I want to talk with you tonight about the Federal budget. I would like to examine in a realistic and non-partisan manner the fiscal problems faced by the present administration, and point out to you the difficulty which the Administration faces in carrying out its promises of one year ago.
There are three separate factors which we must consider almost simultaneously in any examination of the federal government's fiscal problems. These are, of course, first the federal budget or schedule of expenditures; secondly, federal revenues, dependent primarily upon the schedule of various tax returns; and finally, the federal public debt, consisting of the total of individual deficits resulting from an imbalance between the previous two factors.
Let us examine the present prospective status of each of these three items.
I. The Federal Budget
Our first inquiry concerns the federal budget.
This year, fiscal year 1954, the federal government is committed to spend at least some $72 billion dollars. This represents a reduction in expenditures from the budget submitted by the outgoing administration of approximately $13 billion; but unfortunately a considerable portion of these savings are false, consisting only of the deferment of present obligations of the federal government such as civil service retirement and veterans' benefits. For the following fiscal years it is estimated that the budget can be further cut by another $4 or $5 billion dollars, and I can offer several examples of where such cuts should be made; but this, in view of the tax and debt problems which I shall discuss momentarily, is by no means sufficient.
There are several reasons why this rather large budget cannot be cut far more extensively.
First, the real difficulty in effectuating any cut in the budget of sufficient extent to fulfill campaign promises lies in our expenditures for national security. Today, although economic aid has been sharply reduced and the military budget dangerously decreased, expenditures for national security - including the defense department, atomic energy, military aid abroad and civil defense - constitute over 70% of the federal budget. Housing, community development, education and research, social security, welfare, health and labor department appropriations when added together, on the other hand, total less than 4% of our federal budget. Interestingly enough, among the departments criticized most severely, the budget of the Department of Health, Education and Welfare was cut by Congress only 2% below the amount submitted by the outgoing administration; the Agriculture Department only 2%; the Post Office Department only 2%; and the Justice Department only 4%.
Secondly, effective economies in government are restrained by the pressure on particular items. Rivers and harbors and flood control projects gain the support of those congressmen in whose jurisdiction they are located. Subsidies to airlines, shipbuilders, publishers, agricultural interests and others all have powerful friends in their beneficiaries, as do such agencies as the veterans administration, soil conservation service, and many others.
Third, economy advocates are faced with the large amount of unspent funds authorized by Congress, which are carried over from previous years but whose expenditure is already contracted for. On July 1 of this year, such funds totaled $81 billion dollars, not counting special revolving loan and other funds of $20 billion dollars. All of these expenditures will show up in the federal cash budget during the next few years; but Congress will have little or no chance to reduce them, nor will the Administration.
Fourth and finally, is the matter of fixed charges and legal obligations. Such obligations make up some 20% of our federal budget, and include such large items as interest on the public debt (8%), which has been increased by the present administration; veterans' compensation, pension and benefit programs (6%); farm price supports, public assistance and unemployment compensation payments, federal highway aid and other payments fixed by law.
In short, the prospects of reducing the budget by more than 4 or 5 billion dollars next year will be difficult, particularly after this year's reductions. It will be extremely difficult if the Administration seeks, as announced, over a 1,000% increase in civil defense; or if we make a serious attempt to develop civilian use of atomic power; or if a worsening of the crisis in Indo-China or elsewhere in the globe requires more American intervention; or if our farm surpluses require extensive government purchases.
Most important of all, the budget will be difficult to reduce by any sizable proportion if the Congress and the American people realize that the level of our expenditures for national security, dangerously cut last year, must be proposed by the Joint Chiefs of Staff and the Defense Department, not by the Bureau of the Budget.
II. Federal Tax Revenues
Realizing then, the difficulty of substantially lessening federal expenditures, let us look at the other side of the Federal ledger; our tax returns.
The income of the federal government during the present fiscal year is expected to reach less than 69 billion dollars, a sum which you will note is more than 3 billion dollars less than our expected expenditures. But, although I stated that expenditures for the following fiscal year might drop by some $4 or $5 billion, the income of the Federal Government is expected to drop by a like amount.
(1) On December 31, the Excess Profits Tax will expire, causing an annual loss of revenue amounting to 2.3 billion dollars.
(2) On January 1, individual income taxes will take a 10-11% across the board decrease, including a 1% reduction in individual capital gains tax, for a further annual loss of 3.1 billion dollars in revenue.
(3) On April 1, the corporation income tax automatically decreases 5%, for an annual revenue loss of 1.9 billion dollars.
(4) Several excise taxes now bringing in another 1 billion dollars will expire on that same April date.
