and a half. The changes in tax receipts also reflect administrative and legislative actions. The administrative change accelerating payments of the individual income tax, the social security tax, and excise tax payments adds $1.2 billion in receipts in fiscal 1971. This one-shot gain in 1971 is not repeated in 1972. It should be noted that the acceleration of these taxes did not add to tax liabilities but merely shortened the pipeline time in the payment reaching the Treasury. A second administrative change is the depreciation reform recently announced by the President. This reduces receipts by $0.7 billion in fiscal 1971 and by $2.7 billion in 1972. New legislation proposed in the Budget will increase 1972 total receipts over 1971 by $2.8 billion. Almost all of this comes from the proposed increase in the social security tax base from $7,800 to $9,000 effective January 1, 1971, which is reflected only in the unified budget. Although the projected Federal Budget will require somewhat less borrowing in fiscal 1972 as compared with the current year, we will require an increase in the debt limit. In adjusting the debt limit I hope the Congress will grant an increase which will be adequate to meet our needs at least through fiscal 1972. In meeting our borrowing needs we are looking forward to more favorable market conditions in the coming year than we have enjoyed for a number of years. In this context it would be in the public interest if we could do some financing in the long term area where the 44 percent statutory ceiling has blocked the issuance of any new longterm obligations since 1965. I have urged the Congress to remove this archaic restriction, and I am pleased to report that yesterday the House Ways and Means Committee voted some relaxation of the ceiling. I shall be pleased to respond to your questions. BUDGET RECEIPTS-UNDER LEGISLATION PROPOSED IN FISCAL 1972 BUDGET DOCUMENT, FISCAL YEARS Secretary CONNALLY. That is the conclusion of my statement. I am very grateful to you, Mr. Chairman, for the opportunity to make it. Mr. MAHON. Thank you, Mr. Secretary. GENERAL STATEMENT OF THE DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET Shall we listen at this time to the Director of the Office of Management and Budget? You may proceed. Mr. SHULTZ. Thank you, Mr. Chairman and members of the committee. Let me express as did Secretary Connally-my great pleasure in being part of this historic occasion. It is a privilege to appear before this committee. I might say as the person worrying particularly about the budget and the appropriations process, I welcome very much the prompt hearing and the promise that it gives of hard and prompt work in putting this budget through and expressing yourselves on it. I might also say that this the first time that I have had the chance to appear and work with this committee as a whole. I did have the pleasure of working with the Subcommittee on Education and Labor. That was a strong school for me and it taught me real respect for the thoroughness and the detail and the analytic capability that this committee applies to the budget. We all look forward to that and look forward to working with you on it. Mr. Chairman, you noted in your opening statement that one of the particular areas of inquiry had to do with the policies underlying the budget. In this connection I think the use by the President of the full employment budget concept as a policy underlying the budget has come in for a great deal of discussion. What I thought I would do, if I might, is to ask that the statement I have prepared, and which I believe has been distributed to members of the committee, be made a part of the record and then if I could, I would like to talk briefly from some charts I have prepared, since I think that might be more informative than reading this statement that you already have. Mr. MAHON. I agree with you, Mr. Director. I think it would be a good way to proceed. So we will include your statement in the record and we will now hear you talk from the charts. Mr. SHULTZ. Thank you, Mr. Chairman. (The statement follows:) Mr. Chairman and members of the committee: Last July the President set forth the budget policy that guided the formulation of the 1972 budget. In a message to the Congress he stated: "At times the economic situation permits-even calls for a budget deficit. There is one basic guideline for the budget, however, which we should never violate except in emergency conditions, expenditures must never be allowed to outrun the revenue that the tax system would produce at reasonably full employment. When the Federal Government's spending actions over an extended period push outlays sharply higher, increased tax rates or inflation inevitably follow." This is the basic concept of "The Full Employment Budget." Since there has been considerable discussion of this concept, I would like to make a few general remarks on what it is and how it works. Why it is used THE FULL-EMPLOYMENT BUDGET When we speak about the full employment surplus or deficit, we are comparing outlays not with actual revenues but with the revenues that would be generated if the economy were operating throughout the year at full employment. In this context, full employment is defined as an average annual unemployment rate of 4 percent. There are several major reasons why the full employment concept can and should be used: It imposes the discipline of an upper limit on outlays. It permits orderly tax and spending consistent with steady growth. It furthers economic stability by restraint during boom periods and by stimulus during slack