Summary Statement on the 1944 Budget.

In line with my former practice I am issuing this Budget summation describing the modifications in the program of the Federal Government resulting from intervening appropriation and revenue acts since submission of my annual Budget last January. The summation presents a more accurate portrayal than was then possible of prospects for the fiscal year just started, in the light of economic developments and Congressional action.

Such a document is especially appropriate this year because my original Budget of six months ago could not present detailed recommendations for war appropriations so far in advance. These recommendations have been transmitted to the Congress in the form of various supplemental estimates over recent months.

The dominating factor in the fiscal situation is, of course, war expenditures. In presenting a tentative estimate in my Budget Message of last January, I said: ". . . a 100-billion-dollar expenditure program does reflect a national effort of gigantic magnitude. . . . Some persons may believe that such a program is fantastic. My reply is that this program is feasible." The 100 billion-dollar estimate for war expenditures during the fiscal year 1944, including net war outlays of Government corporations, still stands.

This huge war bill reflects the military requirements of our aggressive operations in various far-flung theaters of war. It will provide our armed forces with the crushing superiority in equipment which is needed for successful operation with a minimum sacrifice of the lives of our fighting men.

Total Federal expenditures, excluding debt retirement and trust fund disbursements, for fiscal year 1944 are estimated at 106 billion dollars; net receipts will amount to 38 billion dollars under present legislation. The resultant deficit of 68 billion dollars will be reduced if the Congress enacts additional revenue legislation.

These basic facts of the fiscal situation have tremendous importance for all of us, yet it is extremely difficult for an individual to obtain these summary figures from our highly complex laws and records. I hope that this statement will aid the public in understanding the many intricate factors on which they are based.

APPROPRIATIONS AND EXPENDITURES

The dollars-and-cents figures of the Budget are the monetary expression of our Federal program of action. Appropriations are the legal basis for incurring obligations and for the subsequent expenditure of cash. In many cases actual cash payments are not made in the same year for which the appropriations are made and in which the obligations are incurred. This is particularly true in the case of contracts for war materials. Thus, a rather large portion of the total cash to be paid out in 1944 will be used for contracts and commitments entered into under authority of the appropriations of previous years. Similarly, appropriations for the fiscal year 1944 will be used for placing contracts now, but a substantial part of the work will be completed and paid for in future fiscal years. Hence, for any specific year, there are differences between appropriations, obligations, and cash expenditures.

In some cases when a program such as the construction of ships must extend over a long period, the Congress utilizes so-called "contract authorizations" in lieu of immediate appropriations for the full expenditure ultimately involved. Such authorizations enable the executive departments to place contracts now, leaving the appropriation of cash for a later time when the money will be needed to pay the bills.

WAR ACTIVITIES; GENERAL AND SPECIAL ACCOUNTS.

I recommended war appropriations of 100,711 million dollars in the fiscal year 1944. Congress appropriated 97,633 million dollars and approved 2,000 million dollars of contract authorizations in lieu of recommended appropriations. The net result is a reduction of 1,078 million dollars.

This reduction is distributed as follows: War Department, 390 million dollars; emergency war agencies, 387 million dollars; Lend-Lease Administration, 150 million dollars; War Shipping Administration, 100 million dollars; and Navy Department, 51 million dollars. Congressional action on recommendations for other than war purposes is discussed in a later section.

WAR ACTIVITIES: GOVERNMENT CORPORATIONS.

The war activities of Government corporations consist mainly of: (1) financing war plant facilities, (2) purchasing critical materials, (3) facilitating production of essential commodities by incurring losses in purchase and sale operations, or by payment of subsidies, and (4) miscellaneous operations. Since July, 1940, these war corporations have made war commitments of 19,904 million dollars; disbursements, less cash receipts, are 5,584 million dollars. In the fiscal year just completed, net outlays for war purposes were 2,976 million dollars; during the fiscal year 1944 they are estimated at 3,000 million dollars.

As the war program develops, as the plants for which advances were made are amortized or disposed of, and as stock piles are liquidated, Government corporations are reimbursed. Hence, for the war period as a whole, receipts will offset a considerable portion of outlays.

