February 1965

by CHARLES A. WAITE

The Federal Budget for Fiscal 1966

J_ HE Federal budget presented to local governments—programs which are although they show divergent move- Congress in January shows a shift in essentially for civilian purposes—ac- ments. From fiscal 1965 to fiscal 1966 emphasis from defense and space to count for over 85 percent of the increase the deficit on the administrative budget programs for education, health, aid to in expenditures. A similar pattern is basis declines by $1 billion to about the elderly, and for the war on poverty. shown in the administrative budget. $5 billion, the cash deficit remains virtu- This shift is evident on all three budget Federal expenditures are expected to ally unchanged at about $4 billion, and bases. For example, for the first time rise fa-om fiscal 1965 to fiscal 1966, the NIA budget deficit increases by $1 since 1950, cash budget outlays for with the amount depending on the billion to $6 billion. Summary data defense, international programs and budget concept used. The adminis- for the three budgets are shown in space activities will account for less table!. than half of the total cash payments to trative budget proposes an increase of the public. In the national income just over $2 billion in expenditures. In both the cash and NIA budgets Table 1.—-Federal Government Receipts and Expenditures, Fiscal 1964-66 outlays are up $6 billion. (Billion dollars) The budget estimates assume a GNP 1964 1965 1966 Federal Fiscal Position on of $660 billion in calendar 1965 or an actual estimate estimate Three Accounting Bases increase of about 6 percent, somewhat Administrative Budget: Billion $ less than the 6% percent rise in 1964. Receipts ^__ _ 89.5 91.2 94.4 Personal income is estimated at $520 E xpen ditures 97.7 97 5 99.7 billion, up about $29 billion from the Surplus (+) or deficit (-) _ -8.2 -6.3 -5.3 Cash Budget: previous year while corporate profits Receipts 115.5 117.4 123.5 Deficit Expenditures 120.3 121.4 127.4 before taxes are projected to rise from Surplus (+) or deficit (-) . -4.8 -4.0 -3. 9 National income Accounts Basis about $57 billion to $61 billion. National income and product / If the economic assumptions under- account: Receipts. -__ . _ 114.7 116.0 121. 0 lying the budget presentation turn out Expenditures 118 5 121 0 127.0 Surplus (-H or deficit (-)_ -3.9 -5.0 -6.0 as projected, Federal receipts in fiscal -5 Sources: "The Budget of the United States for Fiscal Year 1966 under all three budget bases are Ending June 30, 1966," and U.S. Department of Commerce, estimated to increase, despite revenue Office of Business Economics. losses from the proposed $1% billion reduction in excise taxes and the sec- Outlook for remainder of fiscal 1965 ond stage reduction of corporate and -10 The NIA budget receipts and ex- individual income taxes under the penditures by major component are Revenue Act of 1964. Administrative presented in table 2 for the fiscal years budget revenues are expected to rise 1964-66 along with quarterly data for 1961 1962 1963 1964 1965* 1966* by over $3.2 billion; cash receipts from calendar 1964. Fiscal Years the public will be up more than $6 Total receipts are expected to show a *Estimates from the Budget of the United States in Fiscal Year 1966 marked increase in the first half of U.S. Department of Commerce, Office of Business Economics 65-2-7 billion, and NIA receipts will rise by $5 billion. Revenues are expected to calendar 1965, largely resulting from accounts (NIA) budget, defense pur- advance more rapidly in the cash and lower-than-usual refunds and higher- chases, which comprised better than NIA budgets than in the administrative than-usual settlements for individual in- one-third of the total rise in expendi- budget mainly because the latter ex- come taxes due to under-withholdings tures in the budget of only two years in calendar 1964. cludes the rise in the Social Security ago, show virtually no increase in fiscal On the expenditure side, a small rise 1966 over the previous year. Outlays payroll tax rates and in the earnings is expected in national defense pur- other than purchases of goods and base scheduled for January 1, 1966. chases. Transfer payments to persons services, such as transfer payments to All three budgets are expected to in early 1965 should also rise due in persons and grants-in-aid to State and remain in deficit through fiscal 1966, part to accelerated dividend payments

