Annual Budget Message to Congress.

To the Congress of the United States:

Pursuant to provisions of law I transmit herewith the Budget of the United States Government for the fiscal year ending June 30, 1938, together with this message, which is a part thereof. The estimates have been developed after careful analysis of the revenues, obligations, and reasonable needs of the Government, and I recommend appropriations for the purposes specifically detailed herein.

PART I

The programs inaugurated during the last four years to combat the depression and to initiate many needed reforms have cost large sums of money, but the benefits obtained from them are far outweighing all their costs. We shall soon be reaping the full benefits of those programs and shall have at the same time a balanced Budget that will also include provision for reduction of the public debt.

The fiscal plans of the Federal Government for these four years have been formulated with two objectives in mind. Our first was to restore a successful economic life to the country, by providing greater employment and purchasing power for the people, by stimulating a more balanced use of our productive capacity, and by increasing the national income and distributing it on a wider base of prosperity. Our second was to gain new advantages of permanent value for the American people. Both of these objectives can be accomplished under a sound financial policy.

Business conditions have shown each year since 1933 a marked improvement over the preceding year. Employment in private industry is increasing. Industrial production, factory payrolls, and farm prices have steadily risen.

These gains make it possible to reduce for the fiscal year 1938 many expenditures of the Federal Government which the general depression made necessary. Although we must continue to spend substantial sums to provide work for those whom industry has not yet absorbed, the 1938 Budget is in balance; and, except for debt reduction of $401,515,000, it will remain in balance even if later on there are included additional expenditures of as much as $1,537,123,000 for recovery and relief. We expect, moreover, if improvement in economic conditions continues at the present rate, to be able to attain in 1939 a completely balanced Budget, with full provision for meeting the statutory requirements for debt reduction.

In carrying out this policy the American people are obtaining lasting benefits. Economic protection of the aged and physically handicapped is being secured through the operations of the Social Security Act. Ability of the farmer to secure a more constant livelihood has been enhanced by the enactment of legislation especially designed for that purpose. The home owner has been benefited through the financing of mortgages at reasonable rates of interest. Investors in securities are being given a larger measure of protection by the Securities and Exchange Act. The market for corporate securities has been restored and industry has been able to finance its long-term requirements on a favorable basis. The rights of labor are being materially advanced through operation of the National Labor Relations Act.

I plan to submit at a later date an estimate of appropriation for additional relief for the fiscal year 1938, which I hope will not exceed the amount of $1,537,123,000, previously mentioned. This hope is based on the assumption that industry will cooperate in employing men and women from the relief rolls in larger numbers than during the past year. Many of those in charge of industrial management, recognizing their obligation to the Nation, have furnished a large measure of employment to the jobless. Today, while it is true that in some sections of the country certain types of skilled workers are still seeking employment, it is nevertheless a fact that the great majority of those now receiving relief belong to the unskilled group. It is my conviction that if every employer or potential employer will undertake during the next six months to give employment to persons now receiving Government help, the national Budget can thereafter be kept definitely in balance. Without such cooperation on the part of employers, the question of a balanced Budget for 1938 must of necessity remain an open one, for the very good reason that this Government does not propose next year, any more than during the past four years, to allow American families to starve.

To continue the gains we are making and to accomplish in the 1939 Budget a complete balance between receipts and expenditures including debt reduction, we must now lay the groundwork of our future fiscal policy.

While relief expenditures should decline with greater reemployment, the normal growth of the country naturally reflects itself in increased costs of Government. Many of the old functions and duties of Government naturally cost more as the industrial and agricultural activities to which they are related expand in volume. The cost of new functions and duties can be substantially reduced only by curtailing the function or the duty. I propose shortly to submit to the Congress a broad plan for placing the Executive branch of the Government on a sounder and more responsible basis of management. The carrying out of such a plan will undoubtedly result in some saving in expenditures; but it must be remembered that what is generally known as overhead represents only a small fraction of total expenditures in any large business, Government or private.

