Irresponsible Budget

August 7, 1961

In his Budget Message of January 1960, President Eisenhower estimated there would be a surplus of $4.2 billion in the fiscal year 1961. In January of this year he slashed his estimate to a thin surplus of only $79 million. On March 25 President Kennedy estimated that instead of a thin surplus there would be a $2.2. billion deficit in the fiscal year to end on June 30. When the final returns came in, the deficit turned out to be $3.9 billion.

In January, President Eisenhower estimated a surplus of $1.5 billion for the fiscal year 1962. In March Mr. Kennedy said that, instead, there would be a deficit of $2.8 billion. Then the official estimate was raised to a deficit of $3.7 billion. It is now raised again to more than $5 billion.

These figures are in themselves evidence of fiscal irresponsibility. Our political leaders and Treasury experts seem unable to make a reasonably accurate estimate of a fiscal year’s result even a couple of months before its end, let alone a year in advance. Recently the forecasts have been systematically wrong in the same direction—overestimating revenues and underestimating expenditures. Congress and the country have been faced with increased expenditure estimates almost every few weeks.

‘APPROPRIATE’ DEFICIT

Even more disquieting than this budgetary slovenliness is Washington’s indifference toward it—as if it were not very important whether forecasts were wide of the mark or not. This goes back to the growing acceptance in official circles of the belief that a budget balance is not important. Last March Mr. Kennedy said it really didn’t matter whether the budget was balanced each year. All that was necessary was a “balance over the years of the business cycle.”

The implication was that a budget deficit would in itself bring the full employment that would bring the tax revenues that would eventually bring balance. Even a couple of months ago Secretary of the Treasury Dillon was saying: “Such a deficit [$2 billion for 1961] is not a cause for alarm in times like these. . . . Another deficit is in prospect for fiscal ‘62, one of about $3 billion. This, too, will be entirely appropriate.” In fact, the fashionable idea is that deficits are actually necessary for “creating demand,” for “full employment,” and for “growth.”

URGENT TAX REFORMS

There is not room here to go over again all the fallacies and confusions in this view. But it may be worth pointing out that if a budget deficit were desirable, then the most desirable kind would be not one achieved by increasing government expenditures but by cutting taxes. Most of the deficit zealots want increased government expenditures to give increased “consumer purchasing power.” They overlook that what is enormously more important for economic growth and increased real wages and productivity is increased savings and investment, and that the way to get this is to mitigate the onerous taxes that now reduce incentive and production.

The most urgent reforms are more adequate tax write-offs for depreciation of plant and equipment, less drastic corporation income taxes, a revision of capital- gains taxes, and abolition of confiscatory progressive income-tax rates above 50 percent. Such reforms, in fact, would probably yield more rather than less revenues, and would give enormous stimulation to national output.

Instead of discussing this, Administration officials are now talking of an actual increase in taxes. This increase is said to be necessary to pay for the costs of defending Berlin. In view of the billions of dollars that the Administration has been asking and mainly getting for foreign aid, farm aid, social security, highways, and housing, it would be disingenuous to blame a tax increase on added Berlin costs. A boost in tax rates above present levels, moreover, might actually reduce tax revenues. It would certainly discourage investment and production.

The road back to fiscal sanity lies in recognizing that though budgets must be balanced, the health and growth of the economy demand that the balance be achieved by cutting both excessive expenditures and excessive tax burdens.