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from veterans' life insurance trust Table 3 contains a detailed reconcilia- due largely to an anticipated increase funds. Other major components will tion of the various budgets. in sales of mortgages by the Veterans remain fairly stable throughfisca l1965 . Administration and loans by the Small Differences in budget patterns With revenues rising faster than ex- Business Administration is expected to penditures in the first half of calendar Although in periods of rising incomes decrease cash payments, but will have 1965, deficits of about $4^ billion receipts on an accrual basis usually no effect on national income account (seasonally adjusted annual rate) are increase more rapidly than collections, expenditures. However, this is offset the opposite is anticipated in fiscal 1966. in fiscal 1966 by an expected drop in expected, or about $1 billion below the ; rate of the last half of 1964. Collections of corporate profits taxes Commodity Cred t Corporation certi- are expected to exceed accruals because ficates of interest, which will reduce The Three Federal Budget of the acceleration of corporate pay- NIA expenditures but have no corre- ments under the provisions of the 1964 sponding effect on cash outlays. Measures Revenue Act, and the lower tax rates Fiscal 1966 Receipts The three measures of Federal finan- effective January 1, 1965. (Fiscal 1966 cial transactions differ from one another will be the first year to reflect the full Federal Government receipts under with respect to both coverage and tim- impact of the tax cut.) In addition, the NIA budget are expected to be up ing. The administrative budget, which the anticipated reduction in excise $5 billion from fiscal 1965 tofisca l1966 . serves as the basis of recommended taxes, like the reduction in corporate Personal income taxes are estimated legislative action, excludes trust fund taxes, will be reflected in lower liabili- to rise nearly $2 billion. The advance operations, which have grown rapidly ties in the national income accounts in personal income assumed in the in recent years. Several important as soon as the lower rates become effec- budget for the coming year will produce parts of the Government's program, tive, whereas cash collections of excise a substantial expansion of the individ- such as Social Security, Federal-aid taxes will reflect these changes only ual tax base. However, the relative highways, and unemployment insurance after a brief lag. By way of contrast, increase in projected taxes shows a are carried out through trust fund personal income taxes on the NIA somewhat smaller gain than personal operations. basis are expected to run slightly ahead income because fiscal 1965 personal The consolidated cash statement pro- of collections despite the lower tax taxes are being inflated by unusually vides a more comprehensive picture of rates on calendar 1965 income. The high net settlements on 1964 incomes, the flow of cash transactions (excluding personal withholding rate, which was and because tax rates will be lower in borrowing) between the Federal Gov- reduced from 18 percent to 14 percent fiscal 1966 than in 1965. The second ernment and the public. It includes in March 1964, is unchanged this year. stage reduction of income tax rates the receipts and expenditures of trust Expenditures are expected to increase enacted in the Revenue Act of 1964 funds as well as the general fund. about the same amount on both the went into effect January 1, 1965. The national income accounts budget cash and national income accounts Since withholding rates were not differs from the cash budget in that it bases, although there are some differ- changed, the main direct impact on counts most taxes as receipts at the ences in detail. A sharp decline in net tax receipts will show up in lower non- time the liability is incurred rather than outlays under Federal lending programs withheld taxes. when the Government actually receives payment. On the expenditure side, Table 2.—Federal Receipts and Expenditures in the National Income Accounts, 1964-66 the NIA budget attempts to synchro- (Billions of dollars) nize Federal purchases with other sec- Fiscal year Quarterly, seasonally adjusted tors of the national accounts. As a at annual rates

result, many goods, chiefly military 1964 1965 1966 1964 actual esti- esti- hardware, are counted as Federal pur- mate mate chases at the time of delivery rather I II III IV than at the time checks are issued, as Federal Government receipts 114.7 116.0 121.0 114.8 112.3 114.0 n.a. in the administrative budget, or when Personal tax and nontax receipts 51.4 50.3 52.2 51.2 47.3 48.2 49.3 Corporate profits tax accruals _ _ 23.5 23.9 24.7 23.9 24.4 24.4 n.a. funds are withdrawn from Treasury Indirect business tax and nontax accruals _ 16.0 16.8 16.1 15.9 16.4 16.6 16.6 Contributions for social insurance 23.8 25.0 28.0 23.9 24.2 24.7 25.0 accounts, as in the cash budget. Federal Government expenditures. 118.5 121.0 127.0 117.2 120.2 119.2 120.1 Purchases of goods and services 66.1 65.9 66.7 64.3 67.1 65.5 65.3 Another major difference between the National Defense _ _ _ 56.2 55.4 55.6 54.0 57.0 55.2 55.3 Other 10.8 11.6 12.3 11.5 11.0 11.2 11.3 cash and the national income accounts Less: sales. _. _ .9 1.1 1.2 1.2 .9 .9 1.2 budgets is the exclusion from the latter Transfer payments 30.4 31.8 35.2 31.1 30.7 30.8 31.5 To persons _ 28.8 30.1 33.4 29.5 29.1 29.1 29.4 of transactions involving financial Foreign (net) . _ _ 1.6 1.7 1.8 1.5 1.6 1.7 2.2 Grants-in-aid to State and local governments 9.8 10.7 13.0 9.8 10.4 10.6 10.7 claims, e.g. loans, and exchanges of Net interest paid 8.1 8.5 8.6 8.3 8.4 8.4 8.4 Subsidies less current surplus of government enterprises 4.1 4.1 3.5 3.7 3.6 3.9 4.2 second-hand or existing assets. These Surplus (+) or deficit (— ) -3.9 -5.0 -6.0 -2.4 -7.8 -5.2 n.a. flows are excluded because they do not Sources: "The Budget of the United States for the Fiscal Year Ending June 30,1966," and U.S. Department of Commerce, directly affect current output or income. Office of Business Economics.