Expenditures must be planned with a view to the national needs; and no expansion of Government activities should be authorized unless the necessity for such expansion has been definitely determined and funds are available to defray the cost. In other words, if new legislation imposes any substantial increase in expenditures either in the expansion of existing or the creation of new activities, it becomes a matter of sound policy simultaneously to provide new revenue sufficient to meet the additional cost. The success of such a policy can be assured only through the full and friendly cooperation of the Congress and the Executive. Of this cooperation I am confident.

PART II

Recommendations

Temporary miscellaneous internal-revenue taxes.—I recommend that the Congress take steps by suitable legislation to extend the miscellaneous internal-revenue taxes which under existing law will expire next June and July, and also to maintain the current rates of those taxes which would otherwise be reduced next June. I consider that the revenue from such taxes or its equivalent is necessary for the financing of the Budget for 1938.

Postal receipts.—The estimates of appropriations for the Postal Service included in the 1938 Budget are predicated upon the continuance during that fiscal year of the 3-cent postage rate for first-class mail other than for local delivery. While the Government makes a profit on first-class mail, the Postal Service is not self-supporting because it carries other classes of mail at a considerable loss. It should be the definite policy of the Government to operate the Postal Service out of postal receipts, and a continuation of the 3-cent rate will be a necessary step toward the accomplishment of this purpose.

Civilian Conservation Corps.—The Civilian Conservation Corps has demonstrated its usefulness and has met with general public approval. It should be continued. I intend shortly to submit a supplemental estimate of appropriation to carry the Corps from March 32, 1937, to the end of the current fiscal year; and I strongly recommend that Congress enact during its present session the necessary legislation to establish the Corps as a permanent agency of the Government.

Expenses of emergency agencies.—There are included in the 1938 Budget, pursuant to the direction of Congress at its last session, estimates of appropriations for the administrative expenses of certain emergency agencies and corporations. Such of the emergency agencies and corporations as may be continued by Congress should have all of their expenditure requirements made subject to the same scrutiny that is given by the Bureau of the Budget to the expenditure requirements of the regular departments and establishments; and I recommend that a provision to that effect be included in any future legislation for the continuance of any such agency or corporation.

PART III

Review of the fiscal years 1936 and 1937, and the fiscal program for 1938

This review concerns itself with the cash actually received and paid out by the Treasury in the fiscal year 1936, with the estimates of receipts and expenditures for the fiscal year 1937, and with the fiscal program for 1938.

Fiscal year 1936

Receipts.—Treasury receipts for the year ended June 30, 1936, amounted to $4,115,956,615, about $295,000,000 less than estimated a year ago. As a result of Supreme Court decisions, the Government lost about $457,000,000 in revenue from taxes levied under the Agricultural Adjustment Act and the Bituminous Coal Act. Had it not been for the invalidation of these taxes, the total revenues received during the fiscal year 1936 would have exceeded the revenue estimates of a year ago by $162,000,000.

The collection of taxes on carriers and their employees, estimated at $33,000,000, has been deferred to the fiscal year 1937 because of pending litigation. The receipts from income taxes were about $7,500,000 less than last year's estimate.

On the other hand, miscellaneous internal-revenue taxes produced $136,488,000 more than was anticipated; customs revenue, $33,621,000 more; miscellaneous receipts, $32,053,000 more; and realization upon assets, $1,483,000 more.

Expenditures.— The total expenditures for the fiscal year ended June 30, 1936 (exclusive of expenditures from postal revenues), amounted to $8,879,798,258, as compared with the estimate of $7,645,301,338 shown in the Budget submitted a year ago. This latter amount did not, however, include $1,673,493,000 for adjusted compensation payments to veterans. The expenditures for the year, excluding these payments, were, therefore, about $439,000,000 less than the estimate.

The total expenditures for recovery and relief were $2,776,796,469 as against an estimate of $2,869,068,187. For the operation and maintenance of the regular departments and establishments of the Government the expenditures amounted to $3,276,872,306 as compared with estimates of $3,482,208,151. For statutory debt retirement there was expended $403,240,150, and for interest on the public debt $749,396,802, the amounts budgeted for these items being $552,025,000 and $742,000,000, respectively.

