that the Federal Government is going to put on the private credit markets. Mr. Chairman and Mr. Bow, in my opinion, you have really taken two giant steps forward in this whole area of Federal budgeting and on behalf of Mr. Zwick and me, I want to say thank you because I think the Congress is now in a much better position to control the financial affairs of the United States of America. I am going to pass over the rest of my statement, Mr. Chairman, and go back to credit. (Full text of Secretary Barr's statement follows:) STATEMENT BY HON. JOSEPH W. BARR, SECRETARY OF THE TREASURY ON THE 1970 FEDERAL BUDGET I am grateful for the opportunity to appear before this distinguished committee. I think it extremely important that you understand the economic rationale that underlies the financial plan President Johnson has recommended to the Congress before reviewing the expenditures in detail over the months ahead. Before getting into the body of my remarks, I want to take a moment to pay tribute to you, Mr. Chairman, and to the ranking minority member, Mr. Bow, who have helped the Congress and the executive branch take giant steps forward by improving the effectiveness of the budgetary process. For more than a decade, as a former Member of this body, and later as an official in the executive branch, this particular problem has been a major concern of mine. As all Members of Congress know, the budget historically has been an unwieldy and complex subject. By your leadership, you gentlemen have given to the Congress and the country-two valuable tools which have made this complex matter much more manageable. These tools are, first, the annual meeting on the budget, at which time the total budget is carefully examined in a conference with the Secretary of the Treasury and the Director of the Bureau of the Budget. The gigantic size and complexity of our Federal programs has made it necessary for you to allocate your review of spending requests to subcommittees. But the session you are holding today gives you an overall look at the total program with the full committee, which is vital in order to obtain an appropriate fiscal policy meeting the needs of the Nation's economy. Therefore, I think this session is most useful indeed. The second tool, in cooperation with Treasury Secretary-designate Kennedy and Budget Director-designate Mayo, is that we now have one unified budget which even a freshman Congressman can understand. This is a luxury which was not available when I was elected to Congress. You have replaced the four cumbersome, and thus often misunderstood budgets-the legislative, the cash, the administrative, and the national income accounts-with one budget encompassing all the outlays and revenues of the Federal Government. A Member can now turn to page 10, and at a glance see what the President is asking Congress to dowhat the total spending and lending is, whether the budget is inflationary or deflationary, whether we are in surplus or deficit. And just as easily, a Member can find out how much pressure the Federal Government itself will be putting on the private credit markets. Gentlemen, these strides represent significant progress. By your forward looking approach to this matter, you have helped enable Congress do what the Founding Fathers intended it to do. The economy is now in the 95th month of the most sustained and vigorous period of economic expansion in our country's entire history. There is no need for me here to enumerate the long list of economic records established during this period of unprecedented prosperity. In his state of the Union message and in his economic report to the Congress I think the President established without serious question that the Nation is now, from an economic standpoint, stronger and more vigorous than ever before with production, employment, after tax in come, both wages and profits-all at record highs, far above the levels of a decade ago. And, I want to emphasize that this isn't just a dollar prosperity. The purchasing power of the average American-and I'm referring not just to his dollar income after taxes but to the real goods he can actually buy with it-has actually increased by 31 percent between 1960 and 1968. This, gentlemen, is the basic definition of economic progress. Perhaps an even more significant aspect to our overall economic well-being is that it is probably being shared by a broader segment of our population than during any previous time of great prosperity. Not only have business profits soared to record highs but the unemployment rate has been sharply reduced— particularly among minority groups who have not adequately shared in economic gains of the past. Much remains to be done in this key area of national policy, but it is clear that significant progress has been made in removing barriers and expanding job opportunities for our underprivileged citizens. However, we must recognize that serious economic problems must still be overcome. The increase in consumer prices in the past year of nearly 4 percent is certainly larger than we can tolerate for very long. Although a small balanceof-payments surplus was achieved in 1969, vigorous efforts must continue to maintain this record in the current year. Today I want to go beyond the overall indicators of a prosperous economy and in a sense look under the hood to see whether our financial machinery is properly geared to continued sound economic expansion in the years to come. Probably the most important single component of the financial underpinning of our economy is the Federal budget. A properly designed budget should be responsible and realistic in terms of what the country needs, what it can afford, and what the Congress can be expected to do. In my judgment President Johnson has presented to the Congress a budget that fully meets this standard. In fiscal 1969 the Federal budget is expected to be strongly in the black, with outlays of $183.7 billion, revenues of $186.1 billion, and a surplus of $2.4 billion. For fiscal 1970 we have projected an even larger surplus of $3.4 billion. In fiscal 1970 budget receipts are estimated at $198.7 billion, an increase of $12.6 billion over the estimate for fiscal 1969. Outlays in fiscal 1970 are projected at $195.3 billion. The estimated increase in fiscal 1970 Federal revenue is due almost entirely to anticipated economic growth. For calendar 1969 we have projected a gross national product of $921 billion, personal income of $736 billion, and corporate profits of $96 billion. Now there is nothing inherently good or bad in itself about a budget surplus or deficit. The test is whether it contributes to the economic strength of our country and a budget does this only when it is consistent with current and prospective economic realities. In the context of the economy as we see it, a Federal budget surplus for the fiscal years 1969 and 1970 is necessary for several important reasons. First, the budget surplus will tend to restrain overall private demand during a time when our productive capacity is straining hard to meet the demands thrust upon it. Second, a Federal budget surplus means that during this period the Treasury will not on balance be competing for funds in our already hard-pressed credit markets. In fiscal 1969 and 1970 taken as a whole, the Treasury will