Annual Budget Message to the Congress, Fiscal Year 1965.

To the Congress of the United States:

This is the budget of the United States Government for 1965.

The preparation of this budget was the first major task to confront me as President, and it has been a heavy one. Many decisions of great importance have had to be made in a brief span of weeks. I have done my best, and I am satisfied that the budget which I am sending to the Congress will advance our Nation toward greater national security, a stronger economy, and realization of the American dream of individual security and equal opportunity for all of our people.

In formulating my budget, I have been guided by two 'principles:

I have been guided by the principle that spending by the Federal Government, in and of itself, is neither bad nor good. It can be bad when it involves overstaffing of Government agencies, or needless duplication of functions, or poor management, or public services which cost more than they are worth, or the intrusion of government into areas where it does not belong. It can be good when it is put to work efficiently in the interests of our national strength, economic progress, and human compassion.

I have been guided by the principle that an austere budget need not be and should not be a standstill budget. When budgetary restraint leads the Government to turn its back on new needs and new problems, economy becomes but another word for stagnation. But when vigorous pruning of old programs and procedures releases the funds to meet new challenges and opportunities, economy becomes the companion of progress.

This is, I believe, a budget of economy and progress. On the one hand, it calls for a reduction from the preceding year in total administrative budget expenditures--and it is only the second budget in 9 years to do so. It calls for a substantial reduction in total civilian employment in the executive branch--and it is the first budget to do so since the practice of totaling the employment estimates in the budget was initiated in January 1956. It cuts the deficit in half, and carries us a giant step toward the achievement of a balanced budget in a full-employment, full-prosperity economy.

On the other hand, this budget safeguards the peace by providing for the further strengthening of the most formidable defense establishment the world has ever known; it recommends continued military assistance to those nations menaced by Communist aggression, direct and indirect; it includes economic assistance to those nations which are willing to take the steps necessary to guard their freedom and independence through economic self-help; it provides the funds necessary to advance our mastery of space toward the achievement of a manned lunar landing in this decade; it provides for the sound management and development of our natural and agricultural resources; and in its recommendations relating to education, housing, manpower training, health, and employment opportunities for youth, it provides more funds than ever before in our history for the fuller development of our Nation's most important resource--its people.

Moreover, this budget makes provision for the initiation of a new and major effort to break the vicious circle of chronic poverty, which denies to millions of our fellow citizens a just participation in the benefits of life in our country. We owe to every young person in America a fair start in life--and this means that we must attack those deficiencies in education, training, health, and job opportunities by which the fetters of poverty are passed on from parents to children. The attack on poverty must rely on local initiative and leadership; and the resources of the local, State, and Federal Governments must be mobilized to support these efforts. I will shortly send to the Congress a special message conveying my recommendations for the attack on poverty.

The urgent and necessary program increases recommended in this budget will be financed out of the savings made possible by strict economy measures and by an exhaustive screening of existing programs. As a result of the highly successful cost reduction program launched in 1962 by the Secretary of Defense, the 1965 program of the Department of Defense will require over $2 billion less in appropriations than would otherwise be the case--a sum greater than the 1965 cost of the new programs I am recommending to the Congress. Department of Defense expenditures will decline by more than $1 billion from 1964 to 1965, and additional savings are expected to be realized in agriculture, atomic energy, postal services, veterans benefits, and in various lending programs through substitution of private for public credit.

My proposals call for administrative budget expenditures in 1965 and $97.9 billion--$900 million less than was requested in the 1964 budget and $500 million less than I now estimate will be spent in 1964. This reduction in expenditures will be achieved despite a steady growth in the workload of nearly every civilian agency of Government-ranging all the way from the number of income tax returns to the number of visitors to our national parks. The reduction in expenditures will be achieved despite built-in and relatively uncontrollable expenditure increases resulting from past commitments and legislative provisions, including higher costs for interest on the debt and for military and civilian pay increases required by law.

Administrative budget receipts are expected to increase in 1965 to $93.0 billion, $4.6 billion over 1964. This increase, reflecting the expectation of a strongly growing economy spurred by prompt enactment of the tax program, takes into account the estimated revenue losses from the new tax rates.

The resulting administrative budget deficit of $4.9 billion for 1965 is $5.1 billion below the deficit now estimated for the current year and marks an important first step toward a balanced budget.

The traditional administrative budget does not include a number of important Federal activities financed through trust funds, such as social security and Federal aid to highways. These activities and the special taxes which finance them have substantial economic effects and serve significant public purposes. A comprehensive disclosure of Federal finances is provided by the consolidated cash statement of Federal receipts from and payments to the public.

SUMMARY OF FEDERAL RECEIPTS AND PAYMENTS

[ Fiscal years. In billions ]

1963 1964 1965

Description actual estimate estimate

FEDERAL RECEIPTS

Administrative budget receipts $86. 4 $88.4 $93.0

Trust fund receipts 27.7 30. 2 30. 9

Deduct: Intragovernmental transactions 4.3 4.2 4.1

Total cash receipts from the public 109.7 114.4 119.7

Add: Adjustment from cash to accrual basis 0.6 --0.1 --0.2

Deduct: Receipts from loans, property

sales, and other adjustments 1.0 0.7 0.7

National income account receipts--Federal sector 109.3 113.6 118.8

FEDERAL PAYMENTS

Administrative budget expenditures 92. 6 98.4 97.9

Trust fund expenditures (including

Government-sponsored enterprises) 26.5 29.3 29.4

Deduct: Intragovernmental transactions

and other adjustments 5.4 5.0 4.6

Total cash payments to the public 113.8 122.7 122. 7

Add: Adjustment from cash to accrual basis 0.6 0.1 1.1

Deduct: Disbursements for loans, land

purchases, and other adjustments 1.8 3.7 2.3

National income account

expenditures--Federal sector 112. 6 119.1 121.5

EXCESS OF RECEIPTS (+) OR PAYMENTS (--)

Administrative budget --6. 3 --10.0 --4.9

Receipts from and payments to the public --4.0 --8.3 --2.9

National income accounts--Federal sector --3.3 --5.5 --2.8

On the cash basis, total payments to the public are estimated at $122.7 billion for 1965. Total receipts from the public are estimated at $119.7 billion, resulting in a $2.9 billion excess of payments over receipts. The estimates of cash payments and receipts in 1965 reflect the normal, built-in growth of trust fund benefit payments, and the employment and excise tax revenues which finance them.