Deficit and public debt.— The gross deficit for the fiscal year 1936 amounted to $4,763,841,642. Excluding $403,240,150 for statutory debt retirement, there was a net deficit of $4,360,601,492. The estimated net deficit as contained in the Budget submitted a year ago was $2,682,482,392, a difference of $1,678,119,100. As previously indicated, the original estimate has been affected to the extent of $457,000,000 as a result of the invalidation of taxes levied under the Agricultural Adjustment and Bituminous Coal Acts and by the additional expenditure of $1,673,493,000, under the Adjusted Compensation Act. If it had not been for the increase in the deficit due to these causes, the net deficit for the fiscal year 1936 would have been about $452,000,000 less than that originally estimated.

The increase in the gross public debt during the year amounted to $5,077,650,869, but this sum included an increase of the balance in the general fund of the Treasury of $840,164,664. The gross public debt on June 30, 1936, was $33,778,543,494.

Fiscal year 1937

Receipts.—The income of the Federal Government during the fiscal year 1937 will increase sharply over that of 1936. It is expected that the total revenue from all sources (exclusive of postal revenues) will amount to $5,828,151,000. This represents an in crease of $1,712,194,000 over the actual receipts for the fiscal year 1936 and an increase of $173,933,000 over the estimates contained in the 1937 Budget as submitted a year ago.

The general improvement in business conditions and the enactment of the Revenue Act of 1936 have resulted in additional revenues from taxes which will not only make up the loss in revenue due to the Supreme Court decisions invalidating the taxes levied under the Agricultural Adjustment and the Bituminous Coal Acts, but will produce additional income of approximately $174,000,000.

Since the Revenue Act of 1936 materially changes the tax structure, the individual items of revenue as contained in the original 1937 Budget will not be exactly comparable with the individual items in the 1937 Budget as revised in this message.

Income taxes are expected to yield $2,372,900,000, or $946,325,000 more than was received from this source last year; miscellaneous internal revenue, $2,274,968,000, an increase of $265,389,000; customs duties, $446,800,000, an increase of $59,988,000; and realization upon assets $31,830,000, an increase of $26,362,000. In addition, it is expected that the new tax on unjust enrichment provided by the Revenue Act of 1936 will amount to $82,000,000 and that the tax on carriers and their employees will be $134,552,000, including $33,000,000 deferred from the previous fiscal year. The collection of taxes levied under the Social Security Act will begin in the last half of the fiscal year 1937, and it is expected that these taxes will produce additional revenue in the amount of $324,600,000.

The only item of revenue showing any decrease is that of miscellaneous receipts, in the amount of $50,325,000, which is due to reductions in interest payments made to the Treasury by the Reconstruction Finance Corporation.

Expenditures.—From present indications expenditures for the fiscal year 1937 (exclusive of expenditures from postal revenues) will amount to $8,480,804,000. Exclusive of statutory debt retirement and adjusted compensation payments, the total expenditures will amount to $7,512,779,000, an increase over comparable expenditures for 1936 of $709,714,000.

This amount is made up of increases of $371,192,000 on account of the Social Security Act, $85,603,000 on account of interest on the public debt, $194,161,000 for the general public works program, $123,442,000 for national defense, and $221,914,000 for other purposes; and decreases of $93,321,000 for the Veterans' Administration, $74,996,000 for the agricultural adjustment program, and $118,281,000 for the Civilian Conservation Corps.

The amount of the recovery and relief expenditures has been estimated at $2,166,157,000, but there is included in the supplemental expenditure items $650,000,000 from an appropriation of $790,000,000 to be requested of Congress for the purpose of carrying the Works Progress Administration and related programs from February 1 to June 30, 1937. This will increase the estimated expenditures for recovery and relief to $2,816,157,000, an increase of $39,361,000 over 1936. The expenditures in the current fiscal year will include, however, the sum of about $165,000,000 for assistance given to individuals and communities directly or indirectly affected by the widespread drought conditions prevailing during the past summer. If this drought had not occurred, the net cost of recovery and relief for the current fiscal year would have been about $125,000,000 below the cost for the previous fiscal year.