TOTAL WAR EXPENDITURES.

War expenditures, including net outlays of Government corporations, amounted to 75 billion dollars for fiscal year 1943, in comparison with the January estimate of 77 billion dollars. Expenditures were therefore 2.9 percent below estimates, primarily because costs of production for many munitions declined more than anticipated. War production has moved from the experimental and pilot stage into mass production and has benefited from technological improvements. Considerable success has been achieved in translating these reductions in cost of production into actual reduction .of contract prices.

The 100-billion-dollar expenditure estimate for the fiscal year 1944 is based on present legislation, particularly legislation which establishes the pay and allowances of members of the armed forces, and which deals with prices and wages. It is assumed that the reduction in production costs will level off, but that no general increase in prices will occur. If we should fail in our effort to stabilize the cost of living, or if a substantial general increase in wage rates should take place, war expenditures would, of course, exceed the present estimate. Total war expenditures for the fiscal years 1943 and 1944 are subdivided in the following table.

TOTAL WAR EXPENDITURES

Fiscal 1944 Fiscal 1943

Estimated Actual

(billions)

Munitions and construction $72 $56

Other, including military pay, subsistence,

travel, and agricultural lend-lease 28 19

Total war expenditures $100 $75

The total war program, measured by appropriations, contract authorizations, and Government corporation commitments voted since July, 1940, amounts to 330 billion dollars. In addition, construction authorized in terms of tonnage for increase and replacement of naval vessels will, it is estimated, require appropriations of another 14 billion dollars.

Of the 330 billion dollars, 232 billion dollars were appropriated for the three-year period ending last month during which 212 billion dollars have been obligated and most of the remainder has been earmarked for completion of programs already under way. Only 110 billion dollars have, however, been actually spent as of June 30, 1943.

Congress has further appropriated 98 billion dollars for the fiscal year 1944, practically all of which will be obligated or committed by the end of the year, even though much of it will be actually unspent at that time.

The spread between appropriations and obligations on the one hand, and between obligations and cash expenditures on the other, reflects the necessity for the Government and for contractors to plan production many months ahead.

APPROPRIATIONS AND EXPENDITURES FOR OTHER THAN DIRECT WAR PURPOSES.

The largest single item of appropriation and expenditure for other than direct war purposes is interest on the public debt, which has risen rapidly because of heavy war expenditures. Interest is estimated at 2,700 million dollars in the fiscal year 1944, as compared with 1,808 million dollars for the preceding fiscal year. We are now financing at an average interest cost on new money of less than 2 percent; since personal and corporate income from all new issues is fully taxable, the net cost is even lower.

For all remaining activities of the Federal Government in the general and special accounts, my original and supplemental appropriations for the year just started amounted to 4,745 million dollars, as compared with appropriations by the Congress of 4,630 million dollars.

The Congress decided to discontinue immediately or in the near future the following agencies or activities: the National Resources Planning Board, the Crop Insurance program, the Home Owners' Loan Corporation, and the Bituminous Coal Division in the Department of the Interior. The Secretary of Agriculture has not been authorized to make commitments for parity payments on future crops or to make incentive payments to increase agricultural production. The program of the Farm Security Administration has been curtailed. On the other hand, the Congress appropriated more than I recommended for some items, such as forest protection, research in steel resources, reclamation, and flood relief and flood control.

Expenditures from the general and special accounts for activities other than war, interest on the debt, and statutory debt retirement, it is estimated, will amount to 4,336 million dollars in fiscal year 1944, which will be slightly above the prior year's expenditures, and 15 percent less than in the fiscal year 1942. The most important increases over the fiscal year 1943 are for veterans' pensions and benefits, retirement funds, and refunds. Refunds alone are now estimated at 282 million dollars above the fiscal year 1943; of this increase, 233 million dollars of rise between January and present estimates is attributable mainly to adjustments for overpayment of income taxes under the Current Tax Payment Act.

SUMMARY OF EXPENDITURES.

