Notes on the Budget

February 5, 1962

Is It Balanced? The President estimates that the Federal government will spend $92.5 billion in the fiscal year 1963, and will take in revenues of $93 billion, leaving a surplus of $463 million. This would be the first surplus in three years and the second in six. But the forecast is based on a series of the most optimistic assumptions. Revenue forecasts, for example, are based on the expectation of unparalleled prosperity. With no important net change in tax rates, revenues are counted upon to jump from $82.1 billion in fiscal 1962 to $93 billion in fiscal 1963. If revenues did not increase, the predicted surplus of half a billion would become a deficit of $10.4 billion.

How Reliable? In the light of the past record, how much confidence can we place in the new estimates? It is ironic to recall that for the fiscal year 1959, which ended with a deficit of $12.4 billion, Eisenhower originally estimated a surplus of nearly half a billion, almost exactly what Mr. Kennedy now estimates for 1963. But in 1959 expenditures turned out to be $6.8 billion more than the estimate, and receipts $6.1 billion less. Eisenhower originally estimated a surplus for the current fiscal year of $1.5 billion. Last March Mr. Kennedy estimated instead a deficit of $2.8 billion. In July this was raised to $5.3 billion. It is now estimated at $7 billion—with the year only a little more than half over. If an estimated deficit is raised a billion dollars or so every two or three months, what confidence can we have in a paper-thin surplus forecast seventeen months ahead?

Why So Big? The spending estimates for fiscal 1963 are the highest on record in peacetime—$11 billion higher than in 1961 and $28 billion higher than in 1955. The taxes to support such spending must undermine productive incentives and siphon off the funds for investment. Sentences in the President’s message give the impression that the rise in Federal spending is almost entirely caused by increased costs of defense. But even with the heavy increase in proposed defense spending to $52.7 billion, more than half of our total spending of $114.8 billion (when we count social security and similar payments) is still on nondefense and welfare items. Even when we confine ourselves to the regular budget, we find that compared with the last completed year, 1961, though projected national defense expenditures have increased $5.2 billion, nondefense and other expenditures have increased $5.8 billion. Nondefense expenditures of $39.8 billion projected for fiscal 1963 are almost double the $20.9 billion nondefense expenditures in 1954.

More ‘Needs’ Met? It is a fallacy to suppose that the enormous new budget enables the American people to “meet more needs” on net balance than before. All it does is to transfer expenditures from the free enterprise sector of the economy to the socialized sector, from the voluntary sector to the compulsory sector. The government can give nothing to Paul that it does not take from Peter. Everybody is forced to pay for somebody else’s education or illness. As Bastiat put it more than a century ago: “Government is the great fiction through which everybody tries to live at the expense of everybody else.”

Inflation Threat: A few months ago Mr. Kennedy gave his support to the theory that an annually balanced budget was unnecessary; all that was needed was a “balance over the years of the business cycle.” But even this theory involved the implicit assumption that if, say, we ran deficits of $7 billion to $12 billion in our bad years, we would have to run equally huge surpluses in our good years. Now Mr. Kennedy’s Budget Message rests explicitly on the theory that though we need heavy deficits to turn the business cycle “from recession to recovery,” even a budget balance at any time, let alone an actual surplus, may endanger prosperity, and that the President needs discretionary stand-by powers to cut taxes or increase spending to cure unemployment.

This theory is very fashionable but quite fallacious. Not merely the new budget itself, but even more the new explicit budget philosophy behind it, must increase the threat and fear of inflation and undermine confidence in the American dollar.