Deficit and public debt.— The current estimates for the fiscal year 1937 show a gross deficit of $2,652,654,000. Deducting public debt retirement, the net deficit will be $2,248,129,000.

The increase in the public debt on account of the deficit, however, will be only $1,348,000,000 since it is anticipated that $900,000,000 of the deficit will be financed from cash on hand. The working balance will be further reduced by net expenditures of about $42,000,000 for trust accounts and $100,000,000 for the retirement of national bank notes now a part of the public debt. This will reduce the working balance from $2,225,000,000 on June 30, 1936, to $1,183,000,000 on June 30, 1937. The gross public debt at the end of the current fiscal year is estimated at $35,026,000,000, an increase over 1936 of $1,248,000,000.

The estimated debt at the end of the fiscal year is based on contemplated expenditures set out in this Budget and does not take into account any change which may occur as a result of the Treasury policy in holding as "inactive" future acquisitions of gold.

Fiscal program for 1938

The expected increase in revenue and decrease in expenditures for relief both reflect the general improvement which has taken place in the economic conditions of the country. The Revenue Act of 1936, which was designed for the purpose of replacing revenue lost through the invalidation of processing taxes, of providing sufficient revenue to amortize the cost of the adjusted compensation payments, and of equalizing tax burdens, gives every indication of satisfactorily accomplishing those purposes. I should like, at this point, to emphasize the importance of maintaining the productiveness of the present tax structure, so that we may properly provide for the fulfillment of our fiscal program.

In legislation enacted during the last session of Congress, which created authorizations for future appropriations aggregating more than $1,500,000,000, there is included about $130,000,000 in the estimates of appropriations contained in this Budget. Such authorizations are contained in the new Federal Highway Act, the Rivers and Harbors and the Flood Control Acts, and the Rural Electrification Act.

There is also included $812,225,000 for social security grants and for the Government's contribution to the old-age reserve account, more than double the expenditures for these purposes in 1937, and there will be for several years still further increases in these requirements. It should be pointed out that these expenditures will be offset to a large extent by the increasing revenues under the Social Security Act.

No estimate of appropriation is presented for the needs of the Civilian Conservation Corps, since its extension beyond March 31 of this year is dependent on the action of Congress. In furtherance of my recommendation for the enactment of legislation to continue it as a permanent agency of the Government, there is included in the "Supplemental Items" an amount sufficient to meet the expenditure requirements for the fiscal year 1938. The following table shows the distribution, on a functional basis, of the expenditure figures contained in this Budget and compares them with similar figures for previous years.

Actual and estimated expenditures of the Government for the fiscal years 1932-38

(Classifications include expenditures from both general and emergency funds)

[In millions of dollars]

Estimated Actual

1938 1937 1936 1935 1934 1933 1932

Regular operating expenditures:

Legislative, judicial, and

civil establishments 771.8 859.0 781.1 597.7 572.5 697.5 978.8

National defense 991.6 964.9 911.6 709.9 540.3 667.8 707.6

Veterans' pensions and

benefits 577.5 1,144.7 2351.4 607.1 556.9 863.2 984.8

Interest on the public debt. 860.0 835.0 749.4 820.9 756.6 689.4 599.3

Total 3,200.9 3,803.6 4,793.5 2,735.6 2,426.3 2,917.9 3,270.5

Public works 908.3 1,146.7 868.7 704.3 551.9 427.7 439.5

Unemployment relief:

Direct relief 13.0 106.7 591.7 1,914.1 715.8 350.7

Work relief (W.P.A. and

C.W.A.) a .2 1,400.5 1,264.4 11.3 805.1

Civilian Conservation Corps (b) 368.0 486.3 435.5 331.9

Total 13.2 1,875.2 2,342.4 2,360.9 1,852.8 350.7

Loans (net) c 153.3 c 419.9 c 175.2 80.5 788.6 874.4 404.0

Subscriptions to stock 17.2 51.5 69.3 156.8 826.5 110.7 627.0

Agricultural adjustment program 482.4 467.6 542.6 743.0 290.3

Less revenues 76.6 521.4 353.0

Net 482.4 467.6 466.0 221.6 d 62.7

Social security 836.0 399.6 28.4

Debt retirement 401.5 404.5 403.2 573.6 359.9 461.6 412.6

Miscellaneous 1.8 2.0 6.8 21.1 8.7

Supplemental items 450.0 750.0

Grand total a 6,158.0 8,480.8 8,803.1 6,854.4 6,752.0 5,143.0 5,153.6

a To be increased by any amount appropriated by Congress for recovery and relief for the fiscal year 1938. As indicated in the message, it is hoped the amount will not exceed $1,537,123,000.

b Funds for continuation of the Civilian Conservation Corps are included under "Supplemental items."

c Excess of credits, deduct.

d Excess of revenues, deduct.

Receipts.—Treasury receipts in the fiscal year 1938 are expected to reach a total of $7,293,607,000, an increase of $1,465,456,000 over similar receipts for 1937 and $3,177,650,000 over 1936. This gain is largely due to an increase in income taxes as a result of improved business conditions and the operation of the Revenue Act of 1936.

The amount expected to be collected in 1938 from income taxes is $3,365,300,000, a gain of $992,400,000 over the fiscal year 1937. Miscellaneous internal revenue will produce $2,508,332,000, or $233,364,000 more than is expected from this source for 1937. The tax on unjust enrichment and the taxes on carriers and their employees from which $82,000,000 and $134,552,000, respectively, will be derived in 1937, will produce no revenue in 1938, since under existing law these taxes expire during 1937. The first full year of tax collections under the Social Security Act will result in revenue of $774,800,000 in 1938, which sum is $450,200,000 greater than the anticipated revenue in 1937, when collections will be for only six months. It is believed that customs revenues will rise from $446,800,000 during the present fiscal year to $463,000,000 in 1938, a gain of $16,200,000. Miscellaneous receipts, however, will decrease $8,950,000, the 1938 collections being estimated at $151,550,000, as compared with $160,500,000 during 1937. From realization upon assets $30,625,000 will be received, while in 1937 receipts from this source will amount to $31,830,000.

Expenditures.—The expenditures for 1938 contemplated under this Budget (exclusive of those from postal revenues) will total $6,157,999,000, or approximately $2,323,000,000 less than is now estimated for 1937. General expenditures for regular activities amount to $5,841,968,000, as compared with $5,664,647,000 in 1937, an increase of $177,321,000. The 1937 estimate, however, contains an amount of $563,500,000 for completion of adjusted compensation payments to veterans, so that the comparable increase over 1937 is $740,821,000. For recovery and relief there is included in the expenditures for 1938 the amount of $316,031,000, which, of course, is not the full amount that will be required for relief during that year. As previously indicated, it is our present hope that the additional amount to be requested for this purpose will not exceed $1,537,123,000. Thus the total expenditure for recovery and relief during 1938 would be $1,853,154,000, or $963,003,000 less than the amount estimated for 1937. Again I emphasize the contribution which employers can make to this attainment.

The general expenditures include $860,000,000 for interest on the public debt, an increase of $25,000,000 over the amount for the present fiscal year, and $401,515,000 for statutory debt retirements, a decrease of $3,010,000. Exclusive of the service on the public debt and the payment of adjusted compensation to veterans, there is a net increase of $718,831,000 in expenditures for regular activities as compared with 1937. This increase is accounted for as follows: For increased requirements under the Social Security Act, $436,337,000; for additional expenditures under the general public works program, $132,519,000; for national defense to provide for the increased strength of the Army as directed by Congress and to provide for replacement of naval vessels in accordance with existing authorizations, $92,882,000; for the necessary funds for the activities of the Railroad Retirement Board and for rural electrification, $39,566,000; and for increased needs of other activities, $17,527,000.