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Corporate tax accruals for fiscal or retail excises to be reduced. The these taxes as well as from customs 1966 are projected in the budget to be list of goods on which the excises may duties and because of the proposed $% billion above fiscal 1965. Corpo- be cut or eliminated will very likely increases in highway and other user rate profits before taxes are estimated not be announced until shortly before taxes. to rise $4 billion in calendar 1965 or the proposed legislation is ready for about two-thirds of the 1963-1964 Congressional consideration, in order Increase in social insurance taxes increase. The tax estimate takes into to avoid anticipatory drops in the Increased contributions for social account the $1 billion reduction in sales of taxed items. The budget insurance account for $3 billion or more accruals which is expected to result also calls for increases or extensions of than half of the total increase in from dropping the top corporate rate taxes or user charges for airlines and revenues under the NIA budget. from 50 percent to 48 percent on the inland waterways. Excise taxes Higher Social Security rates, coupled January 1, 1965. are discussed in a separate section in with a proposed expansion in the wage this issue of the SURVEY. base—both slated to go into effect Excise tax cut proposal Indirect business tax accruals in the January 1, 1966—are responsible for The major change in Federal tax national income accounts budget are most of the rise. Higher unemploy- policy in fiscal 1966 is the proposal to expected to drop only $% billion from ment insurance rates are also likely if cut excise tax liabilities $1% billion the fiscal 1965 level. This is less than legislation proposed in the budget effective in July. The budget did not the proposed excise tax cut because is implemented. specify the particular manufacturers' rising activity will boost the yield from The budget calls for an increase in the taxable income base for the old- age, survivors, and disability insurance Table 3.—Relation of Federal Government Receipts and Expenditures in the National programs from $4,800 to $5,600. It Income Accounts to the Budget also proposes to increase the payroll tax (Fiscal years, billions of dollars) from the current 7.25 percent (half on employees and half on employers) to 1965 1966 1964 8.5 percent, instead of the 8.25 per cent actual Estimate now scheduled by existing law. Of the proposed 1.25 percentage point RECEIPTS: increase, almost half (0.6 percent) will Budget receipts 89.5 91.2 94.4 be allocated to the proposed new Less: Intragovernmental transactions •__••• ______4.2 4.2 4.4 Receipts from exercise of monetary authority _ _ __ .1 .1 .1 hospital insurance program. The higher Plus: Trust fund receipts.- _ _ __ 30.3 30.5 33.6 unemployment tax rate provides for Equals: Federal receipts from the public (consolidated cash receipts) __ _ _ 115.5 117.4 123.5 improvements in the Federal-State em- Adjustments for agency coverage: ployment security system, including Less: District of Columbia revenues ______,3 •3 .3 Adjustments for netting and consolidation: extended coverage, strengthened financ- Plus: Contributions to Federal employees' retirement funds, etc __ ___ 2.0 2.1 2.2 ing and a longer period of eligibility Less: Interest, dividends, and other earnings __. 1.4 1.9 2.1 Adjustments for timing: for unemployment benefits for workers Plus: Excess of corporate tax accruals over collections; personal taxes, social insurance contri- butions, etc _ _ -.7 -.9 -1.8 permanently attached to the labor Adjustments for capital transactions: * force. Less' Realization upon loans and investments, sale of government property, etc .6 .4 .5 Equals : Receipts — national income accounts 114.7 116.0 121.0 Fiscal 1966 Expenditures EXPENDITURES: NIA budget expenditures will in- Budget expenditures 97.7 97.5 99.7 crease more rapidly than receipts in Less: Intragovernmental transactions - - _ 4.2 4.2 4.4 fiscal 1966, rising about $6 billion over Accrued interest and other non-cash expenditures (net) ______2.0 .9 .8 Plus: Trust fund expenditures (including Government-sponsored enterprise expenditures net). 28.9 29.0 32.9 the preceding year. Equals: Federal payments to the public (consolidated cash expenditures) __ __ 120.3 121.4 127. 4 National defense purchases, following Adjustments for agency coverage: the $% billion decline expected in Less: District of Columbia expenditures - .3 .4 .4 fiscal 1965, should level off in fiscal Adjustments for netting and consolidation: Plus: Contributions to Federal employees' retirement funds, etc 2.0 2.1 2.2 1966 at about $55% billion. Small Less: Interest received and proceeds of government sales __ 1.4 1.9 2.1 increases for Department of Defense Adjustments for timing: Plus: Excess of interest accruals over payments on savings bonds and Treasury bills- .9 .8 .6 and National Aeronautics and Space Excess of deliveries over expenditures and miscellaneous items 2. ______1.5 1.7 1.2 Tjfiss; Commodity Credit Corporation foreign curreTiny p.x(Vha,ngp.s .6 .8 ' .7 Administration (NASA) are expected Adjustments for capital transactions: * to be partially offset by a slight Less: Loans — FNMA secondary market mortgage purchases, redemption of IMF notes, etc__ 3.4 1.4 .7 Purchase of land and existing assets .5 .5 .5 reduction for the Atomic Energy Com- Equals: Expenditures —nationa l income accounts _ _ 118.5 121.0 127.0 mission. Although Defense Department out- 1. Consist of transactions in financial assets and liabilities, land and secondhand assets. Acquisition of newly produced tangible assets are included in expenditures for goods and services as defined in the national income and product accounts. lays show little change from fiscal 2. Includes increase in clearing account. 1965, further improvements in military Sources: "The Budget of the United States for the fiscal year ending June 30,1966," and U.S. Department of Commerce, Office of Business Economics. strength and the development of new

