Special Message to the Congress on Budget and Fiscal Policy.

To the Congress of the United States:

I. BASIC FISCAL POLICIES

This Administration intends to adhere during the course of its term of office to the following basic principles:

(1) Federal revenue and expenditures levels must be adequate to meet effectively and efficiently those essential needs of the nation which require public support as well as, or in place of, private effort. We can afford to do what must be done, publicly and privately, up to the limit of our economic capacity--a limit we have not even approached for several years.

(2) Federal revenues and expenditures-the Federal Budget--should, apart from any threat to national security, be in balance over the years of the business cycle--running a deficit in years of recession when revenues decline and the economy needs the stimulus of additional expenditures--and running a surplus in years of prosperity, thus curbing inflation, reducing the public debt, and freeing funds for private investment.

(3) Federal expenditure and revenue programs should contribute to economic growth and maximum employment within a setting of reasonable price stability. Because of the limits which our balance of payments deficit currently places upon the use of monetary policy, especially the lowering of short-term interest rates, as a means of stimulating economic growth and employment, fiscal policy--our budget and tax policies-must assume a heavier share of the responsibility.

(4) Each expenditure proposed will be evaluated in terms of our national needs and priorities, consistent with the limitations and objectives described above and compared with the urgency of other budgetary requirements. We will not waste our resources on inefficient or undesirable expenditure simply because the economy is slack--nor, in order to run a surplus, will we deny our people essential services or security simply because the economy is prosperous.

(5) As the nation, its needs and their complexity continue to grow, Federal nondefense expenditures may also be expected to increase, as predicted by a 1960 Bureau of the Budget study, and as indicated by the nearly 45% increase from fiscal 1953 to fiscal 1961 in expenditures other than national security. But we must not allow expenditures to rise of their own momentum, without regard to value received, prospective revenues, economic conditions, the possibilities of closing out old activities when initiating new ones, and the weight of current taxes on the individual citizen and the economy. It is my determined purpose to be a prudent steward of the public funds-to obtain a dollar's worth of results for every dollar we spend.

II. THE FISCAL 1961 BUDGET INHERITED BY THIS ADMINISTRATION

While this Message is concerned primarily with the Budget for fiscal 1962 now before the Congress, necessary perspective and background are supplied by a re-examination of the fiscal 1961 Budget, adopted by the Congress last year, reviewed in my predecessor's January Budget Message and inherited in its final stage by this Administration.

When originally submitted in January of 1960, the Fiscal 1961 Budget showed a surplus of $4.2 billion. By the time of the mid-year Budget Review, the estimated surplus had shrunk to $1.1 billion. In the final Budget Message in January, it was estimated to be less than $80 million. Without any change in substantive content or policy, that Budget upon later examination proved to be substantially out of balance. These changes reflect the Recession--induced decline in revenues as well as the difficulty always present in making Budget and economic forecasts. The January restatement of the 1961 Budget, simply in terms of its own programs and estimates and without regard to any new decisions or policies by this Administration.

--Optimistically estimated fiscal 1961 tax revenues by assuming a much rosier economy;

--Unrealistically assumed that the Congress would enact a record (though necessary) postal rate increase totalling some $843 million a year in time to take effect April first and provide $160 million additional in the current fiscal year;

--Substantially underestimated the normal flow of defense expenditures under the then-existing policies and commitments by at least half a billion dollars; and

--Similarly underestimated the amount of funds which would be required to pay unemployment benefits to ex-servicemen and Federal employees, to meet the demand for authorized veterans' housing loans, and to fulfill the existing commitments of the Export-Import Bank.

The deficit thus inherited by this Administration for fiscal 1961, augmented by the essential anti-recession and national security steps already taken or recommended to the Congress, is now estimated to total over $2 billion (in contrast with the $4.2 billion surplus originally predicted). But it must be remembered that fiscal 1961 is clearly a recession year, with all of the consequent effects upon both revenues and expenditures. The deficit of nearly $12.5 billion in fiscal 1959 serves as a recent reminder of the difficulties of balancing the budget in a recession year.

III. BALANCING THE BUDGET FOR FISCAL 1962

On January 30th I made the following pledge to the Congress:

"... a new Administration must of necessity build on the spending and revenue estimates already submitted. Within that framework, barring the development of urgent national defense needs or a worsening economy, it is my current intention to advocate a program of expenditures which, including revenue from a stimulation of the economy, will not of and by themselves unbalance the earlier Budget."