The following tabulation summarizes aggregate Federal expenditures from general and special accounts and by Government corporations in the fiscal year 1943, and for the fiscal year 1944, as estimated last January and as now revised.

EXPENDITURES

EXCLUDING DEBT RETIREMENT AND TRUST FUNDS

Fiscal 1944 Fiscal 1943

Classification Revised January Actual

estimates estimates

(millions)

War activities:

General and special accounts $97,000 $97,000 $72,109

Government corporations (net of receipts) 3,000 2,693 2,976

Interest on the public debt 2,700 3,000 1,808

Other activities:

General and special accounts 1 4,336 4,124 4,262

Government corporations (net of receipts) a 1,167 309 a 1,470

Total expenditures $105,869 $107,126 $79,685

1 Includes 361 million dollars of refunds primarily attributable to the Current Tax Payment Act which had not been enacted in January.

To determine Federal cash payments to the public, it is necessary to add to the above expenditures trust fund disbursements to the public, and to subtract major intragovernmental transactions, such as interest payments by the Treasury to trust funds, and the accrual of interest on savings bonds. When these adjustments are made, total cash payments to the public in the fiscal year 1943 amount to 79,317 million dollars, and are estimated at 105,397 million dollars for the fiscal year 1944.

RECEIPTS AND DEBT RECEIPTS: GENERAL AND SPECIAL ACCOUNTS.

Actual net receipts amounted to 22,072 million dollars in the fiscal year 1943. They were estimated for the fiscal year 1944 at 33,081 million dollars last January, and are estimated at 38,148 million dollars at this time.

The increase in the January estimate over the previous fiscal year was attributable to the Revenue Act of 1942 and to greater business activity and higher incomes than anticipated. The further increase of 5,067 million dollars between the January and July estimates arises primarily because of larger collection of direct taxes from individuals under the Current Tax Payment Act of 1943. This Act advances the date of payment of individual income tax on rising incomes and requires partial payment of the uncanceled portion of the 1942 tax. At the time of passage of this Act it was estimated that collections for the fiscal year 1944 would be increased by approximately 3,000 million dollars after refunds for overpayment.

A non-recurrent increase of importance in these collections is accounted for by the regulations issued under authority of the recently enacted Current Tax Payment Act, requiring monthly rather than quarterly payments into the Treasury of amounts withheld by employers. Hence, the anticipated lag in payments for the fiscal year 1944 will amount to only one month instead of a quarter of a year.

Direct taxes on corporations in the fiscal year 1944, including the postwar credits, are estimated 835 million dollars lower than in January. Underlying this change is a reduction in the anticipated yield of the excess profits tax, offset partially by an increase in revenue from corporate normal tax and surtax. Factors accounting for this change include relief provisions of the excess profits tax in the 1942 Revenue Act, the renegotiation of war contracts, and changes in the outlook for corporate profits. Larger estimates of miscellaneous receipts are due to refunds arising from renegotiation of war contracts; these refunds are now expected to be higher than was estimated in the original Budget.

Total receipts of general and special accounts are expected to amount to 40,350 million dollars in fiscal year 1944. This figure includes the amount appropriated to the old-age and survivors' insurance trust fund, and postwar credits for excess profits tax and victory tax. Both of these are currently collected but represent claims against the Federal Government which are deducted to arrive at net receipts.

The foregoing discussion has been based entirely on receipts of general and special accounts. To calculate total receipts from the public it is necessary to include receipts of trust accounts and to exclude transfers such as appropriations to trust accounts. On this basis total Federal receipts from the public were 25,274 million dollars in the fiscal year 1943, and are estimated at 41,898 million dollars for the fiscal year 1944.

PUBLIC DEBT

The direct public debt, excluding obligations of Government corporations, amounted to 137 billion dollars on June 30, 1943. Unless additional tax legislation is enacted, the debt will increase 69 billion dollars in fiscal 1944, bringing the public debt to 206 billion dollars by June 30, 1944. Changes in the cash working balance may alter total debt a year hence.

