Kennedy's Case for a HIGHER BUDGET & LOWER TAXES

When an Administration proposes both a huge tax cut and the biggest federal budget in history, it is asking for trouble. Well aware of this fact, President Kennedy prepared his annual economic report, sent to Capitol Hill this week, with an eye to calming the critics.

In the report--which clearly reflects the thinking of Walter W. Heller, chairman of the President's Council of Economic Advisers--Kennedy insisted there is no alternative to a huge budget deficit in fiscal 1964. "Our choice is not the oversimplified one sometimes posed, between tax reduction and a deficit on one hand and a budget easily balanced by prudent management on the other. We have been sliding into one deficit after another through repeated recessions and persistent slack in our economy. If we were to try to force budget balance by drastic cuts in expenditures--necessarily at the expense of defense and other vital programs--we would not only endanger the security of the country; we would so depress demand, production and employment that tax revenues would fall and leave the Government budget still in deficit."

Strength or Weakness. So, as Kennedy sees it, "Our practical choice is not between deficit and surplus but between two kinds of deficits: between deficits born of waste and weakness and deficits incurred as we build our future strength. If an individual spends frivolously beyond his means today and borrows beyond his prospects for earning tomorrow, this is a sign of weakness. But if he borrows prudently to invest in a machine that boosts his business profits . . . this can be a source of strength."

Kennedy seemed to feel that there was no great harm in the bloating national debt. "The ability of the nation to service the federal debt rests on the income of its citizens, whose taxes must pay the interest. Total federal interest payments as a fraction of the national income have fallen from 2.8% in 1946 to 2.1% last year. The gross debt itself as a proportion of our G.N.P. has also fallen steadily--from 123% in 1946 to 55% last year. Under the budgetary changes scheduled this year and next, these ratios will continue their decline."

Hinted Warning. To those who see a threat of inflation in his fiscal policy, Kennedy cited the fact that prices have been essentially stable for the past five years, claimed that "this has broken the inflationary psychology and eased the task of assuring continued stability."

Overall, Kennedy maintained that the economy improved in his two years in office. Personal income is up 12%; corporate profits reached a record $51 billion for 1962. The balance-of-payments deficit has dropped from $3.9 billion in 1960 to $2 billion in 1962. But this is not good enough. Kennedy contended, since 4,000,000 are still unemployed, some $30 billion to $40 billion in productive capacity lies idle, and the U.S. growth rate has averaged only 2.7% since 1955.

Tax reduction and reform can stimulate the economy to close this gap between performance and capability, Kennedy argued. "The recovery that was initiated shortly after I took office now stands poised at a moment of decision. I do not believe the American people will be--or should be--content merely to set new records. The main block to full employment is an unrealistically heavy burden of taxation. The time has come to remove it."

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