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EXECUTIVE OFFICE OF THE PRESIDENT BU REAU O F TH E BU D GET W A S H IN G T O N , D .C . 20503 Authority O FFICE O F T H E D IRECTOR tty . NABS, Date /D' K>.,Z^ December 27, 1965 MEMORANDUM FOR THE PRESIDENT Subject: Federal Reserve payments and the January budget We have been planning to make an accounting change in the budget which has the effect of reducing expenditures. The Treasury pays interest to the Federal Reserve on the Treasury securities held by the Fed. These are included in budget expenditures for interest. At the same time the Fed pays back to the Treasury almost all of its earnings. 95% of those earnings are interest on Treasury securities. We have been proposing to net these payments against each other • expenditures for interest are thereby reduced by $1.8 billion Treasury revenues are also reduced by $1.8 billion. The deficit is not affected — since we are subtracting the same number from both expenditures and revenues. But the expenditure level is reduced. In making this change we would have to make it for all past years as well, so that the change in expenditures from year to year would not be much affected. ~ If we adopt this change, and at the same time use a defense figure of $57 billion, the total budget expenditures in 1967 will be: (billions of dollars) $9*5 Vietnam 101 (subject to size of Other.. legislative program and pay raise) 110*5 2 I have become very worried, however, that this accounting change may do great harm to your budgetary and legislative program. It can be defended on the grounds that - transactions among other Federal agencies are usually netted out - we also net out transactions between the executive and legislative branches (e.g. certain payments to the General Accounting Office) - we are not changing the measure of the deficit. Nevertheless it will be strongly attacked — as evidence of a "phoney" budget; particularly in conjunction with use of the lower defense figure — on grounds that these transactions have gone on for 40 years without being netted out Moreover, the discussion of this change may open up the con troversy over the "independence" of the Federal Reserve. The other major actions we are taking to reduce expenditures — sale of financial assets — stockpile sales — real property disposal can all be defensed on substantive grounds. able measures to take. They are desir Hostile Congressmen and political commentators, however, will seize upon the Federal Reserve accounting change, and use it to tar many of the other actions with the same brush. No matter which way we go on this, it doesn*t affect the deficit. 3 And if you: accept the $57 billion defense estimate propose graduated withholding, corporate tax acceleration, and postponing the excise reductions your January budget can show an overall 1967 deficit of about $3-3% billion — lower than any year since 1960. Moreover, excluding both the tax changes and the costs of the Vietnam war, your 1967 budget would show a surplus of $2h to $3 billion — the largest since 1951, and the third largest in the history of the United States. I believe this budget story is too good to be endangered by accusationsof "manipulation," however falsethose accusations might be. In summary, therefore, . if we do make the Federal Reserve accounting change, the budget total can be held close to $110 billion — but at a cost of charges that this is not a "true" total if we do not make the accounting change, the budget will be nearer the $112 billion level — but will not provide an invitation to such charges. Charles L. Schultze Director fid " /-$ Bo Bo Form Noo 51* (11/8/50) BUREAU OF THE BUDGET Document Receipt rret--- Classification **0™ 12/27/65 ‘ Date - Charles L. Schultze Name ■ ■ , ..gf tfo> Office _____________ Description of Document* Memo for President re Fed. Reserve Payments and the January Budget. Tos The President Agency Date Received Name and Title of Addressee The Ranch Building and Room dumber Signature of Recipient COPY LBJ LIBRARY EXECUTIVE OFFICE OF THE PRESIDENT BU REA U O F THE BU D G ET WASHINGTON 25, D.C. DECLASSIFIED Authority 0MB letter APR 111978 NAftS, DatejfA December 27, 1965 MEMORANDUM FOR THE PRESIDENT Subject! Federal Reserve payments and the January budget We have been planning to make an accounting change in the budget which has the effect of reducing expenditures. The Treasury pay# interest to the Federal Reserve on the Treasury securities held by the Fed. These are included in budget expenditures for interest. At the same time the Fed pays back to the Treasury almost all of its earnings. 95% of those earnings are interest on treasury securities. We have been proposing to net: these payments against each other « expenditures for interest are thereby reduced by $1.8 billion ♦ Treasury revenues are also reduced by $1.8 billion. The deficit is not affected — since we are subtracting the same number from both expenditures and revenues. But the expenditure level is reduced. In making this change we would have to make it for all past years as well, so that the change in expenditures froia year to year would not be much affected. If we adopt this change, and at the same time use a defense figure of $57 billion, the total budget expenditures in 196? will bet Cbillions of dollars) $9h Vietnam............... Other........ . 101 (subject to size of legislative program and pay raise) 110% x Itav# become vearyjgorried, however,.. that..this..ascflnnt.lnq, chaaoe raav do great h a m to vour budgetary and legislative msoi» It can be defended cm the grounds that * transactions among other Pe<3eral agencies are usually netted out • wa also net out transactions betsteen the executive and legislative branches {0.9. certain paysaents to the General Accounting Office) - w© are not changing the measure off the deficit, Nevertheless it will be strongly attacked — as evidence of a "phoney* budget? particularly in conjunction with use of the lower defense figure — on grounds that these transactions have gone on for 40 years without being netted out Moreover, the discussion of this change stay open up the con troversy o*er the *independence” of the Federal Reserve. The other major actions we are taking to rediice expenditures — sale of financial assets — stockpile sales — real property disposal can all be defenaed on substantive grounds. able nteasitress to take. They are desir Hostile Congressmen and political coromentators, however, will seise upon the Federal Reserve accounting change, mid use it to tar many of the other actions with the saute brush* Mo matter ■which way w® go on this* it doesn't affect the deficit. 3 And if font accept the $57 billion defense estimate* propose graduated withholding, corporate tax acceleration, and postponing the excise reductions your January budget can show an overall 1967 deficit of about $3-3& billion — lower than anv year since 1960. Moreover, excluding both the tax changes and the costa of the Vietnam war, yoar 1967 budget would aha*? a surplus of largest in fchfe Mstory of _tha Unlted Jtate,a> X believe this budget story ia too good to be endangered by accusations of "manipulation, ” however falsethose accusations might be, 1st summary, therefore, , if we do stake the Federal Sesesrve accounting change, the budget total can be held close to $110 billion «<• but at a cost of charges that this is not a "true" total . if w® do not make the accounting change* the budget will be nearer the $112 billion level — but will not provide an invitation to such eStafpts. (rri^prn • ... T • _ :- ** Schnltse Charles %* Schultz© Director