-

First, let me point out that in 1976 the Treasury also raised a large amount of net new cash roughly $62 billion and did so rather easily. Nothwithstanding this financing task, interest rates declined throughout much of the year and credit-worthy private borrowers had ready access to loans. In fact, markets were so slack last year that Treasury wisely emphasized coupon (longer term) issues in its financing program, thus successfully raising a large amount and extending the maturity of our national debt at the same time. I think that 1976 demonstrated that

a large Federal borrowing program does not necessarily result in strained credit markets and rising interest

rates.

One reason for this, of course, is that borrowing demand from the private sector has a much greater influence on our credit markets than does government borrowing. The President's commitment to achieving a balanced budget should reduce federal borrowing and thus ensure that private creuit demands have an even greater effect on our markets in the future.

Concerning 1977, we do face a slightly less favorable overall borrowing climate than we did last year. Specifically, the 1977 deficit will be financed in a period when private credit demands are rising. The continuing housing recovery signals eventual increases in mortgage demands. Business is also expected to borrow somewhat more in 1977, as plant and equipment expenditures rise and inventories are accumulated. Consumers, too, probably will increase their credit demands, reflecting higher automobile and other durable goods sales.

We have been carefully reviewing the resultant outlook for the credit and capital markets in 1977. Our latest estimate is that total funds raised, including Federal, State and local government, corporate and other business, mortgage, consumer credit, security credit, foreign and other credits, are likely to reach nearly $300 billion in 1977. This compares with an estimated $268 billion in 1976 and $228 billion in 1975.

The funds available to meet this enlarged financing, however, seem adequate. We believe that consumer savings will expand further and that the inflows of new savings funds to institutional investors -- already running at record rates -- will expand further. We estimate that, altogether, the supply of funds from financial institutions other than banks savings and loans, mutual savings banks, credit unions, insurance companies, pension funds, mutual funds, foundations and trust funds -- will total some $150 billion in 1977, compared with an estimated $137 billion in 1976 and $108 billion in 1975.

The other half of the $300 billion required will come from two sources. First, the banking system which

supplied $57 billion in the recovery year of 1976 and $38 billion in the recession year of 1975. In 1974, however, a healthier year for economic growth, the banking system furnished $68 billion. Our current estimate suggests that in 1977 the banking system would provide some $70 billion.

The balance will be met from a variety of traditional sources, including businesses and state and local governments, Federal Government agencies, foreign investors and households. All told, some $70-75 billion of funds should be supplied to the credit markets from these sources.

This outlook reflects our expectation that inflation rates will not rise and, therefore, that the Federal Reserve System will be able to be accomodative throughout 1977 and 1918. This, in turn, will enable commercial banks to have the resources to acquire net large amounts of credit market instruments.

My judgment is, therefore, that the large amount of financing in prospect for 1977 can be accomplished without "crowding out" and that any rise in interest rates, at most, will be quite modest. Even with the economic initiatives I have outlined, the economy will only gradually return to higher rates of capacity utilization, and thus the real rate of growth will not reach an unsustainable level. I do not believe, therefore, that federal borrowing will be unduly competitive with the private sector's loan demands.

I thank you.

Table 1

Estimated Effects of the Administration's Flat Standard
Deduction Proposal, Distributed by Adjusted Gross Income Class

1/ Includes the effect of extending the $35 general tax credit to exemptions for age and blindness.

Table 2

Estimated Effects of the Administration's Tax Rebate Program,
Distributed by Adjusted Gross Income Class

(Calendar Year 1976 Levels of Income)

Adjusted

gross

:

income

Tax change resulting from the fifty dollar per capita rebate

class

Percentage distribution

percentage

distribution

2/ The proposal would increase the minimum standard deduction to $2,400, or, for joint returns, $2,800.

Note: Tax calculations are based on the tax rate schedules and assume the standard deduction, both for present law and under the proposal.