FEDERAL FUNDS TRANSACTIONS

In response to your interest and that of some other committees, we have included information in the budget on the transactions of Federal funds. These transactions correspond closely to the old administrative budget concept.

Expenditures of Federal funds in fiscal 1972 are estimated to total $176.9 billion, compared with $164.7 billion in 1971. The increase of $12.2 billion consists chiefly of:

$4.0 billion for revenue sharing;

$2.6 billion for the Department of Health, Education, and Welfare, including $1.2 billion for public assistance grants;

$1.5 billion for military functions of the Department of Defense and for military assistance; if one were to exclude civilian and military pay raises ($1.5 billion increase) and the all-volunteer force proposal ($1.2 billion), outlays for these programs would decline;

$0.7 billion for the Veterans' Administration;

$0.7 billion for the Department of Agriculture; and

$0.5 billion for pay raises in civilian agencies of the Government.

FISCAL YEAR 1971 OUTLAYS

Changes since estimate of last year

The shift in fiscal year 1971 from the $1.3 billion surplus estimated a year ago to the currently estimated $18.6 billion deficit results from a combination of changes on both the receipt and expenditure sides of the budget. Estimated receipts have declined about $8 billion since last February, reflecting mainly the effect of a lower level of economic activity (including the auto strike effects). The estimate of total budget outlays in fiscal year 1971 has been increased $12 billion, the great bulk of which is accounted for by mandatory changes. The increases include:

$3.2 billion for Federal civilian, military, and wage board pay increases, in accordance with laws enacted by the Congress;

$2.3 billion in unemployment benefits;

$1.1 billion for the expected social security benefit increase;

$3.1 billion as the result of mandatory increases for interest, retirement benefits, public assistance grants, and veterans benefits; and

$2.1 billion (net) as the result of congressional action or inaction, such as the delay in enacting postal rate increases.

Statutory outlay ceiling

The table on page 56 of the budget shows that the statutory outlay ceiling enacted for the fiscal year 1971 is expected to be $214.5 billion-$1.7 billion over our estimate of actual outlays in that year.

The new estimate of the legal ceiling is well above the benchmark figure of $200.8 billion that was placed in the statute last summer. As you will recall, the benchmark figure was to be subsequently increased or decreased for:

The effect of congressional action or inaction on the proposals in the 1971 budget; and

Increases in designated uncontrollable payments up to a maximum $4.5 billion.

Over one-half of the adjustments to the benchmark figure result from (1) increases of $4 billion in the payments of social insurance trust funds, interest on the debt, and other designated uncontrollable items, and (2) pay increases of $3.2 billion over February 1970 estimates.

Because the Congress did not enact postal rate increases as proposed in the February 1970 budget, both the outlay ceiling and the current estimate of 1971 outlays are increased by $1.2 billion. Other significant increases are expected during the current session for social security benefits, $1.1 billion; and for public assistance grants, $1 billion. Page 57 of the budget provides additional details.

Let me conclude by saying:

CONCLUSION

The 1972 budget is an expansionary budget suited to the times;

It is not inflationary;

It reverses the trend of the past decade toward Federal domination of the Nation's decisions;

It makes Government more responsive to the will of the people;
It recognizes that a strong defense is vital to the attainment of peace;
It provides resources for the Nation's commitments at home, with new
equity for the poor and sick; and

In conjunction with monetary policy and private sector cooperation, it will help achieve full employment in peacetime with reasonable price stability.

BASIC GUIDE FOR 1972 BUDGET

Mr. SHULTZ. Let me say initially that last July the President set forth the budget policy that guided the 1972 budget thinking. I want to read from the message that he sent to Congress. This is a quotation:

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 revenues 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.

That is the basic guide that the President has used. I would like now to illustrate how it applies across a group of years, in order to show why it has been helpful to the President in formulating his budget.

RECORD OF THE UNIFIED BUDGET

This is a very interesting chart, a chart showing the deficits and one surplus through the years 1961 through 1972 on the basis of a unified budget. The chairman referred earlier to the Federal funds concept of the budget, or the old administrative budget, which is different from this principally in that the unified budget includes the income and outgo from trust funds as well as from Federal funds.