(5) In addition, there is strong pressure for a so called tax revision bill, which will grant relief in many areas of supposed hardships or inequities, which could cost another 1 to 3 billion dollars in annual revenues.
To permit all of these tax reductions to take place will cause a loss in federal revenues of somewhere around 10 billion dollars a year, making any budget balancing impossible even with great reductions in federal expenditures. It has been suggested that the corporation income tax may be reduced only 2% instead of 5%; that excise taxes not be permitted to expire but be revised in order to double their production of revenues; and that the so called tax revision bill be postponed until a more favorable time. But even if these steps are taken, the expiration of the Excess Profits Tax and the decrease in personal income taxes will prevent revenues from reaching a point sufficient to support an adequate federal budget. Under the circumstances, one may question whether we can afford to lose these revenues.
The Federal Government could close those tax loopholes, such as the percentage depletion allowance for oil, gas and mining interests, which loopholes have been estimated to cause an annual loss in revenues of over 4 ½ billion dollars. On the other hand, such revenues could be raised through imposition of a general manufacturers' excise tax, which is the familiar sales tax at the manufacturer's level.
There are however many, many objections to the imposition of a general manufacturer's excise tax.
Among others, it is a discriminatory tax, taking a greater proportion of the income of the small wage earner than of those in the higher income brackets, hitting harder at the poor family than the wealthy individual. It is an unsound tax, taxing not income, not profits, but consumption. Regardless of the level at which it is imposed, it is clearly passed on to the consumer.
When imposed at the manufacturer's level, the effect of the tax is pyramided; for each mark up by the wholesaler or retailer on the cost of the product as it comes to him must of necessity include a percentage mark up on the tax itself which forms a part of that cost. Moreover, inasmuch as it is included in the cost of the wholesalers' and retailers' inventory, the latter are required to borrow more capital for the acquisition of such inventory, buy more insurance to cover it, pay higher personal property taxes on it, and pay higher commissions for its resale. Thus, in addition to the tax itself, these further costs boost prices still higher.
As a result of these costs and the pyramided tax this form of taxation is artificially inflationary, unnecessarily increasing the cost of living and doing business at a time when every effort should be made to hold it down.
At the same time, it clearly reduces the purchasing power of the consuming public. The consumer today has only a limited number of dollars to spend upon the purchase of goods. The addition of a sales tax to the price of these products obviously does not increase the number of dollars the consumer has available, and obviously decreases the number of items on which he can spend his dollars. True enough, it may transfer that purchasing power to the federal government; but in holding the line against recession we are interested in the buying power of the housewife and the worker and the farmer who buys your goods, and not the buying power of the federal government whose expenditures for a limited number of items is not determined primarily by its tax revenues.
In short, a general manufacturer's excise tax or sales tax imposed by the Federal Government would be economically unsound. Its concealment through imposition at the manufacturer's level does not really make it any less painful; nor do the discriminations and evils resulting from the present system of federal excise taxes and state and local sales taxes justify broadening that discrimination to envelop us all. Adequate tax revenues of the Federal Government must be maintained, and I have pointed out the difficulties and alternatives which exist with respect to that task; but certainly the general manufacturer's excise tax or sales tax is not a desirable alternative.
III. The Federal Debt
Finally, then, we come to consider the third factor: the national debt. As you have no doubt read in the newspapers, the statutory debt limit is 275 billion dollars, an amount fixed over 7 years ago. Tonight, the gross public debt of the federal government is 274.96 billion dollars, or less than 40 million dollars under the ceiling.
This is indeed a small margin on which to operate a government which spends some 300 million dollars every day! The President's request for a 15 billion dollar increase in the statutory limit was, as you recall, denied in the closing days of Congress. It now appears as though the government will squeeze by until the first of the year, partly through a reduction in progress payments on defense contracts, a reduction which is particularly hard on small businessmen who are anxious to avoid additional credit costs. During the first 6 months of next year, a large portion of tax revenues, including at least 60% of the corporate income tax, will be paid, and the debt should drop. But in the 6 months thereafter, as revenues decline and expenditures are maintained, an increase in the gross public debt over and beyond the present statutory limit seems almost inevitable.
The likelihood of a further deficit to increase the total debt during the next two fiscal years is obviously very great, inasmuch as, as I have already pointed out, it will be difficult to reduce expenditures which already exceed income, by more than the expected decline in tax revenues. Moreover, should a mild recession strike our economy, tax revenues will likely drop by nearly $10 billion; fiscal theory will call for a further reduction in tax rates; and the size of the deficit will be still greater.