Another measure of Federal finances-one which emphasizes the impact of the Government's fiscal activities on the economy-is based on the national income accounts. Under this concept, Federal fiscal data, including the trust funds, are generally estimated on an accrual rather than a cash basis, and eliminate transactions, such as loans, which do not directly result in production and income. These data indicate an excess of payments over receipts of $2.8 billion in fiscal year 1965.

THE ECONOMY AND TAX REDUCTION

The Federal budget is a detailed plan for managing the business of Government, but it is more than that: In setting the relationship between Government expenditures and taxation, the budget is also a powerful economic force which can help or hamper our efforts to achieve stable prosperity and steady growth.

The expenditure proposals in this budget are ample to satisfy our most pressing needs for governmental services, but the broad economic stimulus needed to carry our economy to new high ground in production, income, and employment will not come principally from Government outlays. I believe--as did President Kennedy--that the primary impetus needed to move our economy ahead should come, in present circumstances, from an expansion of the private sector rather than the public sector. Therefore, the earliest possible enactment of the tax reduction bill now before the Congress is an integral and vital part of my budgetary proposals.

Our country is currently in its fourth postwar period of economic expansion--a period which started in February 1961, and has now lasted nearly 3 years.

Preliminary estimates indicate that the Nation's total output of goods and services-our gross national product--rose to $585 billion in calendar year 1963, an increase of 5.4% over 1962.

Over the same period, personal income rose 4.7%, industrial production 5.1%, and corporate profits 10.5%.

Price stability has been maintained for the sixth consecutive year.

This is a record of strong expansion--and yet the expansion has not been strong enough to absorb the margin of idle workers and idle plant capacity which continues to tarnish our economy's performance. Almost 3 years after the trough of the last recession, and despite the creation of 2 1/2 million new jobs in our economy, the unemployment rate now stands at 5 1/2%. Our factories continue to produce below their optimum rate. As a nation we are producing at a rate at least $30 billion below our comfortable capacity. This is a gap for which we are paying a high price in idle resources, both human and physical.

This gap must be closed. It must be closed--as President Kennedy urged a year ago--by loosening "the checkrein of taxes on private spending and productive incentives." It must be closed promptly, for the unemployed have already waited too long for jobs which can be created simply by allowing our people to spend and invest a greater part of the money they earn.

The bill approved by the House of Representatives last September meets the fundamental requirements for tax action in 1964. I propose only two changes in that bill:

--The bill provides for a reduction in the rate of withholding on wages and salaries from 18% to 15% for calendar 1964, starting on January 1, 1964. Since that date has already been passed, the institution of the 15% withholding rate at a later date in 1964 would require substantial additional refunds to taxpayers next year. A corresponding part of the economic stimulus provided by the tax program would be delayed until then. Hence, I propose that the withholding rate be reduced to 14% rather than 15%, effective as soon as possible after enactment. This will assure that the beneficial effects of the 1964 tax reductions are felt immediately, instead of being postponed, in part, for a year. It will simplify procedures for taxpayers and their employers by making unnecessary another change in the withholding rate in 1965, as provided in the House bill. Moreover, the change will also maintain approximately the same division between the fiscal year 1964 and 1965 revenue impact of tax reduction as would have resulted from the House bill. The revenue estimates in this budget assume approval of this change.

--The House bill fails to close the loophole by which property transferred at death now escapes capital gains taxation, but it nevertheless would reduce the rate of taxation on capital gains. Without the former provision, the latter provision is unwarranted, and it should be deleted from the bill.

With these two changes, I urge the enactment of the House bill by the Senate.

With prompt enactment of the tax program, economic expansion in 1964 should proceed briskly. Reflecting the effects of the first stage of the tax reduction, the gross national product in calendar year 1964 should rise to about $623 billion, plus or minus $5 billion. This is substantially higher than the GNP which could be expected in the absence of prompt enactment of the tax legislation. In fact, since expectations of a tax reduction have been incorporated into the forward planning of many business firms, the effect on the economy of failure to pass the legislation swiftly might be deeply disturbing.

As the tax reduction takes full effect, its stimulus to private consumption and investment will shrink the $30 billion gap between the Nation's actual and potential output, and provide approximately 2 million additional jobs for the unemployed and the new workers entering the labor force. As economic activity expands, and personal and business incomes increase, Federal revenues will also rise. The higher revenues, combined with continuing pressure for economy and efficiency in Federal expenditure programs, should hasten the achievement of a balanced budget in an economy of full prosperity.

Income tax revisions.--The bill currently before the Senate will reduce income tax liabilities by $11.1 billion. Individual rate reductions and structural changes account for about 80% of the total tax reduction. The remaining 20% reflects a reduction in corporate taxes, providing enhanced incentives for new investment.

Once the tax bill becomes fully effective in calendar year 1965, the entire schedule of individual income tax rates will fall from the present range of 20% to 91% to a range of 14% to 70%, and the current first $2,000 bracket of taxable income will be divided into four successive brackets of $500 each.