periods. As the President said, the full-employment budget idea is in the nature of self-fulfilling prophecy: By operating as if we were at full employment, we will help to bring about that full employment. How it works Important as it is, the budget is only one aspect of economic policy, monetary policy being at least its co-equal in importance. Nevertheless, in developing budget strategy, we are constantly concerned with the relationship of the budget to the economy and, especially, with the effects changes in budget strategy are likely to have on the economy. Strategies vary in appropriateness with the state of the economy. The alternative that we chose for the 1972 budget is to maintain a virtual balance between full employment revenues and budget spending Our purpose is to stimulate economic activity-but not to overstimulate it. We believe that this budget is as expansive as it needs to be, and will permit the actual GNP to gradually move up toward the full employment GNP. Another possibility would have been to try to balance outlays with estimated actual receipts. This policy would produce a large full employment surplus, and thereby exert a heavy fiscal drag that would retard economic growth. A third possibility would be severe deficit spending even with full employment revenues, such as occurred in 1966, 1967, and 1968. This simply would not be responsible fiscal policy in 1972. It might produce a rapid rise in the gross national product, but at the cost of a severe inflationary spiral. 1972 budget results under full employment assumptions Budget outlays in 1972 are estimated at $229.2 billion and actual revenues at $217.6 billion, yielding a deficit of $11.6 billion. Even with this actual deficit, spending is still slightly below full employment revenues of $229.3 billion. The actual deficit in 1972 is projected to be less than 1971. This reflects our belief that the economy will be operating at a higher rate in fiscal 1972 than in fiscal 1971. In other words, we expect an expansion in the economy. Comparison of actual and full employment budgets A review of recent history is important to an understanding of our choice of the full employment budget. In fiscal year 1961 there was a full employment surplus but an actual deficit. It may very well be that the large full employment surplus, despite the actual deficit, contributed to the stalling out of the expansion that seemed to be getting underway in the preceding year. In each of the years 1962 through 1965, we had a slight full employment surplus, and an actual deficit. The economy was not operating at full employment but was moving toward it during this period. And, as you may recall, prices were moving at a fairly stable rate. Therefore, the actual deficit was not pushing in the direction of inflation. By contrast, from 1966 through 1968 there was full employment and a large full employment deficit. The economy was using its resources fully. Nevertheless, during this time, the Government was increasing its resource demands on the economy and was not covering its increased spending with higher taxes. The excessive spending that occurred went far beyond full-employment revenues. In conjunction with other factors operating at the time, this resulted in substantial inflation, a very difficult situation we have all been struggling with over the past few years. The budget was not the only reason for the resulting inflation, but surely was a major contributor. General recognition of this fact led finally to the surtax and a major effort, bipartisan in its origins, to gain better control of spending. Thus, the budget for fiscal year 1969 as compared with fiscal year 1968, represented a tremendous fiscal swing in the budget and a necessary but hard wrench to the economy. The President's policy has sought to keep outlays within full employment revenues. Such a balance was achieved in 1969 and 1970. Balances are also expected for 1971 and 1972. REORDERING THE NATION'S PRIORITIES The 1972 budget continues the shift in priorities that characterized the 1971 budget. For the second successive year, spending for human resources will exceed spending for defense, reversing a pattern which had existed for many years. Even with this shift in priorities, this budget reflects the President's strong concern that we must not neglect our defenses. Within these overall priorities, several programs receiving special attention in 1972 are: Revenue sharing, which will affect in a fundamental way how Government serves the Nation; Basic welfare reform, which would remove the principal evils of the present system; Improving health care, with heavy emphasis on preventive research, training more medical personnel, and achieving greater equity and efficiency in the delivery of health services; Education and manpower training, with primary emphasis on finding better ways to carry out Federal programs; Community safety and crime prevention, which is supported by a 32-percent increase in outlays to improve law enforcement, to make our judicial system fairer and more efficient, and to raise the effectiveness of correction and rehabilitation; Expanded efforts to protect and enhance the quality of our environment and recreation areas; Revitalization of housing and community development programs; and REVENUE SHARING We are proposing in this budget a revenue sharing plan which forms the foundation of our efforts to revitalize government. Under this plan approximately $16.4 billion will be shared with State and local governments in a way that will: Assign both revenues and management discretion to those levels of