The increase in the direct Federal debt does not only reflect borrowing from the public. Government trust funds, especially the social security trust funds, are accumulating a temporary surplus in periods of high employment and low disbursements, which is invested in Government bonds. The surplus reflects claims of beneficiaries against the trust funds and is, of course, a liability of the Government even though such investments in Government bonds reduce the need for borrowing from the public during the war period.

The increase in the Federal debt includes the obligations issued in lieu of debt retired by Government corporations. These operations reduce the contingent debt and correspondingly increase the direct debt. They represent refinancing rather than new financing.

Borrowing from individuals and institutions amounted to 61 billion dollars during the fiscal year 1943; it will amount to 63 billion dollars in the fiscal year 1944 unless additional revenue legislation is enacted. Both amounts include that portion of postwar credits against excess profits and victory tax payments which will be claimed after the war.

THE ECONOMIC IMPACT

Governmental spending of over 100 billion dollars a year has major repercussions on the economy. The amounts spent become incomes of corporations and individuals. If expenditures are financed either by taxing or by borrowing active funds, the volume of spendable funds in the hands of consumers will not increase. If, however, expenditures are financed by borrowing from banks or by borrowing idle funds, the spendable income in the hands of consumers will increase greatly.

Individuals are expected to receive incomes approaching 150 billion dollars during fiscal year 1944, over twice the income payments to individuals in fiscal year 1940. Such a huge rise creates a tremendous increase in demand for goods and services. A considerable portion of this enlarged income and demand for goods results from full employment of many millions of workers who were formerly either unemployed or underemployed, or were not seeking employment in the years before the defense and war effort. Such persons now have money to buy more necessities and even luxuries.

The Government directly or indirectly is employing more than one-half of the total labor force either in military service or in war production. In view of this fact, sooner or later a drastic reduction in the supply of goods and in the services available for civilian consumption was bound to result. These facts did not make themselves felt during the earlier phases of the defense and war effort because our economy was running far below its capacity. Industrial production (measured by the Federal Reserve index of production) increased by 68 percent from fiscal 1940 to fiscal 1943. Thus we were able to increase war production and civilian production at the same time. In recent months the index of production has not increased substantially, which indicates that we are approaching the capacity of production with our available manpower.

I do believe, however, that a further increase in production is possible if Government, management, and labor constructively tackle the problems of the most effective use of our resources. This should be our objective since we shall feel the full impact of the curtailment in less essential civilian supplies as our large cushion of inventories disappears.

We must recognize clearly that war expenditures are creating an increase in the demand for civilian goods while the supply of these very goods is decreasing. Many of us must reduce our accustomed standard of living during wartime because of the absorption of a large portion of our labor force and labor reserve for war service. A reduced standard of living is due to the titanic war effort and not, as some people believe, to taxes, rationing, and other governmental controls. These controls are necessary to achieve maximum war production, to assure equitable distribution of the available civilian supplies, and to prevent economic collapse after the war has been won.

We all know that it takes some time to organize a war economy in the most effective manner. We know, too, that controls and regulations imply many inconveniences which we constantly try to reduce. Curtailments and inconveniences cannot be avoided if we are to help win the war with a minimum of sacrifice in human life. Nobody wants to jeopardize victory or cause avoidable loss of life by waging war with an insufficient number of troops, with poorly trained troops, or with less than the best equipment we can produce.

I recommended in my Budget Message last January a truly stiff program of additional taxes, savings, or both. I continue to support that program. The cost of living cannot be stabilized unless price and wage controls are supported by a further substantial absorption of purchasing power as a deterrent to bidding up prices and resorting to the black market. The alternative to stabilization is inflation, and inflation is the most inequitable way of distributing the necessary wartime curtailments. Inflation shifts the full burden to the shoulders of the people in the weakest bargaining position, the people whose incomes do not rise with increasing prices. Inflation also reduces production by creating unrest and friction.

A war program involving 100 billion dollars of expenditure during the next twelve months is, I repeat, a gigantic national effort for victory. That expenditure program must be backed up by a revenue program of sufficient size to make sure that we do not disrupt our home front and that we do prepare the way for an orderly transition to a future peace economy.