The unified budget concept was recommended, as you know, by a commission chaired by the then chairman of the Continental Bank in Chicago, former Secretary of the Treasury Kennedy. A member was Chairman McCracken and, as a matter of fact, the staff director was Robert Mayo, my predecessor as Budget Director.

They recommended the use of the unified budget concept. President Johnson accepted that recommendation. The Congress has worked with this concept, and President Nixon has felt that it is the proper concept to work with. I think the basic reason is that when we are looking at the overall budget total and thinking about the relationship of the budget to the economy, as distinct from any other important questions that we might want to investigate, such as the debt ceiling, it is the overall flow of money that counts. From that point of view, it does not make any difference whether the money flows from a trust fund or into the general fund or into a trust fund or out of some other account; it is income and outgo as far as the Federal Government is concerned.

So the unified budget basically is a budget about the cash flow; that is what impacts the economy. I think-when you look across these years-one thing that comes out, or at least it has struck me, is that it is hard to differentiate among the years. You see things that look very similar. You see a $7.1 billion deficit in 1962, approximately the same as the $8.7 billion deficit in 1967, and yet we know that economic conditions were very different. You see the large $25 billion deficit in 1968, and the not quite so large deficit in fiscal 1971.

Those are both large deficits. But we know the economy was very different. Without wanting to argue at all that the Federal budget is the main determinant of the economy-that is being quite cognizant of the fact that monetary policy is of central importance, and that the whole outlook and behavior of the private sector is also of great importance in the behavior of the economy as a whole-nevertheless, the budget is an important document. It does have an impact.

COMPARISON OF OUTLAYS WITH FULL EMPLOYMENT RECEIPTS

You would expect to see this impact jump out at you a little more from this chart. I think that it does come out more readily when you look at budget outlays in relation to full employment receipts. Here we are comparing the same outlays the same cash outlays-not with the actual receipts but with the receipts that would be generated at full employment. If the economy were operating at full employmentroughly 4 percent unemployment throughout the year-then what would the receipts be? How would they compare with outlays? When you plot it on that basis some matters begin to come into focus.

Remember that back in 1961, perhaps very much like the present time, we had an economy that seemed to be wanting to get started on an expansion and it sort of stalled out, didn't really flower in the way we would like. One may argue that because we had a large full employment surplus in the budget as the economy was expanding, the Government started taking back out of the economy more than it was putting in. This constituted sort of a draft and had something to do with that stalling out.

Through the first half of the 1960's we had a fairly steady picture. Remember we had a major tax cut in 1964, but still there was a fairly steady picture with small full employment surpluses. Perhaps you also remember that unemployment was fairly high through here and began then to come down, and prices were relatively stable through this period extending back into the late fifties.

One, I think, could have felt that in about 1965 we were beginning to get within shouting distance of a goal that we all shared, namely, to get to reasonably full employment and reasonable price stability at the same time.

EXAMPLES OF FULL EMPLOYMENT DEFICITS

Then I think that this chart shows very clearly that we really blew it as a country in terms of the economy, and insofar as the budget impact on it is concerned. We had in 1966, 1967, and 1968 a series of deficits growing deficits-at full employment. That is the essential difference between the 1967 deficit and the 1962 deficit; they were about the same size, but very different because of the differences in employment conditions. By 1968 the economy was using all of its resources, perhaps even straining at the leash. Into that picture comes the Federal Government and injects $25 billion more demand for resources than it takes out in the form of taxes.

I think that it makes sense to say that-with appropriate comments about monetary policy and so on-when you have that size deficit on a full employment basis, you are bound to raise prices. That is the kind of deficit that really does it for you as far as inflation is con

cerned. These large full employment deficits were, we think, a prime source of the inflationary problem that we have been trying to deal with.

Now we come to 1968-69, and we see a tremendous fiscal swing in the budget. I will call it a bipartisan fiscal swing. It represents the surtax passed by the Congress. It represents President Johnson's fiscal 1969 budget, which President Nixon inherited and finished out. So this is a bipartisan fiscal swing.

