of $15,000 or less. The program substitutes a flat deduction of $2,400 for single people, and $2,800 for married couples, for the present complex set of standard deduction provisions. This increase in the standard deduction will apply for the entire calendar year 1977 as well as subsequent years. However, this tax reduction cannot be reflected in lower withholding until approximately a month after the date of the enactment of the bill. We are assuming that the required withholding changes can become effective as of the first of May. Since the lower withholding will not be in effect for the first 4 months of the year, there will be either smaller tax payments or larger refunds when the individuals involved file their tax returns by April 15 of next year. In terms of revenue loss, therefore, this simplification feature will cost $1.5 billion in fiscal year 1977 and $5.4 billion in fiscal year 1978. At current income levels, the full year effect is $4 billion. The third tax component is a business tax reduction. We are proposing that business be given the option of a 2 percentage point increase in the present 10 percent investment credit or, alternatively, a refundable 4 percent tax credit for payroll taxes paid for Social Security (FICA) tax purposes. Businesses will have a choice but cannot take both. They will be committed to their choice for five years. The full year effect of this business tax cut at current income levels is $2.6 billion. In fiscal year 1977 this will cost $.9 billion and, in fiscal year 1978, $2.7 billion. To summarize, these three tax features of the stimulus proposal program represent a budget cost of $13.7 billion in fiscal year 1977. Most of this represents the cost of the tax rebate. In fiscal year 1978 the tax budget cost is expected to be about $8 billion. This decrease is, of course, attributable to the fact that the rebate is for the year 1977 only. Spending Components I will only briefly address the spending aspects of the program, because Bert Lance later will give you considerably more detail on them. The spending elements of the package were chosen on three criteria: First, and most important, the programs had to create jobs. Second, the programs had to be effective, and subject to a well administered expansion. We were not interested in creating waste, confusion, or corruption. Third, the programs had to be vulnerable to reasonably rapid termination. We did not wish to mortgage large amounts of dollars of future tax revenues in the first few days of the Administration. one: Within these limits, our spending program is an aggressive For local public works, we recommend an increased authorization of $4 billion, to be spent over 2 years as quickly as good management allows. We are asking increased appropriations of $2.0 billion in both fiscal year 1977 and fiscal year 1978. We estimate that only $0.2 billion of this can be spent in what remains of fiscal year 1977, but this is an informed guess, not a ceiling. In fiscal year 1978, we expect a full $2.0 billion increase in outlays. For new jobs programs, we are aiming for $1.0 billion in increased outlays this fiscal year, and $5.0 billion in fiscal year 1978. The impact on jobs will be substantial once the spending begins to flow heavily: We project, by fiscal year 1978, an increase of 415,000 jobs in public service employment and of 346,000 training and youth slots under other provisions of the Comprehensive Employment and Training Act. This is an ambitious jobs program, both in its size and in the sophistication and fairness of its several elements. The Labor Department cannot efficiently manage any larger expansion in so short a time. Finally, we propose an expansion and reform of countercyclical revenue sharing changes designed to distribute, at current unemployment rates, $1 billion a year more than does the present system. These funds will combat unemployment by saving hard-pressed State and local governments from having to contract their payrolls. Because countercyclical revenue sharing is administered by the Treasury Department, allow me to say a word more about this element of the stimulus package: Existing law provides for the expenditure of $1.25 billion for countercyclical revenue sharing. Under this program, $125 million is distributed quarterly, plus At the $62.5 million for each half percentage of national unemployment over 6 percent. When national unemployment falls to 6 percent, this latter part of the program turns off. current national unemployment rate, about 8 percent, all funds appropriated by Congress for this program will be exhausted by April of 1977. For The program has targeted funds quite effectively. example, three quarters of all local funds in the third quarterly payment went to governmental ur.its with unemployment rates in excess of 8 percent. The President's economic stimulus package both expands and reforms the program. An additional $1 billion would be made available for distribution beginning in July of 1977. In addition, the program would be given a 4 year authorization, with annual appropriations, as compared to the current authority which covers only five quarters. Thus, the "trigger" would remain in place over the whole business cycle, a sound precaution against any sudden downturn in the years ahead. Finally, the funding would be made more sensitive to changes in the unemployment rate. Instead of the current approach of increasing $62.5 million for every half percentage point of unemployment over 6 percent, each change of one tenth of a percentage point in unemployment would result in an additional $29.2 million in funding. For this program, we currently estimate an increase in spending in fiscal year 1977 of $500 million and in fiscal year 1978 of $600 million. If unemployment is higher than anticipated, the expenditures in fiscal 1977 might be larger than indicated. - In summary, the spending components of our stimulus program - for public works, public service jobs and countercyclical revenue sharing will cost $1.7 billion in fiscal 1977. As this spending takes hold in fiscal 1978, however, the cost will increase to $7.6 billion. When added to the tax reductions described earlier, the overall stimulus program will cost $15.5 billion this year and approximately $15.7 billion next year. Table 5 provides a tabular, line-by-line summary of these budget costs. Effects of the Stimulus Program on the Overall Economy The Administration believes that this stimulus program will have the following, general effects on our economy. 84-209 - 77 - 2 The tax rebate will almost immediately put funds into the hands of consumers, increase their spending, and thus encourage higher levels of overall economic activity. Such an immediate stimulus must be provided through a rebate because public service employment or accelerated public works cannot be expanded fast enough to achieve this objective in the few remaining months of fiscal year 1977. In fiscal 1978 the spending programs will strike heavily at unemployment, particularly among construction workers, veterans, and minorities. With this program, it is expected that the unemployment rate will decline to between 6.7 and 6.9 percent by the fourth quarter of 1977 and fall further in 1978, approaching the 6 percent level by the end of that year. Also the real gross national product, given this program, should increase during calendar year 1977 by about 5-3/4 to 6 percent, as contrasted to only about 4-1/2 or 4-3/4 percent in the absence of the program. - - While this program will provide the needed economic stimulus, we do not expect it to cause any significant increase in the rate of inflation. The present high unemployment rate and the substantial unused industrial capacity still approaching 20 percent indicate that inflationary pressures are subdued now and probably can remain so. Increased prices that do occur will primarily reflect the momentum for price increases which has not yet worked its way out of the economic system. Impact of Program on Federal Budget I turn now to the effect of the economic stimulus program on the Federal budget deficits ard, in turn, the effect of these on the capital markets. The entire federal budget is currently being reviewed by the Administration and, as a result, it is impossible for us at this time to provide a precise deficit figure for the fiscal year 1977. However, we believe that the fiscal year 1977 deficit will be in the range of $67 billion to $69 billion, including the effect of the President's stimulus proposal. A deficit in this range, together with about $10 billion of off-budget financng, will mean that the Treasury will raise $77 billion to $79 billion of net new cash in fiscal 1977. Questions have been raised as to whether this prospective Treasury financing will "crowd out" private borrowers from the credit markets. - 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. - |