SUMMARY When the present administration assumed office in January 1961, the Nation faced two serious economic problems: A recession at home, which had continued for eight months; and a persistent deficit in this country's international balance of payments, which had shaken confidence in the stability of the dollar. Forthright action was taken to combat both problems. While their ultimate solution lies in the future, gratifying progress has been made. The two problems are intimately related. In the world of the 1960's, everything the Government does to foster recovery and economic growth at home must be considered in the light of its impact upon the Nation's economic position in the world. And every move to maintain confidence in our currency abroad must be weighed against its effect upon the domestic economy. Any accounting of Treasury actions and accomplishments during 1961 must, therefore, focus on efforts to reconcile conflicts-both seeming and real-between our domestic and our foreign economic programs. In fact, there is no conflict between our national and international objectives. If this Nation fails to maintain a vigorous economic system, capable of utilizing its resources fully and expanding its productive potential adequately, America's political and military leadership of the free world will inevitably deteriorate. Similarly, if we fail to help maintain stable currencies and vigorous economies throughout the free world, there can be no prosperity for our own people. While our international and domestic goals thus automatically interlock and reinforce each other, formulating policies that will serve both objectives can involve difficult choices. We must disavow any philosophy and reject all programs that support one exclusively at the cost of the other. This we have done in 1961 and will continue to do. Budgetary policies have been adopted which meet urgent national needs and, at the same time, have clearly demonstrated to the world. our intention to manage our fiscal affairs wisely and prudently. Monetary and debt management policies have been followed that have contributed simultaneously to vigorous economic growth at home and to stability in world financial markets. 3 Tax policies have been developed that will directly promote expansion of business and employment at home and, at the same time, strengthen the Nation's competitive position abroad. The interrelationship of fiscal and monetary policies has been recognized and designed to encourage greater investment in productive facilities-another objective that serves both our national and international needs. And finally, the administration has moved boldly into a new world of close and confidential financial cooperation with our friends and allies, thus strengthening the economic security and stability of all free nations. Our problems are far from solved and the future may bring new ones which will require that old programs be modified or scrapped and new ones developed to supplement or supplant them. Our policies, however, will always be pointed toward both objectives: A vigorous, expanding domestic economy and equilibrium in our international financial position. FISCAL POLICY Fiscal policy, which concerns the level and composition of Government expenditures, the level and sources of Government receipts, and the balance between expenditures and receipts, plays a key role in the attainment of our national objectives. Federal expenditures for goods and services, or in the form of transfer payments to State and local governments or to individuals, affect the trend of private economic activity and the composition of national output. Moreover, even Government programs which do not require significant cash outlays may strongly influence private economic decisions. For example, Government insurance and guarantee programs, such as those covering home mortgages, may require little direct expenditure but can have widespread economic consequences. Similarly, not only the volume of tax receipts but also different levels and types of taxation produce far-reaching economic results. The financial plans of the Federal Government must fulfill certain basic requirements: National security, including military, other defense, and foreign policy requirements, must be met in full. The need of the domestic economy for stimulation or restraint, or for an essentially neutral influence, as appropriate to economic conditions, must be met. International financial consequences of domestic economic trends and policies must be taken fully into account. Vital nondefense programs must be provided for. An adequate revenue base must be established and maintained. National security needs come first. While the Government must fulfill national security requirements as efficiently as possible-ever on guard against waste and duplication-it is inappropriate to confine national security programs within arbitrary expenditure ceilings. Other considerations of fiscal policy must be tailored to fit national security requirements, if necessary through tax increases, increased borrowing, postponement or curtailment of less-essential domestic programs, or some combination of these. The influence of Government spending trends and of the Government's surplus or deficit position on the health and vitality of the national economy is a continuous consideration. Few dispute the appropriateness of Federal budget deficits in a time of declining 5 or depressed economic activity, or of Federal budget surpluses in a time of rapid expansion and inflationary threat. But between such periods of obvious need for stimulation or restraint, there frequently exist economic conditions which call for fine tuning of fiscal policies to more complex economic needs. With the emergence of international balance-of-payments considerations as a factor in domestic economic policy judgments, additional delicate adjustments of fiscal policy nowadays are frequently required. Decisions concerning the components of Government outlays also require the weighing of complex considerations. Since Government resources are limited, spending priorities must be established and essential programs distinguished from the merely worthwhile or desirable. How many in the latter category may be undertaken, and to what extent, will depend on the level of spending required by national security and essential domestic programs and the extent to which overall economic needs dictate a tighter or less restrictive fiscal policy. Major budget concepts No single budgetary system is wholly adequate for complete analysis of the effect of Federal fiscal operations on the level and composition of economic activity. For this reason, other accounting concepts, in addition to the conventional administrative budget, have been developed. The most familiar is the cash budget which covers all cash receipts from and payments to the public, except borrowing from the public. More recently, the record of the activities of the Federal Government in the national income and product accounts has been increasingly used. The administrative budget, the accounting system commonly referred to as "the Budget," is primarily a presentation of administration policies. It sets forth governmental programs, together with their estimated costs and proposed means of financing them. The administrative budget is, however, of limited use in appraising the effects of Federal financial transactions on the economy. In part this is because the operations of the Government trust funds and of Government-sponsored enterprises are largely omitted from the administrative budget figures. The cash budget includes the activities of the Government's various trust funds, the largest of which are the social security and highway trust funds, but also the transactions of Government-sponsored enterprises, which include the Federal Deposit Insurance Corporation, Federal intermediate credit banks, Federal land banks, Federal home loan banks, and banks for cooperatives. Unlike either the administrative or cash budgets, the timing of Federal receipts and expenditures in the national income and product accounts is designed to coincide with their impact upon the economy. Hence, most taxes are recorded at the time the tax liability is incurred, and purchases reflect the time of acquisition rather than of payment. This statement also includes trust funds but excludes certain financial transactions, such as loans or the purchase or sale of existing assets, which represent neither the production of current output nor incomes earned in production. It is also clearly important in analyzing the economic significance of the Federal budget to recognize that it includes substantial outlays for public works and other durable assets and capital items that will continue to yield benefits for many years after the fiscal year in which the expenditures are recorded. Many loan and grant programs, as well as direct expenditures programs, fall in this category. In addition many categories of Government expenditures are "developmental" in nature, such as outlays for education and training and for research and development. The importance of the distinction between outlays for current and capital purposes, in fact, has caused many businesses and State and local governments, as well as foreign governments, to show separate budgets for current and capital expenditures. Fiscal year 1961 When this administration assumed office, the Nation was in its eighth month of economic decline. The gross national product, which had reached a peak of $506.4 billion, seasonally adjusted annual rate, in the fourth quarter of fiscal 1960, had fallen to $504.5 billion in the second quarter of fiscal 1961 and fell further to $500.8 billion in the January-March quarter of 1961. The industrial production index, seasonally adjusted, had fallen, by December 1960, to 103 percent of its 1957 base from a high of 111 in January 1960 and continued to fall, reaching a low of 102 in February. The unemployment rate, seasonally adjusted, which had remained at 5 percent or more in every month but one since the 1957-58 recession, had reached 6.7 percent in December 1960 and continued near this level throughout the first ten months of 1961. In addition, our balance-of-payments position, which had progressively worsened during 1960, remained a serious consideration. In those circumstances, a fiscal policy directed toward arresting the downturn and giving upward momentum to the economy was clearly in order. Extended temporary unemployment benefits, a speedup in income tax refunds, early payment of Veterans' Administration life insurance |