This afternoon I have a very serious message to deliver to our country Present high inflation threatens the economic security of our Nation. Since my economic and budget reports were made to the Congress and to the people in January, rapid changes in world events and economic prospects have made it necessary to intensify our anti-inflation fight.
In the last 8 weeks inflation rates and interest rates have surged to unprecedented heights. This is a worldwide problem. During the last 2 reporting months, for instance, the increases in the wholesale price index in Italy, Great Britain, and Japan have all increased more than 25 percent. And even in Germany, West Germany, where the prime consideration, equal to national defense, is inflation, the wholesale price index has increased more than 13 percent.
The inflation that we face today is deep-rooted. Its many causes have been built up over more than a decade. The most important of these causes are the soaring prices for energy throughout the world, declining productivity growth in our Nation, and our failure in government and as individuals, as an entire American society, to live within our means.
Inflation is a symptom of economic distress. The truth is that we have inflation because our economy is not productive enough to do all the things that we demand of it. We want it to give us higher incomes, bigger profits, and bigger government programs in the areas where we have a special interest. The Federal Government must stop spending money we do not have and borrowing to make up the difference.
Our whole society, the entire American family, must try harder than ever to live within its means. As individuals and as a nation, we must begin to spend money according to what we can afford in the long run and not according to what we can borrow in the short run.
There are no quick answers to inflation, and, above all, there certainly are not any painless answers. If there were any such solutions, any quick or painless solutions, they would have been implemented long ago. We cannot abolish inflation overnight by just passing a law against it. Only a long-term effort, with a partnership of business and labor and individual citizens and government at all levels, can succeed in bringing this serious problem under control.
This dangerous situation calls for urgent. measures. We must act firmly and decisively, and we must act now. We must remove any doubt about our Nation's will to take the painful steps that will be required to control inflation. We cannot accept high rates of inflation as a permanent fact of American life.
The intensive anti-inflation program that I'm announcing today involves five major components: first, discipline by reductions in the Federal Government; second, discipline by restraints on credit; third, discipline in wage and price actions; fourth, discipline by greater conservation of energy; and fifth, structural changes over a long period of time to encourage productivity, savings, and research and development.
Let me discuss these one by one. First, the budget. I will soon set forth a revised budget for fiscal year 1981, beginning next October 1. It will be a balanced budget. And the Congress and I are determined to keep this budget in balance.
Since the last balanced budget 12 years ago—and there has been only one balanced budget since 1961—we have added almost one-half trillion dollars to our Nation's debt. In 1981 we will thus achieve an objective that has escaped us, eluded our country in good times and in bad times, and that is a balanced budget.
By the end of this month, I will send to Congress a major revision in both my 1980 and 1981 budgets. It will propose significant reductions of budget authority from the current proposals in order to cut spending this fiscal year and next fiscal year.
I will cut spending in the 1981 budget by more than $18 billion. * To reach that goal, I will defer or reduce or cancel most of the new or the expanded programs which were originally proposed in the 1981 budget. I will cut expenditures for personnel, operating, and maintenance throughout the Government. I will freeze Federal civilian employment immediately and maintain rigid ceilings, so that by the end of October of this year, we will have 20,000 fewer Federal employees on the payroll. I will reduce ongoing spending programs throughout the Federal Government.
*The President meant to say $13 billion. [White House correction.]
I urgently request from the Congress the savings and the revenue measures in the budget that I proposed back in January. I want to stress in particular the legislation needed to hold down hospital costs, to reform Federal pay, and to speed up collections in revenue. When budget cuts demand sacrifices from many Americans, it's intolerable for some to evade prompt payment of the taxes which they owe. I will send to the Congress legislation to make sure that taxes that are owed on interests and on dividends are actually paid and paid in a timely manner.
I will maintain my commitment, through all of this procedure, to a strong defense and to the level of real growth in defense spending which I committed on the honor of our Nation to our NATO Allies. But the Defense Department will not be immune from budget austerity. In particular, I will require that Department to make savings that do not affect adversely our military preparedness. I consider the proposed defense budget adequate to meet our Nation's needs. We must maintain budget restraint and fiscal responsibility in every single agency of the Federal Government.
Based on our estimates of economic and budgetary developments, the action that I have just described will produce a balanced budget in 1981. Of course, in our system the Congress controls the power of the purse. The recent intense efforts, one of the most inspiring demonstrations of congressional leadership that I have ever seen, and my close cooperation and consultation with these congressional leaders, have all convinced me that the Congress will indeed enact and maintain a balanced budget that I have just described to you. But to ensure that outcome I will use every power at my command, as President, as I did last week on a popular bill.
I will veto any legislation that exceeds the spending limits which I consider to be inconsistent with a balanced budget. I will use lily full powers under the 1974 Budget Reform Act to hold down Federal spending, including some expenditures which have already been authorized by the Congress and for which money has been appropriated.
If, during the course of the year, I judge these actions and powers which I've just described as being insufficient, I will ask the Congress for a temporary grant of extraordinary powers to ensure that spending by the Federal Government of our country is contained.