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weapons are called for in the budget. currently planned number of missiles, Nondefense purchases are estimated For example, increased funds are rec- bombers, or Polaris submarines. at $12% billion, up $% billion from ommended for the development of the Table 4 shows the breakdown of ad- fiscal 1965. The moderate increase is Nike-X anti-missile system and a ministrative budget expenditures pro- due largely to somewhat higher payrolls more powerful submarine-launched grammed for the Department of and reflects a contingency allowance ballistic missile. Defense. The stability of military for a pay raise for civilian employees On the other hand, the 1961-64 personnel and operation and mainte- and a small rise in the number of non- buildup in military strength is now nance costs reflects the virtually un- defense employees to staff new pro- largely completed and older missiles changed number of persons on active grams. Although a request for further and bombers will be phased out in duty. Purchases of equipment are also salary adjustment will await a report fiscal 1966. The general level of de- stable, with a decline in missile pro- on the comparability of Federal pay fense spending has been markedly curement offset by increases in weapons, rates with those of industry, allowance affected by savings under the Depart- equipment and ammunition for general has been made in the budget for civilian ment's cost reduction program; in purpose forces. Kesearch and develop- and military pay increases. About fiscal 1964 these economies are estima- ment expenditures are off slightly since $J4 billion of the nondefense rise is ted by the Defense Department to have an increasing number of weapons sys- attributed to an increase in Commodity been about $2% billion. Additional tems have passed the full-scale develop- Credit Corporation inventories. savings—such as from the reduction, ment stage, and in fiscal 1966 emphasis consolidation and discontinuance of 95 is being placed on improving these Other expenditures rise military installations—are expected ul- systems. Funds are also included for Although purchases of goods and serv- timately to raise this total to about $5 the manned orbiting laboratory pro- ices are directly part of final demand, billion per year. gram. Outlays for military construc- other government expenditures which For the first time in several years the tion and military assistance are sched- are (excluded from the GNP—transfers, budget does not ask for authority to uled to decrease slightly while family interest, grants-in-aid and subsidies— increase the size of strategic forces. housing and civil defense programs re- affect income and influence personal Although replacement will continue, main at fiscal 1965 levels. consumption, business investment and the emphasis now appears to be on up- State and local purchases. Between grading current forces for accuracy, Small rise in space outlays fiscal 1965 and 1966 these expenditures striking power, and invulnerability to The proposed $200 million increase for are expected to increase over $5 billion. attack, rather than on increasing the NASA may be compared with an average Transfer payments to persons are annual rise of over $1 billion since fiscal 1962, and is the smallest since the program was fully underway. Total NASA Change in Federal Government expenditures are expected to exceed Changes in Federal Government Receipts * $5 billion in fiscal 1966. New obli- gational authority requested, an indi- Expenditures Billion $ Change -4 0 4 cator of future spending, is virtually the same amount as enacted for fiscal 1965. Programs for manned space flight account for about two-thirds of the NASA budget. Flights of the two- man Gemini spacecraft will be con- ducted in fiscal 1966 as well as extensive testing of a more powerful Saturn launch vehicle and the Apollo space- craft. The only major new project to be initiated in fiscal 1966 is the Voyager, an unmanned vehicle that would land an automated capsule on Mars to search for life. Outlays for atomic energy programs are down close to $0.2 billion from the preceding year. Reduced procurement of uranium, as well as fewer construc- tion projects and less procurement of equipment, are the major reasons for * National Income Accounts basis * National Income Accounts basis U.S. Department of Commerce, Office of Business Economics the decline. U.S. Department of Commerce, Office of Business Economics

