Estimates vs. Reality

February 10, 1964

On paper, President Johnson’s first budget has some merits which should be stated at the very beginning. It gives at least lip service to economy. And it estimates administrative budget expenditures in fiscal 1965 at $97.9 billion, which is half a billion less than the 1964 estimate.

But how probable is it that these estimates will be realized? Here a score of doubts arise. The new obligational authority asked for by the President for 1965 is $103.8 billion. This is $1.2 billion higher than 1964, and a new high record.

How reliable, then, are the new budget estimates? Let us begin on the spending side. The estimated reduction of $500 million compared with 1964 is achieved by an estimated reduction of $1.3 billion in national defense and of $1.1 billion in other expenditures. This is partly offset by an estimated increase of $1 billion in expenditures for “space” and interest, and of $900 million for the “attack on poverty.”

Yet many of the estimated reductions in other expenditures are very doubtful. For example, farm subsidies are estimated at $5.1 billion, down $1.3 billion from 1964. But this reduction seems to rest merely on a pious hope. The estimate for new obligational authority for foreign aid is surprisingly low at $2.4 billion (compared with $2.5 billion in 1964). But the President adds: “The 1965 budget does not allow for sudden opportunities that sometimes present themselves in international economic affairs.” By this he refers to opportunities “to provide any additional funds needed,” for which he promises to send in special requests.

A NEW HIGH RECORD?

Finally, a score of welfare programs are to be expanded, and the President adds a half dozen more “to attack poverty.” It is unlikely that all these together will add less than $1 billion to spending. In brief, it is highly improbable that total spending in 1965 will actually be less than in the current fiscal year. It is much more likely to hit a new high record. On the revenue side of the budget, we are asked to believe in a paradox. The budget assumes that taxes are being cut $11 billion a year, fully effective in fiscal 1965. Yet estimates of receipts from personal income, corporate, and other taxes are all higher than in either 1963 or 1964. They are $93 billion for 1965, up $4.6 billion over 1964 and $6.6 billion over 1963. The argument is that lower tax rates will create so much prosperity that they will actually increase tax revenues.

RATES VS. REVENUES

To judge how plausible this argument is, let us look at it in detail. The greatest percentage cuts in tax rates are in the lowest incomes. For adjusted gross incomes of $3,000 and under, the reduction in aggregate tax liability is 38.3 percent; for incomes from $3,000 to $5,000, 26.2 percent; for incomes from $5,000 to $10,000, 19.9 percent, etc. This means that for the new income-tax rate brackets to yield as much revenue as their corresponding old rate brackets, taxable incomes in the less-than-$3,000 bracket would have to rise 60 percent; in the $3,000 to $5,000 bracket 35 percent; in the $5,000 to $10,000 bracket nearly 25 percent, etc. Of course as personal incomes increase they get into higher tax brackets. But even so, is the new revenue estimate plausible?

The probabilities are very high that spending in 1965 will be higher and revenues lower than guessed at in the budget, and that the deficit in 1965 will be much bigger than the $4.9 billion estimate.

In view of the past record, this would not be surprising. For the fiscal year ended June 30 last, for example, President Kennedy originally forecast a surplus of $463 million; there was a deficit of $6.3 billion.

But even on its face, the new budget is fiscally irresponsible. It will be the 29th deficit in 35 years. It is unconvincing for Mr. Johnson to call it a “giant step toward the achievement of a balanced budget.” It is larger than the majority of the preceding 28 deficits. And it is based on the fallacious theory that a big deficit is necessary and sufficient for full employment. The one result it does guarantee is inflation and a further loss of confidence in the dollar.