RECEIPTS FROM THE PUBLIC

[ Fiscal years. In billions ]

1963 1964 1965

Source actual estimate estimate

Administrative budget receipts:

Individual income taxes $47.6 $47.5 $48.5

Corporation income taxes 21. 6 23.7 25. 8

Excise taxes 9.9 10. 2 11. 0

Other 7.3 7.0 7.7

Total administrative budget receipts 86.4 88.4 93.0

Trust fund receipts:

Employment taxes 14.9 16. 8 17.0

Deposits by States, unemployment insurance 3.0 2.9 2.8

Excise taxes 3.3 3.5 3.5

Federal employee and agency

payments for retirement 1.9 2.0 1.9

Interest on trust investments 1.5 1.6 1.7

Veterans life insurance premiums 0.5 0.5 0.5

Other 2.7 3.0 3.5

Total trust fund receipts 27.7 30.2 30.9

Intragovernmental transactions (deduct) 4.3 4.2 4.1

Total receipts from the public 109.7 114.4 119.7

All corporations will pay lower tax rates, with incorporated small businesses receiving the largest proportionate tax rate reduction because the tax rate on the first $25,000 of their taxable income is reduced from 30% to 22%. Large corporations (with estimated tax liabilities above $100,000) will have to speed up their tax payments in order to reduce the lag between the time when taxable profits are earned and the time when taxes are paid; however, this speedup plan is gradual, shifting the timing of corporation tax collections a bit each year for the next 7 years.

The combination of the investment tax credit and the revision of depreciation guidelines achieved in 1962, plus the $2 1/2 billion tax rate reductions and structural changes proposed for corporations in the pending bill, will result in a total reduction of about $5 billion in corporate tax liabilities.

The bill also contains many changes in the income tax laws that are designed to reduce the weight of taxes where the burden is most unfair, and to correct special tax advantages which will no longer be equitable under the proposed structure.

Excise tax extension.--The Congress should extend several current excise tax rates which will otherwise decline or expire on July 1, 1964. These excise taxes have been continued at the present rates through annual extensions for the past several years. Without extension, revenues would fall by $1.7 billion during fiscal year 1965.

User charges.-- Many Federal Government programs furnish specific, identifiable benefits to the individuals and businesses using them. Equity to all taxpayers demands that those who enjoy the benefits should bear a greater share of the costs. I am, therefore, renewing recommendations for the enactment of user charges for commercial and general aviation and for transportation on inland waterways.

Appropriate fees should also be assessed in other areas where the Government provides special services. New legislation is necessary in several cases to carry out this policy--such as a revision of patent fees to reflect today's costs more adequately--and appropriate proposals are either before the Congress or will be forwarded this year.

NEW OBLIGATIONAL AUTHORITY

Obligations incurred by Federal agencies under authority provided by the Congress are the forerunners of Federal expenditures. Expenditure control, therefore, depends substantially upon careful control of obligations.

In this budget, new obligational authority of $103.8 billion is proposed in the administrative budget for fiscal year 1965. This is $1.2 billion above the amount now estimated for fiscal year 1964, but is $4.1 billion less than was originally requested for the current year in the 1964 budget. The amount recommended for 1965 includes $50.9 billion for the Department of Defense (including military assistance), $120 million less than the amount for the current year.

Significant changes in new obligational authority from 1964 to 1965 include increases of $1.5 billion for the Department of Health, Education, and Welfare, mainly as a result of new health and education proposals; $361 million for the Department of Labor because of the recently amended manpower training program and the proposed youth employment legislation; and $500 million for special appropriations requested for new community programs to attack poverty. Major decreases include $1.5 billion for the Housing and Home Finance Agency, reflecting nonrecurring authority requested in 1964, and $1.3 billion for the Department of Agriculture.

Of the total amount proposed, $40 billion will become available under permanent authorizations without further congressional action, including $27.6 billion becoming automatically available as revenues flow into the trust funds. In the administrative budget, the principal permanent appropriation is to pay the interest on the public debt which in 1965 is estimated at $11 billion, $0.4 billion more than in 1964.

For the current fiscal year, the Congress is requested to enact $4.2 billion of additional new obligational authority to provide needed funds for housing and space programs and to finance legislation enacted last year for which no appropriations were provided-such as increased military compensation, broadened manpower development activities, aid to higher education, vocational education activities, and mental retardation programs. Including supplemental authorizations, a total of $102.6 billion in new obligational authority is estimated for fiscal year 1964 in the administrative budget.

NEW OBLIGATIONAL AUTHORITY

[ Fiscal years. In billions ]

1963 1964 1965

Description actual estimate estimate

Total authorizations requiring current

action by Congress:

Administrative budget funds $90. 6 $90.0 $91.4

Trust funds 3.9 0.4 4.2

Total authorizations not requiring current

action by Congress:

Administrative budget funds 11.6 12.6 12.4

Trust funds 24.7 31.3 27.6

Total new obligational authority:

Administrative budget funds 102.3 102.6 103.8

Trust funds 28.6 31.7 31.8

GOVERNMENT PROGRAMS AND EXPENDITURES

The expenditures proposed in this budget are necessary to meet the needs of our growing society, promote the basic strength of the Nation, honor our worldwide commitments, and fulfill our financial obligations. Between 1955 and 1965, our population will grow by almost 30 million people, about 17%, with the largest increases in the very young and the very old age groups. To keep pace, the Federal Government has had to continue existing public services and provide the additional services needed for future growth. The expansion of the economy, even though falling short of its potential in recent years, has helped provide the resources for both increased public and private services.

We will continue to experience rapid population growth while we seek to improve the rate of economic growth, and over the long run this will put upward pressure on Government expenditures for civilian purposes. Nevertheless, wherever and whenever possible, we should try to reduce costs, curtail less urgent activities, and find other savings to permit essential new or growing services to be financed at the least cost to the taxpayer. That has been the policy in this budget. Essential services have been provided while administrative budget expenditures decline by over one-half billion dollars between the fiscal years 1964 and 1965.