Cutting back Federal spending to match revenue is not a cure-all, but it is an essential first step. The sources of inflation are far too complex to be treated by a single remedy. But nothing will work in an overall anti-inflation program until the Federal Government has demonstrated to the American people that it can discipline its own spending and its own borrowing-not just as a 1-year exercise but as a longterm policy. Together, we will do just that. We will dispel the notions that Federal budget deficits must always be with us.
I want to be absolutely honest about these budget cuts. We have been cutting out waste and fraud and trimming the bureaucratic fat. But this time, there will also have to be cuts in good and worthwhile programs—programs which I support very strongly. In this critical situation we must all look beyond some of our most worthwhile immediate aims to the overriding permanent needs of our Nation.
Our second area of action is restraining the growth of credit. Just as our governments have been borrowing to make ends meet, so have individual Americans been borrowing to make ends meet. When we try to beat inflation with borrowed money, we just make the problem worse.
Inflation is fed by credit-financed spending. Consumers have gone in debt too heavily. The savings rate in our Nation is now much lower than it has been for more than 25 years. Less than 3 percent of the earnings of Americans now go into savings. As inflationary expectations have been worsened, business and other borrowers are also tempted to use credit to finance speculative ventures .as well as productive activities.
The traditional tools used by the Federal Reserve to control money and credit expansion are a basic part of the fight against inflation. But in present circumstances, these tools need to be reinforced so that effective constraint can be achieved in ways that spread the burden reasonably and fairly.
I'm therefore using my power under the Credit Control Act of 1969 to authorize the Federal Reserve to impose new restraints on the growth of credit on a limited and on a carefully targeted basis. Under this authority the Federal Reserve will first establish controls for credit cards and other unsecured loans but not for secured loans on homes, automobiles, and other durable goods, and second, to restrain credit extensions by commercial banks that are not members of the Federal Reserve System and also by certain other money market lenders.
The Chairman of the Federal Reserve will announce a voluntary program effective immediately to restrain excessive growth in loans by larger banks and by other lenders. At the same time, the program will encourage the flow of available credit supplies for investment and for other productive uses. Special attention will be given to the particular needs of small businesses, farmers, and homeowners, and I support these initiatives by the Federal Reserve.
These carefully targeted actions will not damage the productive capacity of our Nation. To help curtail the excessive uses of credit and by dampening inflation they should, along with the budget measures that I have described, speed prospects for reducing the strains which presently exist in our financial markets.
In addition, I'm taking steps to reduce the extension of credit by the Federal Government. Federal loans and loan guarantees will be cut by nearly $4 billion in fiscal year 1981. As a longer run measure, I urge Congress to institute the credit budget which I proposed in January. It will help us control more effectively the loans and the loan guarantees provided by the Federal Government.
Our third area of action is the voluntary wage and price standards. I do not have authority to impose mandatory controls. I will oppose such authority being approved at all by the Congress. We will not impose mandatory wage and price controls. Government wage and price controls have never worked in peacetime. They create unfair economic distortions, and they hurt productivity. These results always force price controls first to be eased and then to be dismantled while inflation roars ahead.
Controls create inequities, and the greatest inequity is their effect on the average American family. As even the most ardent advocates of mandatory wage and price controls will admit, the cost of vital necessities such as food and fuel would be passed on to those who are living on frozen wages and on fixed incomes.
We simply cannot outlaw inflation with a massive Federal bureaucracy or wish it away with a magic formula. On the other hand, voluntary wage and price restraints offer the flexibility we need to deal with our complex economy.
The Council on Wage and Price Stability has just issued revised pay standards and confirmed an extension of the price standards. The new pay standards were developed from the recommendation of a tripartite advisory committee, with members from business, labor, and the public. The committee unanimously recommended standards for pay increases in the range of 7 1/2 to 9 1/2 percent and stated that under normal circumstances increases should average 8 1/2 percent. I'm determined to meet this goal.
In the face of last year's 13-percent increase in the Consumer Price Index, and the even higher rate of recent months, this unanimous recommendation of the Pay Advisory Committee, designed to produce an average wage and salary increase of 8 1/2 percent, reflects a commendable spirit of restraint and cooperation. With business, labor, and public support, we can meet this goal of restraint.
I'm sharply expanding the price and wage monitoring activities of the Council on Wage and Price Stability. Its current staff of 80 people will be more than tripled. The Council will then establish teams of experts to track wage and price developments in each major industry. The Council will meet with leaders from specific industries to secure their cooperation in this fight against inflation. Where necessary, we will ask large firms for prenotification of significant price increases. We will investigate wage and price increases that seem out of line with the standards. I mean to apply these standards with vigor and toughness to both business and labor.
Our fourth area of action is energy. The plain truth is that we will never be completely strong at home or secure abroad until we've at last solved our Nation's excessive dependence on imported oil.
This year, we expect to spend $90 billion of America's hard-earned income to foreign countries to buy their oil. The price of imported oil has more than doubled-more than doubled in the last 12 months. Last year's increase alone in 1979 was greater than all other increases combined since the oil embargo of 1973. In fact, last year alone the price of oil increased more than it has since oil was first discovered.
