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G A R D N E R A C K L E Y , Chairman

March 17, 1966

J A M E S S. D U E S E N B E R R Y
A R T H U R M. O K U N


Subject: Moderating F iscal Actions



Through Joe Califano, you asked us for a rundown of the ways your
January Budget program helps to moderate the pace of the economy.


To meet our commitments abroad, we had to shoulder continuing
large increases in special Vietnam costs. These reach $4. 7 billion
in fiscal 1966 and mount to $10. 5 billion in fiscal 1967. Apart from
this substantial Vietnam increase of $5. 8 billion, the total of all other
Budget expenditures rises only $600 million in fiscal 1967, reaching
$102. 3 billion from $101. 7 billion in fiscal 1966.


The net increase of $600 million results from several substantial
increases offset by a number of major decreases.

The increases total $5. 3 billion, consisting of
$3.2 billion for Great Society program s,
$0. 8 billion for higher interest costs on the public
debt, and
$1.3 billion for unavoidable commitments such as
construction already in progress and the full year
effect of last year’s pay increases.
The decreases total $4. 7 billion and consist of
$1. 6 billion in defense outlays not related to Vietnam,
$1.5 billion in savings through pruning lower priority
programs and improving management, and
$1.6 billion in increased sales of mortgages , etc.
and shifts away from direct Federal loans.


Expenditures for many programs are being substantially reduced
in fiscal 1967. Following are 7 cases where Budget expenditures
for fiscal 1967 are below those of the current fiscal year by at
least $50 million:
Reduction in fiscal
1967 expenditures
(millions of dollars)
Space research and technology


Small Business Administration


Food for Peace


Farm income stabilization


Postal service


M ilitary family housing


Schools in impacted Federal areas


When Administrative Budget expenditures are taken as a proportion
of G N P , it is clear how tightly the Budget has been held down.

Excluding special Vietnam costs, this proportion falls from
14. 9% in fiscal 1965 to 14. 5% in the current fiscal year. It
drops further to 13. 7% in fis c a l 1967, the lowest figure since
fiscal 1948.
Even including Vietnam costs, the proportion rises only slightly
from 14. 9% in fiscal 1965 to 15.2% for both fiscal 1966 and
fiscal 1967, remaining well below previous levels.
During the decade from fiscal 1955 to fiscal 1964, the Budget
was at least 16% of GNP in nine years, and was 15.5% at its
low point in fiscal I960.

- 3 -

As a proportion of GNP, defense expenditures in fiscal 1966
and 1967 are lower than in any post-Korean year except
fiscal 1965.

Measures on the tax side w ill have a significant moderating effect.
The increase in payroll taxes effective January 1 lifted
revenues and reduced after-tax incomes by nearly $6
billion on a full year basis. Moreover, a further rise
w ill take effect next January at a rate of $1-1/2 billion.
The Tax Adjustment Act of 1966 will add $6 billion to
Federal revenues over the next 15 months. We estimate
that it w ill make a substantial subtraction from total
private spending
$4 billion (annual rate) by the end of this calendar
y e a r, and
$6 billion by the middle of calendar 1967.


The economic impact of this new legislation comes from several
tax changes that draw off private purchasing power.
For the rest of this calendar year, the excise tax restoration
w ill siphon off purchasing power at a rate of $1 billion.
Meanwhile, the graduated withholding plan w ill cut into
consumer incomes at an annual rate of $1-1/4 billion.
In the first half of 1967, the graduated withholding plan will
lose its punch, but the excise tax restoration w ill step up to
a $1-1/2 billion rate. And the quarterly payments of selfemployment taxes w ill enter the picture.
The speedup in corporate tax payments w ill add $1.0 billion
to revenues this spring and $3.2 billion in the spring of 1967.
To be sure, many corporations will not have to tighten their
belts as a result of paying their taxes more promptly. But
this measure will surely take some of the zip out of business
investment demand.


Putting the expenditure and the tax side together, we can conclude
that, despite the large increase in Vietnam costs, the fiscal 1967
Budget does not supply fresh new economic stimulus.


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It is the first time in 4 years that the economy is not
getting new additional fuel from the Budget.
You have demonstrated that fiscal policy can make an
appropriate prompt adjustment to changing economic
conditions, while meeting increased defense commit­
ments. The Nation can have justified confidence that
your fiscal actions will continue to fit the needs of
the economy.

Arthur M. Okun
Acting Chairman

Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102