The attack on poverty.-- In this budget I have provided over $1 billion of new obligational authority to begin an all-out attack on the problem of poverty in the United States. In a nation as rich and productive as ours we cannot tolerate a situation in which millions of Americans do not have the education, health, and job opportunities for a decent and respected place as productive citizens. The vicious circle of poverty--in which one generation's poverty, ignorance, and disease breed the same problems for the next--must be broken. I propose to break that circle by raising the educational, skill, and health levels of the younger generation, increasing their job opportunities and helping their families to provide a better home life. I 'propose a program which relies upon the traditional and time-tested American methods of organized local community action to help individuals, families, and communities to help themselves.

THE 1964 AND 1965 BUDGETS COMPARED

[ In billions ]

Change from prior year (administrative budget)

New obligational Expenditures

authority

1964 1965 1964 1965

budget budget budget budget

document document document document

National defense $+2.2 $-0.2 $+2.4 $-1.3

Space +2.0 +0.1 +1.8 +0.6

Interest +0.3 +0.4 +0.3 +0.4

Subtotal +4.6 +0.3 +4.6 --0.3

Health, labor, welfare, and

education (including attack on

poverty) +2.1 +2.6 +0.9 +0.9

All other -2.0 --1.7 --0.9 --1.1

Total +4.7 +1.2 +4.5 --0.5

PAYMENTS TO THE PUBLIC [Fiscal years. In billions]

Function 1963 1964 1965

actual estimate estimate

Administrative budget expenditures:

National defense $52.8 $55.3 $54.0

International affairs and finance 2.6 2.4 2.2

Space research and technology 2.6 4.4 5.0

Agriculture and agricultural resources 7.0 6.1 4.9

Natural resources 2.4 2.5 2.6

Commerce and transportation 2.8 3.2 3.1

Housing and community development -0.1 -0.2 -0.3

Health, labor, and welfare 4.8 5.5 5.8

Education 1.2 1.3 1.7

Veterans benefits and services 5.2 5.4 5.1

Interest 10.0 10.7 11.1

General government 2.0 2.2 2.2

Allowances:

Attack on poverty 0.2

Civilian pay comparability 0.5

Contingencies 0.2 0.3

Interfund transactions (deduct) 0.5 0.7 0.6

Total administrative budget expenditures 92.6 98.4 97.9

Trust fund expenditures:

Health, labor, and welfare 21.9 22.7 23.5

Commerce and transportation 2.9 3.4 3.5

National defense 0.7 0.9 1.2

Housing and community development (¹) 1.6 0.5

Veterans benefits and services 0.8 0.6 0.5

All other 0.8 0.6 0.7

Interfund transactions (deduct) 0.5 0.5 0.5

Total trust fund expenditures 26.5 29.3 29.4

Intragovernmental transactions and

other adjustments (deduct) 5.4 5.0 4.6

Total payments to the public 113.8 122.7 122.7

1 Less than one-half million dollars.

Poverty stems from no one source, but reflects a multitude of causes. Correspondingly, a number of individual programs have been developed over the years to attack these individual problems of job opportunities, education, and training. Other specific programs deal with the closely related areas of health, housing, welfare, and agricultural services. I propose to establish a means of bringing together these separate programs--Federal, State, and local--in an effort to achieve a unified and intensified approach to this complex problem, in which each separate element reinforces the others.

Under this proposal, locally initiated, comprehensive community action programs would be developed, to focus the various available resources on the roots of poverty in urban and rural areas. I shall shortly transmit to the Congress legislation initiating this attack and authorizing, in 1965, $500 million of new obligational authority specifically for this purpose. Additional funds for the local community action programs will be available from existing agency programs. Moreover, other legislative proposals, recommended elsewhere in this message, will contribute important new resources to the attack on poverty. The Youth Employment Act, the National Service Corps, and the community work and training program, are examples of such proposals. Of particular significance will be the education proposal for project grants to meet special educational needs. All told, in 1965 more than $1 billion of Federal resources under existing and proposed legislation would be concentrated, through local community action programs, in an intensive and coordinated attack on poverty.

Special emphasis is also being given to the economic needs of the 165,000-square-mile Appalachian region of the United States, which has been largely bypassed in the growth of prosperity in recent years. This emphasis by the Government, combined with the resources and activities of State, local, and private institutions and enterprises in the region, will be directed toward the development of the natural resources of the region, and the promotion of better employment opportunities for its people.

National defense.-- To preserve freedom and protect our vital national interests in these recent years of uneasy peace, this Nation has invested heavily in the improvement of its defenses. We have chosen not to concede our opponents supremacy in any type of potential conflict, be it nuclear war, conventional warfare, or guerrilla conflict. We have now increased the strength of our forces so that, faced with any threat of aggression, we can make a response which is appropriate to the situation. With present forces and those now planned, we will continue to maintain this vital military capability.

During the past 3 years, we have achieved notable increases in military readiness, including:

--A 100% increase in the number of nuclear weapons available in the strategic alert forces.

--A 60% increase in the tactical nuclear forces deployed in Western Europe.

--A 45% increase in the number of combat-ready Army divisions.

--A 35% increase in the number of tactical fighter squadrons.

--A 75% increase in airlift capability to improve mobility.

These rapid gains result from an increase in cash payments for military purposes from

$47.7 billion in 1961 to $56.0 billion in 1964. Along with the high level of preparedness we have now achieved, vigorous efforts to promote economies in the management of our Armed Forces have been producing significant savings. We are therefore able to propose a decrease of $800 million in cash outlays ($1.3 billion in the administrative budget) for national defense in fiscal year 1965 while maintaining our position of strength.