actually be adding funds to the private credit markets in sharp contrast to the situation in 1969 when $23.1 billion had to be drawn from private investors. This healthy situation means greater freedom for the Federal Reserve to establish effective monetary policies, and more ready access to private savings by private users of credit, plus State and local governments who have had a rough time in past tight-money periods. In this context the homebuilding industry in particular should greatly benefit. A third important reason for maintaining a Federal budget surplus at this time is that it will strengthen the hand of our negotiators during the critical period in which we will be working to improve and modernize the international monetary structure. The Federal Government influences economic activity and the distribution of income not only through direct expenditures and loan programs but also through special tax provisions. A dollar foregone through a special tax provision is no different than a dollar spent through a budget outlay. In other words, these tax expenditures use budget resources in the same way that direct expenditures or net lending do. In most cases, the special tax provisions are alternatives to direct expenditures or net lending to achieve the same purpose. The Annual Report of the Secretary of the Treasury for fiscal year 1968 contains for the first time a discussion of these tax expenditures and provides a detailed description accompanied by estimates of the amounts involved. To bring this material up to date, the Treasury staff has prepared an analysis of tax expenditures related to the budget for fiscal year 1970, copies of which have been distributed to the committee members. The revenue cost of the special tax provisions is presented alongside budget outlays. This makes it possible to get a more complete picture of total Government expenditures for various functions. You may be surprised to find that tax expenditures approach or even surpass the budget outlay for certain functions. The purpose of this special analysis is to present information which will help us to use budget resources most effectively. We can obtain more efficient use of resources by the Federal Government if explicit account is taken of all calls upon budget resources. In this way the importance of different budgetary objectives and the effectiveness of alternative uses, whether through direct expenditures, loan subsidies, or tax expenditures, may be fully understood, examined, and reevaluated periodically. I should like to warn the committee that this whole area is highly controversial and that the figures presented in this report are certain to be controversial. The figures may vary depending on the assumptions used. We do not claim that our figures and assumptions are the last word. These are Treasury assumptions and I would suggest that the committee might want to have its staff analyze this document-perhaps in conjunction with the staff of the Joint Committee on Internal Revenue Taxation. The staff of the Treasury will be pleased to cooperate. Many of the provisions in the tax code are virtually the same as appropriations and should be considered by the Congress as they review the various Federal programs. You have in front of you a set of charts with the heading "Fiscal Policy in Perspective for 1969." I think these charts quite clearly set forth the economic rationale which underlies the financial plan which President Johnson recommends to the 91st Congress and I would like at this time to go over them with you. BUDGET SURPLUS PROPOSED Secretary BARR. As we look at this budget that the President is proposing, it is going to be in surplus for fiscal year 1969 and, if the surtax is extended, will also be in surplus for fiscal year 1970. It is a budget that is responsible for several reasons, but if you were Secretary of the Treasury it would be especially responsible because our credit markets have been under severe strain. You can look around and you can see a 7-percent prime rate in effect today. Now, in fiscal year 1968 we had to borrow $23 billion from the public. Economists will differ on the total amount of private savings coming available in any 1 year but they will agree that it is probably close to $80 to $90 billion-some place in that range. What did we do in fiscal year 1968? Because of that big deficit, the Federal Government soaked up between a quarter and a third of all the private savings that were becoming available in this country. The result was, as you have seen, enormous pressures on the credit market and enormous competition with people who want to borrow money to buy homes, to finance an automobile, to carry the inventory in their business." We think this is clearly inappropriate in the climate which exists right now. So the budget for 1969, with a surplus and the budget for 1970 with a surplus, means simply this: The Federal Government will not be in those private credit markets competing with State and local governments, with business, and with individuals for the money that is available. On the contrary, we will be supplying funds to those private markets. Roughly $3 billion in fiscal year 1969 and $4 million in fiscal year 1970 will be supplied if these budget plans materialize as we have projected them today. CHARTS RELATING TO BUDGET FOR 1970 CHART 1 The budget in fiscal year 1970 should register a surplus if economic policy in the country is to be responsible and realistic. The estimate of $195.3 billion in total budget outlays represents our minimum requirements to meet the urgent domestic and international needs. An extension of the surcharge will make it possible to meet these requirements and to provide for a surplus which will be helpful in relieving inflationary pressures. It is clear from the chart that if hopes for an early settlement of the Vietnam war are realized, military expenditures can be reduced and substantial savings made for other desirable purposes. Secretary BARR. I don't think I need to explain chart 1. It reflects where we are getting our funds and how we are spending them. It is presented in simple graphic form. CHART 2 Under existing legislation, a budget surplus is expected at $1.9 billion in fiscal year 1969 reflecting the surcharge, excise, and other provsions enacted last June. The proposed surcharge extension would add another $0.5 billon, reflecting estimated corporate taxpayments. Under existing legislation for fiscal year 1970, the budget would register a deficit of $7.1 billion. Under proposed legislation, revenue yield would increase $10.5 billion to yield a surplus of $3.4 billion. (NOTE. The $10.5 billion includes the net effect of increased social security contributions and benefit payments.) $Bil. EFFECT OF PROPOSED TAX ACTION ON BUDGET $Bil. 1.0 0.5 taxation) Secretary BARR. Chart 2 is a bit more pertinent. If you will look at chart 2, you will see that unless the surtax is extended this year you are going to lose $500 million in revenues in fiscal year 1969. That comes from the impact of the extension on corporate taxes. If the surtax is not extended in fiscal year 1970 and the projected expenditure plans are followed, you would have a budget deficit of approximately $7.1 billion, a deficit which I think is completely inappropriate at this time. |