There is, of course, a "desperate alternative" here, too. The Federal Government might sell its public lands, power developments, and other projects, in order to increase its fluid assets and reduce its debt; or it might call for a transfer of the social security, unemployment compensation and other trust funds to the general treasury, thus improving its fiscal position on the books. But I need not tell you that these are dangerous alternatives indeed, threatening the rights and interests of all of the people of the United States, and leading to disastrous consequences in the future which may cause still greater budgetary deficits.
IV. An Optimistic View
You have before you, then, an apparently grim or at least disillusioning picture. Federal expenditures cannot be substantially lessened, unless we endanger our defensive strength. Federal taxes cannot be substantially reduced if we are to balance the budget (and if it is insisted that Congress keep tax loopholes open), unless a discriminatory and undesirable sales tax is imposed. The national debt cannot be reduced and the present debt limit will have to be exceeded, unless the government adopts policies with respect to its assets and trust funds which would endanger the security and rights of ourselves and our posterity.
Although the Administration cannot be blamed for the tremendous expenditures of World War II and the Korean Conflicts, which were to a large extent responsible for this situation, at the same time I do not think we can fairly place all of the blame upon its predecessor. The last year of World War II expenditures was fiscal 1945-46 and the public debt which had risen so rapidly during the war stood at 269.4 billion dollars at the close of that year. Surprisingly enough, by the end of fiscal 1952-53, the gross national debt stood at 266 billion dollars, a drop of nearly $4 billion. Similarly, the net debt, which is calculated on the basis of the so-called consolidated cash budget of the government based on actual revenues and expenditures of all types, and which is the basis for most economic and business analyses, also showed a sharp reduction during the years of the Truman Administration.
Our ultimate objective must quite obviously be a balanced budget within a framework of full employment. But inasmuch as it appears that we shall face continuing deficits for some time unless undesirable alternatives are adopted, we might well remember some of the incorrect premises upon which much discussion of the national debt has centered.
First, is a deficit inflationary? Certainly that is its tendency, and that is ample reason for its reduction; but the causal relationship is not that simple. Our worst inflation was experienced during the fiscal year 1950-51; but that was a year when the administrative budget showed a sizable surplus. In subsequent years, the government showed a deficit but prices levelled off. This year, we face a sizable deficit again; and yet the financial pages indicate that the danger today is more recession than of inflation. Obviously, other economic factors are more important in the nation than the size of the deficit.
Secondly, is a balanced budget necessary to give us the strength to maintain the cold war? The view that it is also fails to look at the federal budget in the framework of the entire national economy. All of us surely realize that World War II could not have been won if our military expenditures were slashed to the point necessary for a balanced budget. But because our economy was prosperous and our productive potential showed a tremendous increase, and because our federal government had the financial and productive resources to draw upon, even though it meant incurring a huge deficit we were able to accomplish fantastic military production objectives in order to win that war. It is equally important to emphasize today that what we shall "afford" is not to be determined on the basis of whether the federal budget is or is not balanced, but on the basis of our defensive and productive strength and other national objectives.
Third, does an unbalanced budget show an unsound economy? Again, it is important to look at the entire national picture. During the past 20 years, our national debt increased to previously unheard of levels. But at the same time, personal income, employment, savings, planned investment, and profits increased over the same period of time to record levels, as did our standard of living, purchasing power and general prosperity. In 1932, our national debt was considerably less than 10% of the present debt ceiling which had us all so concerned; but our national prosperity was also considerably less. In the years since 1932, every time you or I bought a savings bond, it was a sign of further prosperity; and yet at the same time it increased the national debt. Of course, the argument that "we owe it to ourselves" ignores the difference between taxpayers and bond holders; but the fact remains that for every dollar owed by the government there is a dollar asset in the hands of a private citizen or corporation, an asset which he regards as a part of his personal prosperity. In short, our nation as a whole has not been living beyond its means but getting richer and more productive while at the same time financing a huge war effort and giving extensive aid to other nations (whose economies could not support such an effort and who really were living beyond their means).
Fourth, as a result of the foregoing, the national debt burden, as distinguished from the national debt, has decreased not increased. At the end of 1945, the gross debt was over 152% of that year's national income; by the end of August 1953 its percentage of national income was less than 88%. Total public and private debt in this country has fallen from 425% of national income in 1933 to 190% at the end of 1952. This year's deficit about which we are so concerned, is but a small fraction of the value of this year's national output.
Thus in addition to seeking a balanced budget, we should also work for full employment, and for increasing the productivity of our workers. The output of our plant and the income of all of our citizens in order to continue a lightening of the debt burden. [sic]
Certainly this conclusion brings us back to that which unites us here: profit sharing. It is through such practices that the productivity of our workers and our industrial community will continue to increase, and our wages and our national income shall continue to rise, so that the burden of debt shall weigh less heavily on each of us, and the actual debt will decrease as our citizens become still more prosperous.
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