This message is designed to review my recommended budgetary revisions within the framework of that pledge. Omitting any increase in the defense budget too urgent to be denied by budgetary restrictions, and assuming that our review of the economy late in April does not require either a reduction in taxes or additional increases in expenditures, enactment of the new non-defense programs and appropriations I have transmitted will not unbalance the Budget previously submitted by my predecessor.

--if the Congress enacts or continues in effect all the revenue measures requested in that earlier Budget, or preferably the alternative measures that I am requesting to achieve the same amount of revenue;

--if that earlier Budget contained accurate estimates of the revenue to be produced by those measures, based on accurate assumptions about prospective economic conditions;

--if the Congress enacts no spending measures committing the Executive Branch to outlays in excess of those requested; and

--if the earlier Budget contained accurate estimates of those expenditures which must necessarily be incurred in fiscal 1962 under existing commitments covered by that Budget, regardless of Congressional or Executive decisions--for example, entirely apart from any policy changes, a large proportion of the Department of Agriculture Budget depends upon the effects of economic, crop and weather conditions which must be predicted in advance.

I have already indicated in my message on the State of the Union that my predecessor's Budget for fiscal 1962 "will remain in balance only if . . . an earlier and sharper up-turn in the economy than my economic advisers now think likely produces the tax revenues estimated." Nevertheless the present message, and the fiscal 1962 Budget revisions it summarizes, are based upon a commitment of balancing revenue and expenditures under an assumption that the January predictions with respect-to these four conditions are a valid starting basis for a new Administration.

The point I wish to stress in this message is that any Budgetary unbalance at the close of fiscal 1962 will not be the result of any non-defense programs I have submitted, for they have been carefully limited to a pattern of expenditures no greater than the revenues estimated by the earlier Budget, as supplemented by those additional revenues which enactment of this program can reasonably be expected to stimulate, according to Treasury estimates, in fiscal 1962. Other measures I have requested--such as improvements in unemployment compensation, highway construction, Social Security, and health insurance for the aged--are all accompanied by their own self-financing provisions. In short, new defense recommendations aside, should there be a deficit in 1962, it will be the consequence of the overestimation of revenues and under-estimation of expenditures in the January budget, and not the result of new policies or programs proposed by this Administration.

In summary, the total expenditures estimated in the January budget were $80.9 billion. My proposals, apart from Defense, will add about $2.3 billion for a total of $83.2 billion. The effects of my economic program on the economy would be reflected in additional revenues of about $900 million which, added to the January budget figures, would make a total of $83.2 billion of receipts, and leave the Budget in balance.

At the same time, it would be unrealistic to fail to recognize that the January Budget estimate of receipts was over-optimistic. Based on a more realistic economic outlook and including the effect of my economic proposals, it appears more likely that the revenues for fiscal year 1962 will be about $81.4 billion. However, as the economy returns to satisfactory high levels of economic activity, the position of budget balance will be restored. Indeed, given full recovery, the present tax system would generate revenues substantially in excess of the proposed levels of budget expenditure. This, then, is the revised budget--apart from defense additions-that I now present to the Congress:

--a budget that is in balance in terms of my pledge of January 30;

--a budget that is likely to be in deficit unless economic conditions rapidly improve to meet the levels predicted in the January 16th Budget;

--a budget that would be in surplus if the economy were operating at or near its full potential.

IV. OMISSIONS AND ASSUMPTIONS IN THE PREVIOUS BUDGET FOR FISCAL 1962

For Fiscal 1962, however, the January Budget submitted by my predecessor assumed a higher rate of economic activity during this calendar year than is presently in sight, and thus a balanced budget. As already stated, that earlier Budget and its assumptions are necessarily the starting point for a new administration. It was on this basis that I made to the Congress on January 30 the commitment quoted earlier in this Message.

But before any new programs or budget increases could even be considered by this Administration--and wholly apart from the overly optimistic economic assumptions of the January Budget--we found upon a closer scrutiny of that Budget that it omitted provision for substantial expenditures for which that Administration was committed, and was based upon fundamental policy and program assumptions which neither this Administration nor the Congress could possibly accept, and which had to be altered at considerable cost to what lithe budgetary leeway remained. For example:

(1) The previous administration committed itself, as we have also, to extend $100 million in assistance to Chile for reconstruction and rehabilitation in the wake of a devastating earthquake. But no estimate of expenditures to meet this commitment was included in the Budget.

(2) The earlier Budget recommended, as I do also, the construction of a new $114 million linear electron accelerator for high energy physics research. But appropriations to initiate this project were not specifically recommended in the Budget.

