Special Message to the Congress on Fiscal Policy.

To the Congress of the United States:

Clearly this Nation must come to grips with the problem of an inflation that has been allowed to run into its fourth year. This is far too long, and it has already caused substantial distortions in our economy.

Inflation is a form of economic aggression against the very young and the very old, the poor and the thrifty. It is these Americans who are largely defenseless against the kind of price increases for food, clothing, medicine, housing and education that have swept over the Nation in the 'last few years.

Government has two major instruments for dealing with this problem. One is monetary policy, which should continue its program of restraint. The other is fiscal policy--the management of the Federal budget--which must turn away from budgets which have propelled the inflation, and turn instead to one with a strong surplus that will help to curb it.

The prospect of a thin budget surplus or a return to deficits would again nudge monetary policy off course. The result, as always, would be further increases in interest rates, a dangerously overheated economic engine, and the threat of accelerating the advance of the price level. Because the problem of inflation was neglected far too long, we cannot risk even a neutral budget policy of narrow balance.

Only a combined policy of a strong budget surplus and monetary restraint can now be effective in cooling inflation, and in ultimately reducing the restrictive interest rates forced on us by past policies. This is fundamental economics, and we intend to deal with fundamentals.

We are determined to keep faith with America's wage earners, farmers and businessmen. We are committed to take every necessary action to protect every American's savings and real income from further loss to inflation.

The budget for the year beginning July 1, 1969, submitted in January, estimates the surplus at $3.4 billion. However, current examination of this budget reveals that some of its estimates of expenditures were low. For example, interest on the Federal debt will be far more than was estimated. This, along with such items as an underestimate of farm price support payments and a substantial overestimate of offshore oil lease receipts, means that a current analysis of the budget submitted in January shows a reduction in the surplus of $1.3 billion for this fiscal year and $1.7 billion for the fiscal year 1970.

Thus, half of the projected 1970 surplus has disappeared before the year begins. Similarly, more than half of this year's projected surplus of $2.4 billion will not be realized--and for the same reasons.

ON THE MATTER OF CUTTING EXPENDITURES

To produce a budget that will stop inflation, we must cut expenditures while maintaining revenues. This will not be easy. Dealing with fundamentals never is. I intend to submit budget revisions which will reduce Federal spending in fiscal 1970 significantly below the amount recommended in January, even before those previous figures have been adjusted to reflect current conditions.

ON THE MATTER OF MAINTAINING REVENUES

I am convinced that the path of responsibility requires that the income tax surcharge, which is expected to yield $9 1/2 billion, be extended for another year. As I have said before, the surcharge is a temporary tax that must be ended as soon as our commitments in Southeast Asia and economic conditions permit. Because of budget and economic conditions, I reaffirm my support of the recommendation President Johnson made last January that the surcharge be extended, and I am transmitting to the Congress a request that this be done.

In addition, the scheduled reductions in the telephone and passenger car excise taxes must be postponed, and user charges equal in revenue yield to those now in the budget should be enacted. Together, these will produce close to $I billion in revenue next year.

On the question of tax reform, this Administration remains committed to a more equitable and more efficient tax structure. In the coming month, the first specific proposals of that reform will be coming up to the Congress from the Treasury Department.

Taken together, these actions to reduce spending and maintain revenues will produce the strong budget surplus urgently needed to meet the inflationary threat.

Moreover, by proving Government's serious intent to counter the upward spiral of prices and wages, we will create conditions which will encourage the private sector to stop assuming a high rate of inflation in long-range planning.

Courageous Government action will modify the inflationary psychology which now afflicts business, labor and consumers generally. It is particularly hard on small business, and those of modest means in the management of their incomes and savings.

This ordering of our economic house-distasteful as it is in many respects--will do much to slow down the rise in the cost of living, help our seriously weakened position in international trade, and restore the sound basis for our on-going prosperity.

RICHARD NIXON

The White House

March 26, 1969