Management Improvement Program: Reform '88" has helped make Government more efficient and more responsive. We reduced waste and fraud in Federal programs by combining the efforts of the inspectors general into the President's Council on Integrity and Efficiency, resulting in over $110 billion saved or put to better use—and their efforts are continuing.

I saw that the Federal Government did not have effective cash management practices for dealing with what is now a $2 trillion annual cash flow, nor did it have a government-wide credit management program for what is now a $1 trillion portfolio. This resulted in the waste of billions of dollars each year. We built the necessary government-wide controls in both areas and stopped the drain.

Moreover, we began the establishment of the first government-wide financial accounting system, consolidating and making uniform over 400 previously incompatible individual agency systems. This was essential for any well-managed government, and is presently being implemented.

The Federal Government has a major effect on our daily lives through the collection of taxes and fees, the direct provisions of services, the payment of financial assistance through various entitlement programs, and the regulation of commercial enterprises. Through modernization, improved administration, and automated services the Government has made substantial reductions in the time it takes to provide services to the public. As the 21st century approaches, the Federal Government must adapt its role in our society to changing conditions and changing technology. At the turn of the century, the U.S. population will exceed 268 million, with a larger proportion of elderly citizens. Changes in technology and communication will increasingly link the world's economies, trade, capital flows, and travel as never before.

The 1990 Management Report, which is being forwarded to the Congress as part of the 1990 budget submission, reflects the highlights of OMB's report to me on "Government of the Future." That Management Report has been expanded as a beginning to a planning process that has, in part, shaped the proposals in this budget and should become a part of the annual budget process.

BUDGET PROCESS REFORM IS DESPERATELY NEEDED TO CONTINUE DEFICIT REDUCTION

The persistence of the budget deficit is overwhelming evidence that the Federal budget process is fundamentally flawed. Past efforts at "reform" have been directed largely toward protecting a large portion of domestic spending from real fiscal discipline. Fourteen years after passage of the Congressional Budget Act and three years after enactment of the Balanced Budget and Emergency Deficit Control Act, the Federal budget process remains unwieldy and undisciplined. The American people expect better of their political system, and they deserve it.

Under the Congressional Budget Act, Congressional budget resolutions—Congress' proposed budgets—are passed each year. They are not sent to the President for approval and, therefore, are not law. They provide guidance to the committees of Congress, but the guidance is often late and ambiguous. The resolutions are usually passed well after the dates required by law, and well after they are needed by the finance, authorizing, and appropriations committees. Moreover, there is little agreement within Congress on the guidance provided. The House of Representatives and the Senate do not agree, except in the most general terms, on the priorities implied by resolutions both have approved.

Except for last year's on-time performance, Congress self-imposed budget deadlines have usually been missed, and massive continuing resolutions and reconciliation bills have been the rule rather than the exception. These large, cumbersome bills provide cozy hiding places for hundreds of special interest add-ohs, which line-item veto authority would permit the President to challenge.

A number of changes in the budget process-most of which I have recommended before—are needed to instill budget discipline throughout the legislative process. I urge Congress to adopt the following measures:

Balanced budget amendment.—I remain committed to and urge approval of a constitutional amendment requiring a balanced budget. The amendment should require a super-majority vote (at least 60 percent) in the Congress to increase taxes.

Line-item veto.—My successors should be given the authority, subject to Congressional override, to veto line-items in annual appropriations bills, in authorizing legislation that provides or mandates funding for programs, and in revenue bills. Such authority would permit the elimination of substantial waste and would be an effective instrument for enforcing budget discipline.

Enhanced rescission authority.—To enhance the President's ability to control Government spending, I recommend that lineitem veto authority be complemented by a change in law that would require the Congress to vote "yea" or "nay" on any rescission proposed by the President. Current law allows the Congress to duck responsibility by simply ignoring proposed rescissions for 45 days.

Biennial budgeting.—The annual budget process consumes too much time and energy. A biennial budget would reduce the repetitive budget tasks, allow more time for considering key spending and revenue decisions, provide less scope for gimmicks that give the illusion of "savings," such as shifting spending from one year to another without affecting the underlying programs, and permit the realization of real savings that would be possible with a more assured availability of funds. For these reasons, I recommend that biennial budgeting be adopted.

Joint budget resolution.—To ensure the broader scrutiny and stricter discipline that is needed in the congressional budget process , I propose that Congress be required to prepare a budget resolution covering a minimum of two years showing revenue proposals individually and showing spending priorities. The Congress should also be required to submit its budget resolution to the President for his signature or veto. Subsequent legislation which exceeds these allocations should not be considered without super-majority approval.

Individual transmittal of appropriations bills.—The practice of transmitting full-year continuing resolutions covering a number of appropriations bill does not permit the Legislative and Executive Branches to exercise proper scrutiny of those bills. Too often in the past, such continuing resolutions have provided convenient cover for special-interest spending that would not survive close scrutiny. To minimize this risk, I propose that appropriations bills be transmitted individually to the President.

Credit reform.—The effects of credit activities are recorded imperfectly under current budget accounting. The subsidy component of Federal lending programs remains hidden.

To correct this major fault in the budget system, I recommended credit reform legislation two years ago. This legislation, which I am recommending again, would measure the true cost—the present value—of the subsidies provided by Federal credit programs and put that cost on an expenditure basis equivalent to the cost of other Federal programs. This change must be an integral part of the reform of the budget process.

Measuring the effects of budget proposals.—Budget discipline and lasting deficit reduction would be facilitated if the Legislative and Executive Branches were to use a common set of principles for scoring budget proposals and actions on them. I urge that the Congressional Budget Office and the Office of Management and Budget be charged with the responsibility to develop, in consultation with the budget, finance, authorizing, and appropriations committees, a common set of budget scoring principles for use by the Legislative and Executive Branches.

Adoption of these reforms should enable the Federal Government to make informed decisions in a deliberate fashion that fosters rational priorities. The American people deserve no less from their elected representatives.

CONCLUSION

The accomplishments of the American people in past eight years will always be for me a source of pride. However, we must continue our recent progress in reducing the Federal deficit.

Deficit reduction is a key national priority, written into law by the G-R-H Act, which, despite its defects, legislated a process to achieve a balanced budget.

This budget achieves the 1990 target of the amended Act, and projects a budget balanced in 1993. It preserves legitimate programs for the aged and needy, provides for adequate national security, devotes more resources to other high-priority activities, and accomplishes all this without raising taxes. Tax increases are not needed. History shows that they would simply be used by the Congress to increase spending. Tax increases have been overwhelmingly voted down in the last three Presidential elections.

I call upon the Congress to enact this budget. Higher taxes are not needed—as this budget demonstrates—but genuine deficit reduction through moderating the growth in spending is essential to enable the next Administration and Congress to address the Nation's agenda for the future.

Over the past eight years, we Americans have made our world a safer place for freedom because we had the will to reinvigorate our economy, rebuild our defenses, and provide for the less fortunate among us. Together, we achieved a new beginning for our country and prepared the way for the next Administration to build on our accomplishments.

RONALD REAGAN

January 9, 1989