(3) The earlier Budget based its estimate of expenditures for the Department of Agriculture's Commodity Credit Corporation on the assumption that price supports on every major commodity would be reduced to the lowest level permitted by law--reductions which were never formally recommended by the then Secretary of Agriculture, which would never be permitted by the Congress and which would have been absolutely ruinous to our farm economy. Without having to actually take such a move, the earlier Budget assumed a reduction of cotton price supports from 75% to 70% of parity, a reduction of milk from 80% to 76%, rice from 75% to 70% and peanuts from 78.6% to 75%. Compared to the average levels of the last five years, which indicate how far the former Secretary of Agriculture was actually able and willing to push supports down when in office, these recommendations are down some 9.3 parity points for cotton, 5.5 for peanuts, 2.4 for milk and 7.9 for rice.

(4) The earlier Budget recommended a program of Federal aid to public schools, limited to aid for construction. But, under a highly unusual fiscal proposal, the Budget itself included practically no expenditures for this activity. Instead it proposed that states and localities float loans which Federal taxpayers would help pay off through installment payments of school bond interest as well as principal over the next 30 years.

(5) Similarly, aid to higher education was contained in the earlier program, as in mine. But again the effect on that Budget was deferred by the device of a 20-35 year period of installment payments.

(6) The earlier Budget assumed, completely contrary to our urban and economic needs, Congressional termination of the Federal farm housing loan programs; no new authority for low-income housing; a cut-back in veterans' and college housing loans; and no expansion in urban renewal. In short, before funds could be found to finance new and urgently needed housing programs, merely meeting the needs of existing programs required further additions to the Budget.

(7) The Federal Government, under the previous Administration as well as this, has an obligation to meet the educational needs of Indian children on reservations. The fact is that several thousand such children in New Mexico, Arizona and Alaska have been without any schools at all--but wholly inadequate funds to meet this obligation were included in the earlier Budget.

(8) The earlier Budget proposed that the Congress would cut back sharply on its program for constructing airports, on the electric and telephone loan programs of the REA and on the loan programs of the Farmers Home Administration. I do not believe the Congress would have or should now cut back these essential programs, and I have recommended their expansion.

V. CHANGES IN THE FISCAL 1962 BUDGET

This Message is not intended to present a wholly new budget. For reasons already stated that is not possible for this fiscal year. Nor is it intended to propose any new programs or expenditures in the non-defense area. With but a few exceptions, the items covered by this message and the attached table have been previously communicated, with full explanation, to the Congress. This message is primarily intended to share with the Congress my review of the non-defense changes in Federal activities and expenditures already recommended to meet our nation's needs.

The funds previously recommended for each Department and Agency have been scrutinized as carefully as time would permit, from the viewpoint of both the needs of the nation and the adequacy and efficiency with which these needs are 'being met. With the exception of the national defense program, that review is now largely complete, and the new programs and amendments resulting therefrom have been transmitted to the Congress or will be shortly.

As already emphasized, these changes of themselves will not unbalance the earlier budget--i.e., their cost in fiscal 1962, assuming the accuracy of the previous expenditure estimates, will be covered by the revenue previously estimated and the new revenues generated by the program. But despite this restraint and the further limitations imposed by the assumptions or omissions already mentioned, these changes nevertheless represent what we regard to be advances in areas of high priority. While the entire list is summarized on the attached table, among the most significant are the following:

Aid to Education. The largest single increase is in the field of education. Our educational needs have become too urgent to overlook. The Federal Government must do more to help finance improvements in this field--both for elementary and secondary education, and for higher education.

Funds for Scientific Research. My recommendations, largely in the form of amendments to the 1962 budget, provide a series of increases for scientific research-for oceanography, for high energy physics, for saline water conversion, for medical research, for National Science Foundation grants for basic research and science education, and for various other purposes. These increases reflect my strong belief that advances in scientific research are of the utmost importance to the growth of our economy, to the welfare of our people, and to the pre-eminence of our scientific achievements, and my conviction that the Federal Government must of necessity play a sizeable role in supporting such research.

Health. I have proposed significant measures to strengthen, improve and lower the cost of health care--with self-financed health insurance for the aged under Social Security at a net savings to the Budget, assistance to medical schools and students, and grants to the States for expanded community health services and facilities.