We must forge ahead toward the goal that I set last July—cutting in half the amount of oil that we will import in 1990. To do this, we will require increased conservation and increased production of domestic oil, natural gas, and coal, and the rapid development of alternative energy supplies. For 3 years, as every Member of the Congress well knows, I have fought for a national energy policy to achieve each of these goals, and we have worked closely together. Today, at long last, we are close to enacting such a policy into law, and we must not falter now.
I'm asking the Congress to finish without delay the three essential elements of the energy policy. First, the windfall profits tax; second, the energy security corporation; and third, the energy mobilization board. These bills are the cornerstone for energy security, for our national security, and for our fight against inflation.
I have recently submitted to the Congress a proposal to conserve energy in electric powerplants and to convert them from oil to coal. This legislation, also, must be passed promptly.
But we can never solve our energy dependence unless we meet the problem of America's extravagant gasoline use. Gasoline is the most important and the most wasted petroleum product in the United States. It accounts for some 40 percent of all the petroleum we use in our country. In almost every other industrial country, the average amount of gasoline used by each citizen is much less and the price for gasoline is much higher—more than twice as high in most other industrialized countries than it is today in the United States. Americans have done well in the past year in gasoline conservation. But if we're going to reduce further our dependence on foreign oil, we must do more.
Therefore, I am exercising my Presidential authority to impose a gasoline conservation fee on imported oil. This will amount to about 10 cents a gallon and will be imposed only on gasoline. The fee will not add to the cost of any other petroleum product, and it will not add at all to the profit of oil companies. It should reduce imports by 100,000 barrels per day in 1 year, and within about 3 years, it will reduce the imports of oil from foreign countries by more than 250,000 barrels every day. I will submit to Congress a request for a specific gasoline tax, in the same amount exactly, which will replace the conservation fee.
The funds from this gasoline conservation charge will be held in reserve or used to reduce the national debt. I do not intend to use these revenues to balance the budget or as a substitute for necessary spending cuts. That would not contribute substantially to the control of inflation. But these revenues, which will begin occurring immediately, will give the budget, which will be balanced, a margin of safety, ensuring that it will remain in balance if conditions or estimates change in a way that we do not anticipate.
We can now set new State targets for gasoline consumption which will, within a year, reduce consumption by 400,000 barrels per day. This action also underscores a commitment to greater conservation that our friends abroad, both the producing countries and the consuming countries, can both join and support.
Finally, the Secretary of Energy is pursuing an intensified national energy conservation plan. Our aim is to involve every level of government, business and labor-in fact, every single citizen in our country-in conserving American energy.
Our fifth area of action involves longterm structural changes to encourage productivity, savings, and research and development. We must face the fact that over the last 10 years the pace of productivity growth in the United States has slowed sharply. Last year productivity actually declined. This trend is an important longterm factor in inflation. It must be reversed.
I'm asking my Presidential commission on an agenda for the 1980's as part of their work to develop specific recommendations for revitalizing our Nation's economy. Our priority now is to balance the budget, but once these spending limitations have actually been achieved, we can then provide tax relief to encourage investment. Through fiscal discipline today, we can free up resources tomorrow, through tax deductions, for the productivity increase which our Nation needs.
This discipline which I've described to you will not be easy. Our new budgets will be very tight. There are some things we cannot afford, at least not right now. But [he most important thing we cannot afford is the national delusion which we have been harboring about inflation. We cannot afford the fairy-tale that inflation can somehow be passed along to the next person or somehow be passed along to the next generation.
The actions I've outlined involve costs. They involve pain. But the cost of acting is far less than the cost of not acting. The temporary pain of inconvenience and discipline is far less for all of us together than the still worst permanent pain of constantly rising inflation. For all of us, but especially for the most disadvantaged among us, inflation is indeed the most cruel tax of all.
When we take these necessary steps against inflation, it will not result in a quick victory. Don't look for massive changes next week. Over the next several months inflation is likely to continue at a high level. We must be patient and we must be persistent. But I'm confident that the steps that I've outlined today will make the inflation rate be declining later on this year. As that happens, we can look forward to calmer financial markets and to lower interest rates.
By taking control of this problem-which involves taking control of ourselves—we can put an end to the fear about the future that afflicts so many of our own people and so many of our institutions. In the fight against inflation, what is at stake is more than material wealth or material comfort. What is at stake is whether or not Americans—as a nation and as a people—will retain control of our own destiny.
In crises abroad, we've always shown our ability to respond with steadfastness and with courage. We must now show the same determination, the same national unity, the same national commitment, the same partnership, in meeting the challenge of inflation.
With inflation, as with defense and with energy, our responsibility is clear: to face the world as it is, not to mislead ourselves, to be honest about the hard decisions that are necessary, to make these decisions and with courage carry them out, and to build together a strong and secure and a hopeful future for every American. With proper discipline we will prevail in our fight against inflation.
Thank you very much.