RECENT PATTERN OF FULL EMPLOYMENT BUDGET BALANCE

I think there was general recognition across the country that by 1969 we were out of control and the economy had to be wrenched back into control. We have been paying the price for that wrench in subsequent years, as well as for the transition problems associated with a winding down of the war and a winding down of many of the associated things. So, in 1969, we got back to the point where the budget was in balance at full employment. Since that time the notion of staying within full employment revenues has been maintained consistently.

In fiscal 1969 we had a full employment balance. In fiscal 1970, outlays were kept within the full employment revenues. In fiscal 1971, despite the large actual deficit, we anticipate that outlays will be barely within full employment revenues. In fiscal 1972, the President has sent up to you a budget which requests outlays right up to but still within full employment revenues. There is a large actal deficit, but there is also a consistent pattern of staying within full employment revenue. The President feels that holding outlays within full employment receipts is consistent with having a budget that helps the economy; it helps the economy expand when we want expansion, as we do now, but it also is responsible in the sense that as the economy moves up and as we get to full employment we will not be duplicating the inflationary pressures of 1966-68. We will have a pattern where we won't have to go through this wrench again.

DISCIPLINE FOR OUTLAYS IN THE FULL EMPLOYMENT BUDGET

I think that from the standpoint of budget work the use of this concept has several advantages for us.

First, it gives us a discipline in terms of how high outlays may safely go without getting us into trouble down the road. I am not talking about just fiscal 1972, for we have to think about 1973, 1974, 1975. We have to look ahead in this picture. The concept lays down a discipline for outlays the full employment revenues.

I think that it is important to point out that when the economy is operating at a lower level than we would like, people have come to expect that there is going to be a deficit in the Federal budget. The question is, how much of a deficit? Is there any guide, any rule? Is there anything that we can hold on to that tells us how much is enough? When are we starting to get in real trouble? I would submit that the discipline of the full employment budget-full employment receipts gives a guide, something to hold on to, that tells us where a reasonable marker is.

59-467 0-71-2

Second, it gives us a chance to work with a concept of desirable outlays that can be better determined by full employment receipts than by looking at a crystal ball. It gives us a chance to think about the management of Government outlays against an idea of receipts that is broadly calculable.

Third, it does have the desirable effect of being broadly consistent with the kind of developments that we would like to see for the economy.

That is the thinking behind the President's use of the full-employment budget idea, and-broadly-that is how he came to the decisions he did about 1972 outlays and other related matters. I might say, Mr. Chairman, that a chart exactly like this-except it didn't have 1971 and 1972 on it-was used in 3 days of discussions with the President in San Clemente about the budget back in July when the basic decisions behind this budget were made.

MOVING THE ECONOMY TOWARD FULL EMPLOYMENT

This is just a chart dramatization of what I have been saying, but it suggests the kind of objective we have relating the budget to economic development. This is the gross national product at full employment, growing, and the impact this kind of a budget will have to help move the economy toward that growth path. It can't do the job by itself but it helps move toward that goal.

If we tried to balance the actual budget either by a large tax increase or a great reduction in planned expenditures, what we would be doing with the actual GNP is turning it away from this line. That would be the net impact and force of the budget on the economy. Conversely, if we duplicated the 1967-68 pattern, what we would be doing is raising actual GNP higher than full employment GNP and regenerating the inflationary picture.

RATIO OF BUDGET OUTLAYS TO GROSS NATIONAL PRODUCT

This next chart shows a picture of the budget growth since 1970. You can see the outlays and receipts. It portrays the ratio of budget outlays to gross national product. It has been relatively stable at about 20 percent.

This pie chart shows you the breakdown taken from the budget book where the receipts are expected to come from and proportionately and broadly speaking, the basic purposes for which it flows out.

PRIORITIES IN THE FEDERAL BUDGET

One of the things that has interested people about the budget is the question of priorities, what is happening to our priorities as they might be seen in the budget. In this next chart we have plotted defense outlays as a percent of budget totals. You can see that they have been gradually coming down. They move back in the reverse direction, and then with Vietnamization and the winding down of the war in the last 2 years they have come back down and are more or less on this same line.