government closest to the problems; Alleviate the fiscal problems of State and local government by providing additional unrestricted revenues through general revenue sharing and by eliminating the present matching requirements of the categorical grants being absorbed into special revenue sharing; and Make State and local elected officials responsible for and capable of dealing with their problems. State and local governments are caught in a financial squeeze that threatens their financial solvency. States and localities face a revenue gap of as much as $10 billion in 1971, in spite of large Federal grants and the more than 450 major tax increases that have been adopted in the past dozen years by State governments alone. The Federal Government, largely through categorical grants, has provided substantial financial aid to States and localities. However, these Federal efforts have developed into a patchwork system of aid whose purposes are quite often lost in the maze of compliance procedures. The Federal system of aid-giving has, unfortunately, compounded the problem in many cases. For the most part, this aid has been accompanied by some sort of matching requirement. In addition to its other burdens on States and localities, the matching requirement has drawn State and local revenues into a pattern of expenditures and priorities that are usually planned and imposed by the Federal Government. This means that Federal aid quite often misses some of the most critical areas facing States and localities. Basically, the administration's revenue sharing proposal involves general revenue sharing of $5 billion and special revenue sharing of $11.4 billion. The general revenue sharing proposal will provide funds to States with approprate pass-through to localities. There will be no restrictions on the use of these funds beyond the necessary audit to assure the money is spent for proper governmental purposes and that civil rights guarantees are not obstructed. The administration's proposal ties general revenue sharing to the personal income tax base so that it will increase each year as the tax base of the Federal Government grows. The special revenue sharing plan will provide about $11.4 billion, which States and localities can spend, in the broad functional area for which they are designated-transportation, education, urban and rural community development, manpower training, and law enforcement. States and localities will receive and spend this money, broadly speaking, within these functional purposes, but with an arrangement that permits them to determine how the money will be spent within each broad functional area. In the state of the Union message, the President stated that he is allocating an additional $1 billion to revenue sharing over and above the amounts that would normally flow into the categorical programs grouped together under special revenue sharing. This additional amount expresses his sense of priorities and his desire to assure that special revenue sharing does not cause a loss of Federal aid to States and local governments. Approximately $700 million of this additional amount has been allocated within the special revenue sharing areas. The remaining $300 million is covered by the budgeted allowance for contingencies and will be allocated later in conformance to actual demands. This revenue sharing proposal represents the President's strong feeling that if the people are given an opportunity to have some power and control over things that come closest to them, they will respond, and we will have better government, more effective government, and, in general, a much healthier country. The remainder of this statement deals with areas of the budget in which—I have learned from reading the record of previous hearings-this committee has a special and continuing interest. BUDGET AUTHORITY One area of particular concern, of course, is budget authority. A total of $249 billion is estimated in the budget for fiscal year 1972, about $13 billion more than in 1971. Of the total, the Congress must act on $170 billion (current budget authority). The remainder consists of $98 billion that will become available under existing laws without current action by the Congress (permanent budget authority) and $19 billion in offset receipts. As shown in the table on page 44 of the budget, permanent budget authority consists mainly of trust fund programs and interest on the public debt. The following amounts of current budget authority are contained in the budget: $141.6 billion in 1970; $166.0 billion in 1971; and $170.2 billion in 1972. The increase from 1971 to 1972 of only $4.2 billion is somewhat misleading since the 1971 totals include some special nonrecurring items: $10 billion in borrowing authority for the new Postal Service, $3.1 billion for the Urban Mass Transportation Program, and $3.3 billion for the TVA. The gross increase in 1972 budget authority is accounted for largely by the following programs: Increase over 1971 (in billions) Commodity Credit Corporation (including Public Law 480) $1.5 I, of course, need not remind you that only a portion of the new budget authority provided in any one year will be fully obligated or spent in that year. As a result, there is always a substantial carryover of unspent budget authority from previous years. The chart on page 45 of the budget shows that $87 billion of outlays in 1972, almost two-fifths of the total, will come from appropriations and other budget authority enacted in earlier years. Conversely, about two-fifths of the 1972 budget authority will not result in outlays until future years. |