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12 SUEVEY OF CURRENT BUSINESS February 1965 estimated to account for 60 percent or close to $% billion represent payments losis hospitals and for health care of over $3Ji billion of this increase. This retroactive to January 1, 1965. Civil children from indigent families. The estimate does not include any allow- service retirement pay is estimated to first full year of the program to develop ance for medicare benefits, which are be up about $0.2 billion. Veterans' Appalachia is also expected to raise not called for in fiscal 1966. This pensions, research and development grants. Federal aid to highway con- increase—the largest since fiscal 1961— transfers and railroad retirement pay- struction is estimated to be off about is due principally to a rise of nearly ments are expected to remain stable. $% billion from an unusually high fiscal $2% billion in Social Security benefits. Grants-in-aid to State and local gov- 1965 expenditure level, attributable to Along with the normal increase of over ernments are scheduled to increase by acceleration of construction in States $% billion expected under present pro- over $2 billion, or more than twice as where programs have been lagging. grams, pending legislation is designed much as the rise from fiscal 1964 to Subsidies (less the current surplus of to increase cash benefits by 7 percent. fiscal 1965. New or expanded pro- government enterprises) are expected Under this proposal, benefit payments grams for educational assistance and an to decline more than $% billion below in fiscal 1966 are up $2 billion, of which expansion of the war on poverty pro- the fiscal 1965 level, due in part to a gram account for about two-thirds change in the timing of feed grain of the rise. Proposals to give financial acreage diversion payments. Lower assistance to public schools serving price support levels for cotton, rice and children of low income families, to Federal Grants-in-Aid to State and feed grains are also called for in the assist in the purchase of books for both budget. The postal deficit is expected Local Governments* public and private school children and to remain stable. Other NIA budget to provide other aids to elementary and categories such as net interest paid and 15 secondary schools account for $% billion foreign transfer payments are estimated of the increase. Other education to be only slightly higher in fiscal 1966. grants, under legislation enacted last year for higher education, libraries, TOTAL vocational education, etc. will rise over Table 4.—Defense Department Budgetary $% billion. Grants channeled through Expenditures, Military Functions and Military Assistance, Fiscal Years 1964- the Office of Economic Opportunity for 1966 the war on poverty are estimated to be (Billion dollars) up $% billion. Several other projects 1964 1965 1966 Highways connected with the anti-poverty pro- actual estimate estimate gram, but administered outside the OEO are also expected to show in- Total 51.2 49.3 49.0 creases. During fiscal 1966, according Military personnel „ 14.2 14.8 14.8 to the budget, an estimated 600,000 Operation and maintenance- 11.9 12.2 12.2 Procurement 15.4 13.3 13.2 persons will be enrolled in work, edu- Aircraft. 6.1 5.5 5.5 Public Assistance Missiles 3.6 2.6 2.3 cation and training programs financed Ships 2.1 1.8 1.9 Ordnance vehicles, etc 1.6 1.4 1.6 under the Economic Opportunity Act. Electronics & communi- cations __ _ _ _ 1.3 1.1 .9 In addition, several million individuals, Other .8 .8 .9 mainly young people, will be directly Research, development, test, assisted by community action organi- and evaluation 7.0 6.7 6.4 Construction, military 1.0 1.0 .9 Other zations opeiating throughout the country. Family housing .6 .6 .7 Among other grant-in-aid programs, Civil defense .1 .1 .1 public assistance is up $% billion, re- Military assistance _ _ _ 1.5 1.2 1.1 Revolving & management flecting higher case loads and new legis- funds -.5 -.7 -.4 * National Income Accounts basis lation providing for assistance to needy Source: "The Budget of the United States for Fiscal Year U.S. Department of Commerce; Office of Business Economics elderly patients in mental and tubercu- Ending June 30, 1966" and U.S. Department of Defense.

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