Surplus and public debt.—The surplus for the fiscal year 1938, as presented in this Budget, is $1,135,608,000, after providing for debt retirement. Excluding provision for debt retirement, the surplus will amount to $1,537,123,000. As I have previously stated, it is hoped the additional needs for relief during the fiscal year 1938 will not require expenditure of more than this latter amount. On this basis the estimated gross public debt, on June 30, 1938, will be about the same amount as at the close of the fiscal year 1937. This does not take into account any change which may occur as a result of the Treasury policy in holding as "inactive" future acquisitions of gold.

Appropriations.— The total appropriations recommended in this Budget aggregate $6,839,000,000. including those for the Postal Service, District of Columbia, and probable supplemental items, while the appropriations already made and prospective supplemental items for the fiscal year 1937, exclusive of requirements for recovery and relief, total $6,261,000,000, an increase of $578,000,000 for 1938. This increase is due to additional appropriations amounting to $309,000,000 on account of the Social Security Act; $80,000,000 required under the general public works program; and $189,000,000 on account of departmental requirements, including the national defense. The appropriations made and contemplated for recovery and relief for 1937 total $2,215,000,000, whereas it is hoped that corresponding appropriations for 1938 will not exceed $1,537,123,000.

PART IV

The District of Columbia

The first section of the 1937 District of Columbia Appropriation Act, approved June 23, 1936 (Public No. 762, 74th Congress), contains the following provision:"Not to exceed $50,000 shall be available for expenditure, under the direction of the President, for making an independent study of the fiscal relations between the United States and the District of Columbia and enabling him to report to Congress at the beginning of the next regular session, what, in his judgment, is a fair and equitable amount to be paid by the United States as an annual contribution toward the expenses of the government of the District of Columbia; such sum shall be available for personal services without regard to the civil service laws and the Classification Act of 1923, as amended, and for such other expenditures as may be necessary in connection with such study."

Pursuant to the above, I appointed a director and an advisory committee of three members to conduct an independent study of the various elements and conditions affecting the fiscal relations between the United States and the District of Columbia.

The report contains detailed findings and recommendations with the supporting data and information collected from the Federal and District Governments in Washington and from 17 comparable American cities and the capital cities of 21 foreign countries.

The application of the basic principles and recommendations as outlined and detailed in the report is reflected in the following 3-point formula, which I recommend be carefully considered by the Congress with a view to enacting such legislation at this session as may be necessary to establish equitable fiscal relationships between the two Governments.

I. Intergovernmental contractual services.-Contractual arrangements shall be established for the reimbursement of the cost of specific intergovernmental services supplied either Government by the other. Appropriations therefor shall be included in the respective annual departmental budgets.

II. Capital outlays o[ joint interest.—The National Capital Planning Commission (proposed in the report) shall determine the extent of the respective Federal and District interests in capital outlays and improvements to be included in the District budget.

III. Per capita governmental costs.— Pending the grant of broader powers of local control over purely local affairs, the excess of the District governmental costs per capita over the average of those in comparable cities shall be assumed by the Federal Government: Provided, however, That such excess District governmental costs shall be assumed only after allowance has been made for reimbursements due to unusual costs occasioned by Congressional enactments.

I also recommend that, concurrently with enactment of any legislation which carries into effect the provisions of this continuing formula, the substantive law providing for annual Federal contributions of a fixed percentage of District appropriations be repealed and that the system of annual Federal lump-sum contributions be abandoned.

The application of this formula to the 1938 Budget estimates would provide for a net reimbursement by the Federal Government to the District of Columbia of $2,533,357, made up as follows:

I. Intergovernmental contractual services $1,996,407

II. Capital outlays 536,950

III. Excess per capita District of Columbia governmental

COSTS

Total $2,533,357

After the application of the formula there will still be a deficit in the general revenue account of the District of Columbia of about $9,800,000, which will make it necessary, of course, to provide additional revenue. Sources of additional revenue are indicated in the report.