Nevertheless, national defense expenditures will remain high. These payments, estimated at $55.2 billion ($54.0 billion in the administrative budget) in 1965, will provide for all essential military purposes, including substantial improvements in our present and planned military capabilities. For example, the 1965 budget provides for additional Minuteman missiles, further improvements in our air, land, and sea tactical forces, procurement of additional airlift aircraft, and continued research and development to ensure our ability to counter new threats.

To reinforce the total defense effort, the Congress should authorize funds for fallout shelters in public buildings, schools, hospitals, and other nonprofit institutions.

Although we continue to seek a relaxation of tensions, we cannot relax our guard. While the nuclear test ban treaty is a hopeful sign, neither that treaty nor other developments to date have, by themselves, reduced our defense requirements. We will continue underground nuclear testing, maintain our above ground test facilities in ready condition, maintain strong weapons laboratories, and continue the development of detection devices. However, because of the nuclear strength we have achieved, it will be possible to cut production of enriched uranium by 25% and to shut down four plutonium piles.

Our inventories of strategic and critical materials are being reviewed to assure that they are necessary for current civil and military defense requirements. I recommend that the Congress enact legislation to improve the management of these materials and simplify the disposal of those no longer needed.

International affairs and finance.--The less-developed nations are engaged in a critical struggle for political independence and economic betterment. This struggle takes many forms, from combating armed aggression and subversion in Vietnam to advancing national efforts to reduce poverty and illiteracy in South Asia, Latin America, and other areas. Upon the outcome of this struggle will depend the stability and security of much of the world. Through our programs of foreign assistance, we provide aid to these free peoples and thereby advance our own vital interests. It is essential that we continue, with a small portion of our great resources and technical knowledge, to promote in the emerging nations hope and orderly progress, replacing misery, hostility, and violence.

The $2.4 billion of new obligational authority recommended for 1965 in this budget for the programs of the Agency for International Development is $1.1 billion less than originally requested for 1964. It will make the total 1965 obligational availability for the program equivalent to the amount provided by the Congress for 1964 including unobligated funds carried forward from the prior year. The 1965 recommendation represents a prudent assessment of the funds required to fulfill the obligations we have undertaken and the opportunities we seek in a changing and challenging world.

The amount requested reflects a continuing effort to increase the effectiveness and efficiency of our assistance programs. We are reducing AID staffing by several hundred employees, proportionately one of the largest reductions of any agency in Government. We are stressing the necessity for recipient countries to take adequate self-help measures. The 1965 request reflects the successes we have had in reducing the dependence of some nations upon the low-cost foreign aid loans made by the Agency for International Development; by 1965 a number of countries will have turned to other sources and types of loans more consistent with their increasing economic strength.

On the other hand, the 1965 budget does not allow for sudden opportunities that sometimes present themselves in international economic affairs. We must be able to take quick advantage of situations in which resolute and decisive actions can turn threats to the free world into constructive evidence of our determination to preserve the peace. We must also be able to take advantage of opportunities in which swift action can advance us dramatically along the road to free world cooperation and prosperity. Should such opportunities arise, I will request prompt action by the Congress to provide any additional funds needed to meet emerging requirements.

Our partners in the Alliance for Progress will continue to receive our most determined support and generous cooperation. Recent improvements in the organization of the Alliance should permit an acceleration of this program and foster ever greater hemispheric unity. I am therefore proposing an expanded bilateral program for the Alliance in 1965. Upon completion of negotiations and arrangements with other member countries, legislation will also be proposed to provide additional funds for long-term, low-interest loans by the Inter-American Development Bank.

The sincerity of our purpose overseas is exemplified by the highly successful work of the Peace Corps. As a result of this record and the gratifying flood of requests for the services of the Corps, funds are requested in 1965 for 14,000 volunteers, as compared with 10,500 in 1964.

Space research and technology.-- Our plan to place a man on the moon in this decade remains unchanged. It is an ambitious and important goal. In addition to providing great scientific benefits, it will demonstrate that our capability in space is second to no other nation's. However, it is clear that no matter how brilliant our scientists and engineers, how farsighted our planners and managers, or how frugal our administrators and contracting personnel, we cannot reach this goal without sufficient funds. There is no second-class ticket to space.

Appropriations enacted for 1964 for the National Aeronautics and Space Administration were $600 million below the amount requested. As a result, major development programs leading to the manned lunar landing have fallen behind schedule. Careful replanning of the entire program, including a reduction in the number of test flights, will offset some of this delay. Even so, more funds are needed in 1964, and I am therefore recommending a supplemental appropriation of $141 million for this year.

For 1965, I am requesting appropriations of $5.3 billion, $63 million above the 1964 amount, including the proposed supplemental appropriation. The 1964 and 1965 recommendations represent the minimum amount needed to achieve our goals in space. The estimated increase of $590 million in expenditures in 1965 is due principally to payments required by commitments made in 1964 and earlier years. With the leveling off of appropriations, annual outlays should remain relatively stable in subsequent years.

In addition to the manned space flight program, though related to it, funds are included to support unmanned space flights. for lunar exploration and supporting research and development. Funds are also included for scientific satellites, planetary probes, and experiments with meteorological and communications satellites.

Agriculture and agricultural resources. At the present time, our farms are able to produce all we need for domestic use and all we can reasonably expect to sell abroad with substantially less land and manpower than are now being used. As a result, we have crop surpluses, inadequate farm income, underemployed rural people, and improper land use. A wide range of Government programs, including the feed grain and wheat programs, rural area development, and the more constructive use of surplus production at home and in Food for Peace, have improved this situation. Nevertheless, we need further efforts to help the farm economy adjust to its rapidly changing economic and technological environment and to help the Nation take advantage of its remarkable productive agriculture.