Housing and Community Development. I have recommended enactment of a program designed to greatly strengthen urban renewal and other existing programs, and add needed new authority in such important areas as moderate-income housing, rehabilitation and improvement of existing housing, and the preservation of open spaces. We are also obliged to increase Federal assistance for local airport construction. The additional expenditures thus entailed, in my judgment, are necessary in our Nation's future.

Area Redevelopment. The tragedy of our chronically depressed areas, and the enormity of their challenge to our economy, require no less than the very reasonable program for aid to depressed areas which I have recommended and which I am confident that the Congress will soon enact.

Natural Resource Development. It is not economical to be foolishly wasteful rather than prudently conservationist toward the country's natural resources. I have proposed modest but symbolic increases in funds for conservation and development of forests and public domain lands, for the national park system and seashore recreational areas, and for navigation and flood control activities; and reprogramming of other funds will permit additional reclamation activities.

Agriculture. In the field of Agriculture we propose to move vigorously in a wholly new direction, to alter fundamentally the pattern of the Nation's agricultural economy with an eventual reduction of governmental outlays. Meanwhile, in the short run, it is necessary to take various actions which will increase the 1962 expenditures over those seriously understated in the January budget, as already discussed. The increases are for price supports, Rural Electrification Administration and Farmers' Home Administration loans, the school lunch program and special milk program, and surplus food distribution at home and abroad. These expenditures will raise farm income and increase the use of our surplus agricultural commodities.

Veterans. I am recommending that the Congress enact a selective increase in compensation rates for veterans with the more severe service-connected disabilities, to offset rises in the cost of living since the last increase in 1957 and to adjust rates in some categories which are out of line. My budget estimates include provision for this purpose.

Budgetary Transfer Authority. To achieve greater effectiveness and savings in the use of the taxpayers' funds, the heads of the several Government Departments and agencies should have the authority to exercise some flexibility in the course of a fiscal year to meet new situations or changing circumstances. Therefore, I am asking the Congress, in enacting appropriations for each Department and agency, to provide the necessary authority for the transfer of a modest amount or percentage of the funds and personnel available to an agency head for operating expenses, to be used only as needed to meet unforeseen high priority requirements, and to be controlled by the Bureau of the Budget through the regular budgetary apportionment process. In this way, the funds appropriated by the Congress can be utilized with the utmost efficiency.

VI. FEDERAL REVENUES

Mention has already been made of the revenue estimates for fiscal 1962 and the necessity for Congressional enactment of all measures necessary to produce those revenues. My earlier message on Highways contained recommendations for the user taxes needed to assure a satisfactory rate of progress on highway construction at levels previously recommended by my predecessor. This Administration will not permit funds for this program to be diverted from general revenues. Other tax recommendations, designed to stimulate modernization of plant and equipment, and to achieve greater tax equity without any material change in overall revenues, will be contained in a subsequent message.

Three additional points are more appropriately contained in this message:

(1) Postal Rates. The January Budget submitted by my predecessor called for an additional $843 million in postal revenues to eliminate the deficit in that Department's operations. Such an increase must be effective July 1 to close the gap between postal expenditures and postal revenues; and, building on the previous Budget, this Administration's Budget requires an equal amount. I urge the Congress to close this gap; and I have directed the Postmaster General to review carefully and intensively all services and activities of the Post Office with a view toward improving efficiency and reducing costs.

(2) Tax Enforcement. I want to reemphasize my earlier request to the Congress for additional funds for the Internal Revenue Service. More and better qualified agents can both increase the collection of Federal revenues and help curb corruption in and out of government, racketeering and organized crime.

(3) The Debt Limit. My predecessor's message in January, even in assuming balanced budgets in both fiscal 1961 and 1962, pointed to the seasonal pattern of tax collections as necessitating another increase in the debt limit. The permanent debt limit of $285 billion, presently exceeded, has been superseded by a temporary limit of $293 billion which expires next June 30.

Inasmuch as the federal debt will exceed $285 billion on June 30th, a new increase in the ceiling will be required before that date.

I urge the Congress to enact an increase that will provide sufficient flexibility to permit sound management of the debt and of our budget expenditures. I am delaying the specific recommendation until early May so that we may have the advantage of the very latest estimates of revenues and expenditures.

CONCLUSION

This message reviews the current budget outlook and describes my philosophy concerning budget and fiscal policy. We seek to achieve the vigorous and sustained growth of the economy that will make possible a balance in the Federal budget. If we use our fiscal resources wisely, we can make tangible progress toward the achievement of our national and international objectives. Toward this end, I ask the cooperation of the Congress and the American people.

JOHN F. KENNEDY