I shall shortly transmit to the Congress my recommendations for agricultural legislation. Included will be cotton and dairy proposals that will decrease by $230 million the estimated expenditures of the Commodity Credit Corporation in 1965.

Titles I and II of Public Law 480 (Agricultural Trade Development and Assistance Act), the principal authority for our Food for Peace program, should be extended beyond their expiration date of December 31, 1964. Legislation also should be enacted to encourage the shifting of more of our present cropland to less intensive uses.

Federal payments in 1965 for agriculture and agricultural resources are estimated at $5.1 billion, a reduction of $1.3 billion from 1964. This reduction is expected to occur mainly in farm commodity programs. A part, however, depends upon congressional approval of legislation proposed last year authorizing the Farmers Home Administration to insure private credit for financing the rural housing program and a new proposal providing for fees to cover the costs of meat, poultry, and grain inspection services.

Natural resources.--We must manage and develop our natural resources wisely, to meet the needs of an increasing population and growing economy. Even within the limits of a restrictive budgetary policy, public investments must be made in resource conservation and development and in research to enable us to use more effectively our water, land, minerals, forests, and other resources. Federal cash payments of $2.7 billion are estimated in 1965 for these purposes.

The budget provides for continuing construction of going projects which will supply water to our cities, industries, and farms; abate water pollution and improve water quality; control destructive floods; produce electric power; improve navigation; and provide recreational opportunities. Provision is also made for the Corps of Engineers and the Bureau of Reclamation to start 44 new projects with an estimated total Federal cost of $512 million.

The need for outdoor recreational areas and facilities is growing rapidly. To help meet this need, legislation should be enacted to assist States in providing recreational opportunities. Legislation should also be enacted to preserve seashore and other areas with important recreation potential, and to protect our remaining wilderness areas.

Commerce and transportation.--To encourage continuing growth of our Nation's millions of privately owned businesses, the Government provides extensive aids, particularly to smaller businesses and areas of persistent unemployment, and helps assure the availability of adequate transportation and communication facilities.

Enactment of legislation already approved by the Senate is essential to provide the additional authorizations necessary for the area redevelopment program to go forward and to permit necessary improvements in that program.

Major proposed revisions in our national transportation policy are also pending before the Congress. These proposals would make substantial contributions toward a more efficient transportation system by placing greater reliance on the forces of competition and improving the effectiveness of Government regulation. Extensive hearings have been held on these proposals and I recommend their prompt enactment.

Total Federal payments for commerce and transportation programs will amount to $6.6 billion in 1965. This is about the same amount as in 1964. Higher outlays from the Highway trust fund (financed by special taxes on highway users), increased loans and grants to redevelop depressed areas, and financing of a design competition for the civil supersonic transport aircraft will be offset by reductions for the temporary accelerated public works program and the postal service, and by strict economies in all 'programs.

Housing and community development. In the Housing Act of 1961, the Congress substantially broadened Federal aids to private enterprise and local public agencies to help improve housing conditions and rebuild urban communities. The act also made funds available to finance these programs for several years. In several cases, these funds are now almost depleted. I am therefore recommending legislation to provide authority and funds for continuing such programs as urban renewal, urban planning and open space grants, housing loans for the elderly, and low-rent public housing. In addition, I am recommending important revisions and expansions essential to increase the effectiveness of these programs in meeting critical needs--particularly the needs of lower income groups whose inferior earning power seriously handicaps their efforts to achieve adequate living conditions.

Legislation is already being considered by the Congress to strengthen Federal aids to urban communities in order to help modernize and enlarge necessary mass transportation facilities. I urge that action be completed soon on this vitally needed program.

To carry on and improve housing and community development programs without adding to net budgetary requirements, we shall continue to sell to private lenders federally owned mortgages acquired in earlier years. New legislation is proposed to increase the effectiveness of the sales 'program. The proceeds of such sales and other receipts of housing and community development programs are expected to more than offset payments for these programs in 1965, with resulting net receipts estimated at $40 million.

Health, labor, and welfare.-- This budget places major stress on strengthening the productivity of our labor force, improving the health of our people, and reducing the fear of economic insecurity. In 1965, the Federal Government will strengthen the health, labor, and welfare activities which contribute to these objectives. Payments for these activities, mainly from self-financing trust funds, will be $28.6 billion, about $1.3 billion more than in 1964.

Most of the payments are for social insurance and public welfare programs which complement efforts by individuals and families to provide for their own security. These programs have been significantly improved by legislation enacted in recent years. To foster greater self-sufficiency and reduced reliance on public welfare, the Congress should enact proposed legislation to create a National Service Corps and expand demonstration projects in community work programs.

The budget proposals for health activities in 1965 will continue to strengthen the National Institutes of Health and the Food and Drug Administration and will improve environmental health protection. The budget provides for rapid progress under the legislation passed in the last session of the Congress to combat mental illness and retardation, increase the number of doctors and dentists, and reduce air pollution. New legislation is needed this year to improve nurse education and to extend the Hill-Burton program for construction of medical facilities, expanding and redirecting it to meet pressing needs for nursing homes and for modernizing urban hospitals.

Pending legislation to provide urgently needed health insurance for aged persons through the social security system should also be enacted. Provision should be made for benefits to be paid from administrative budget funds to those not eligible under the social security system. Since benefit payments would not start until 1966, this provision would not affect the 1965 budget.

For manpower training and services, the budget recommends for both 1964 and 1965 the full authorization provided under the recent amendments to the Manpower Development and Training Act. More than 275,000 unemployed workers, including youths found unqualified for military service, will be trained on jobs and in classrooms during 1965. Of these, about 60,000 will receive basic literacy education. Prompt enactment of the Youth Employment Act is needed to provide work and training in camps and in hometown projects for an estimated 60,000 youths. Legislation is again recommended to improve the State unemployment insurance programs financed from the unemployment trust fund; this legislation would extend coverage to more people and lengthen the duration of benefits.

Education.-- Bills enacted last year for Federal assistance to higher education and enlarged Federal support for vocational education mark important milestones in efforts to improve our educational system on a national scale. The budget includes supplemental appropriations for 1964 so that these measures can be implemented promptly.

But much remains to be done. Important elements of the education program proposed last year have not yet been enacted. In particular, attention must be turned to the basic foundation of our educational system--the elementary and secondary schools. First, I recommend enactment of pending legislation providing grants to raise teachers' salaries and build critically needed classrooms. Second, to supplement this general aid, I am also recommending an expanded program providing project grants to meet special educational needs and to provide special services for schoolchildren, particularly for use in connection with community action programs to combat poverty.

The Congress should also enact the remaining portions of last year's proposals, such as the federally guaranteed loan program and the work-study program for college students; and the proposals directed at special educational needs of other individuals, including graduate students, prospective and existing teachers, all citizens who appreciate the advantages of good public libraries, adults who have missed the opportunity for basic schooling in the "3 R's", and those who seek to make learning a continuing process through university extension services.

In keeping with the continuing need to strengthen the scientific and technological resources of the Nation, the budget also provides for expansion of the National Science Foundation's basic research and science education programs. Major emphasis will be placed on increasing support for graduate students in the sciences and on strengthening science instruction and facilities in colleges and universities, one objective of which is to develop additional top-ranking centers of graduate study in the sciences.

Expenditures for education are estimated at $1.6 billion in 1965, an increase of $0.3 billion over 1964. New obligational authority of $3.1 billion is requested, up $1.2 billion from 1964.

Veterans benefits and services.-- We have a lasting obligation to those who died or were disabled in the defense of the Nation, and to their dependents. During the past 3 years a cost-of-living increase in disability compensation rates has been provided, and increases in benefits have been granted for the widows, children, and dependent parents of veterans who died as a result of military service. In addition, vocational rehabilitation programs have been extended to disabled peacetime ex-servicemen and to those wartime veterans who were precluded from entering training within the regular time limits.

In 1965, the Federal Government will spend $5.5 billion on its programs for veterans. This is $425 million less than in 1964, mainly because of an anticipated substantial rise in receipts from sales by the Veterans Administration of Government-owned mortgages, which are applied against expenditures.

We will continue to make certain that veterans with service-related disabilities, and their dependents, are fairly provided for. Benefits and services for other groups of veterans will also continue to be provided, but with the recognition that veterans and their families are sharing to an increasing extent in Federal, State, and local programs which are raising the standards of income maintenance, educational opportunity, and health and welfare for all Americans.

SPECIAL ASPECTS OF THE GOVERNMENT

PROGRAM

Certain additional elements of the proposed 1965 Government program deserve special note.

Federal expenditures and the balance of payments.-- The recent improvement in the U.S. balance of international payments represents progress toward eliminating our persistent payments deficit. Preliminary estimates indicate that the gross balance-of-payments deficit in the second half of calendar year 1963 was roughly one-third that of the first half. For the year as a whole, these estimates show the deficit to be the lowest since 1957.

Three factors in particular have contributed to the improvement during the past year: the continued price stability of U.S. products, a proposed interest equalization tax on foreign securities, which would be effective as of July 1963, and an increase in short-term interest rates. Anticipation of the proposed tax, which is intended only as a temporary measure, has already had a favor-. able effect. To insure continuing benefits from the tax during the critical period ahead, I urge its speedy enactment by the Congress. Enactment of the tax reduction legislation now before Congress will also help the balance of payments by making U.S. firms • more competitive in world markets and by promoting the kind of economy which will be more attractive to U.S. and foreign investors.

During the past one and a half years, all Federal Government activities affecting the balance of payments have been under continuing scrutiny for the purpose of finding savings--large and small--which can be made in payments abroad. In some cases, purchases or activities formerly conducted overseas have been restricted to the United States. In others, they have been eliminated. Over 80% of the current obligations by the Agency for International Development for loans and grants to developing countries now must be spent for goods and services produced in the United States. In addition, defense offset agreements with certain of our European allies, the prepayment of funds previously loaned to foreign governments, and the sale of special nonmarketable, medium-term Treasury bonds to foreign central banks have been particularly helpful to our balance of payments.

As a result of the reviews and actions undertaken, the net annual outflow from Federal Government programs--payments less regular receipts-is estimated to drop by $800 million between 1963 and 1965. This excludes special receipts of a nonrecurring nature, such as prepayments of loans, sales of nonmarketable medium-term securities, and advances received on military exports.

Federal expenditures of an investment nature.-- A large part of the civilian expenditures of the Federal Government contributes directly and indirectly to the growth and development of the Nation's physical and human resources. For example, budget and trust fund expenditures for fiscal year 1965 include $3.7 billion for Federal civil public works, for the acquisition of major nondefense equipment and other physical assets, and for small business, rural electrification, and other loans and additions to civilian Federal assets. Another $5.3 billion of Federal civilian budget and trust fund outlays represent grants for highways, hospitals, schools and other facilities which increase State, local, and private physical assets.

Federal expenditures in 1965 also include $1.8 billion for such developmental activities as education, training and health, and $1.5 billion for scientific research and development other than for defense and space objectives. These outlays increase knowledge, enhance skills, and strengthen the physical vigor and quality of the labor force. Thus, of the total estimated Federal cash payments to the public in 1965, about $12.3 billion or 10%, represent an investment in civilian programs which will help promote the long run growth of our Nation.

Furthermore, during fiscal year 1965 an estimated $8.2 billion will be spent on defense research and development, including atomic energy, and $4.5 billion on space research and development. In the long run these outlays will also make a valuable contribution to the technological development and economic growth of our country.

Federal expenditures and the national output.--Direct Federal purchases of goods and services in 1965 are estimated at $69.1 billion, which is less than 11% of the gross national product; five-sixths of these purchases are for the defense and space programs. Total Federal purchases of goods and services have remained at approximately 11% to 12% of the gross national product throughout the last decade.

Other large portions of the budget, such as social security payments, represent transfers of purchasing power to or within other sectors of the economy. Such outlays, amounting to $52.4 billion in 1965, are estimated to fall somewhat as a percent of total national output. These include $31.8 billion for transfer payments--such as old-age and survivors insurance benefits, unemployment compensation, and military and veterans pensions--which improve the recipients' standard of living by providing them with increased purchasing power. Similarly, grants-in-aid to State and local governments for such activities as highways, public assistance, and public health increase the ability of these governments to provide local public services. These Federal expenditures transferring purchasing power to other sectors of the economy have more than doubled from 1955 to 1964, while Federal purchases of goods and services have risen by about 50%.

In fiscal year 1965, the Federal Government will add to its direct use of total national output much less than will State and local governments. In contrast to the estimated rise of $1.3 billion in direct Federal purchases in 1965 as compared with 1964, present indications are that purchases by State and local governments will continue to rise by at least as much as the $3 billion to $4 billion by which they have been increasing in recent years.

PUBLIC DEBT

Under 'present law the temporary debt limitation of $315 billion will continue in effect through June 29, 1964. The temporary limit then becomes $309 billion for one day, June 30, 1964, after which the permanent ceiling of $285 billion again becomes effective.

The present temporary debt limits were enacted in November 1963. The House Committee on Ways and Means noted in its report of November 4, 1963, that the ceilings were very restrictive, and cut sharply into the normal allowances for contingencies and flexibility during periods of peak requirements in March and June. The report also noted the concern of the Secretary of the Treasury that the debt could not be reduced to the $309 billion limit set by statute for June 30, 1964, without disrupting orderly management of Treasury finances.

Based on the latest estimates contained in this budget, the debt subject to limit on June 30, 1964, is now estimated to be $312 billion. Accordingly, a change in the limit is necessary before June 30, 1964, if serious difficulties in the conduct of public debt management are to be avoided. A further change will be needed to cover the anticipated, but reduced, deficit for 1965.

Debt limitations which are so restrictive or so temporary in application as to necessitate several legislative revisions in a single year--as last year--conflict with economical operation of the Government and effective financial management, and involve both the Congress and the Executive in unnecessarily repetitive discussions of the same issues. Instead, the debt ceiling should provide sufficient flexibility for sound management of the Government's finances at the lowest cost, and also permit the Treasury leeway for actively supporting the Nation's balance-of-payments position through timely debt operations. With or without a restrictive debt ceiling, expenditures in this administration will be held to the lowest possible level.

PUBLIC DEBT AT END OF YEAR

[ Fiscal years. In billions ]

1962 1963 1964 1965

Description actual actual estimate estimate

Owned by Federal agencies

and trust funds $55.7 $57.7 $60.3 $62.6

Owned privately and by

Federal Reserve banks 242.5 248.1 251.5 254.4

Total 298.2 305.9 311.8 317.0

EFFICIENCY AND ECONOMY IN GOVERNMENT

I call upon all Government employees to observe three paramount principles of public service:

First, complete fairness in the administration of governmental powers and services;

Second, scrupulous avoidance of conflicts of interest; and

Third, a passion for efficiency and economy in every aspect of Government operations.

For its part, the Federal Government must be a good employer. It must offer challenging opportunities to its employees. It must be prompt to recognize and reward initiative. It must pay well to attract and keep its share of dedicated and resourceful workers. It must welcome fresh ideas, new approaches, and responsible criticism.

For 33 years I have been in Government service. I have known its challenge, its rewards, and its opportunities. But all these will multiply in the years to come. The time is at hand to develop the Federal service into the finest instrument of public good that our will and ingenuity can forge.

Controlling employment.-- Although both our population and our economy are growing and placing greater demands upon the Government for services of every kind, I believe the time has come to get our work done by improving the efficiency and productivity of our Federal work force, rather than by adding to its numbers.

This budget proposes a reduction in Federal employment in 1965--from 2,512,400 to 2,511,200 civilian employees--and I have directed the heads of all departments and agencies to work toward reducing employment still further. This reversal in the trend of Federal employment results from a rigorous appraisal of personnel needs, determined measures to increase employee productivity and efficiency, and the curtailment of lower priority work. It will be accomplished despite large and unavoidable increases in workloads.

Of the 9½ million civilian employees of governments in the United States today, 2½ million are employed by the Federal Government and about 7 million by the State and local governments. In the decade from fiscal year 1955, Federal civilian employment in the executive branch will rise by 6%, while the population of the United States will increase by 17%. State and local employment will increase about 65% during the same period.

In fiscal year 1955, we had 14 Federal civilian employees in the executive branch for every 1,000 people; in fiscal year 1965, we will have fewer than 13 Federal civilian employees to serve every 1,000 people.

Management improvement and cost reduction.--As substantial as are savings due to tightening up on Federal employment, even larger economies result from actions which eliminate waste and duplication, simplify unnecessary complex systems and procedures, and introduce new and better business methods.

The emphasis on management improvement in the executive branch during the past 3 years has led to impressive economies on a very wide front. Functions have been consolidated. Automatic data processing equipment has improved efficiency and reduced operating costs. Excess property in the possession of one agency has been transferred to others, saving substantial funds budgeted for new 'purchases. Productivity has been increased in agencies with the heaviest volume of workloads, thus avoiding p