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The original documents are located in Box 9, folder "FY 1977 - 9/18/75, Budget Reduction
Proposals (1)" of the White House Special Files Unit Files at the Gerald R. Ford
Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
1977
BUDGET
REDUC-
TIONS
Digitized from Box 9 of the White House Special Files Unit Files at the Gerald R. Ford Presidential Library
OP THE
PRESIDENT
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE
UNITED
OFFICE OF MANAGEMENT AND BUDGET
SECUTIVE
STATES
WASHINGTON, D.C. 20503
THE PRESIDENT HAS SEEN
SEP 1 8 1975
ACTION
MEMORANDUM FOR:
THE PRESIDENT
FROM:
James T. Lynn
f.
SUBJECT:
Further Action to Hold Down the 1977
Budget Deficit
On August 8 you asked that we prepare suggestions for keeping down the
1977 budget deficit. The attached binder identifies specific reduction
possibilities, mainly by cutting back on Federal expenditure growth
but also, to a small extent, by increasing revenues through tax law
revisions. Given current economic forecasts, these approaches would
result in a 1977 budget presentation in January showing Federal
expenditures of about $395 billion with a deficit of around $46 billion
if tax cuts are extended or around $29 billion if they are not extended.
This reduction from the earlier figures we have given you results from
both the cuts and new estimates of a "starting point" for such cuts.
Background
My memorandum to you of July 1 noted that the planning guidance to the
agencies was aimed at holding the 1977 budget deficit to $34 billion
in comparison to a $60 billion target this fiscal year. I also noted
that by the time your budget is to be submitted next January we might
be looking at deficits of $70 billion (or more) in fiscal 1976 and
$56-$60 billion in fiscal 1977 (assuming continuation of the tax cuts)
However, our "starting points" for the July 1 memo and this latest
cutting effort have changed due to a number of factors. These
differences are summarized in Tab A, which should be read.
The table below summarizes the deficit outlook if the ideas for deficit
cuts suggested in the attached binder are adopted (after taking out
about $2 billion from the binder expenditure cuts to cover possible
losses as such ideas are refined) :
GERALD P. LIBRARY FORD
2
(In billions)
FY 1976
FY 1977
Outlays
Current base estimate
$370.8
$419.1
Listed deficit reductions *
-1.4
-23.5
Resulting outlay estimate
369.4
395.5
Receipts
Current base estimate
292.3
351.4
Listed deficit reductions
---
2.4
Economic impact of budget cuts (rough and
disputed)
---
-4.0
Resulting receipts estimate
292.3
349.8
Deficit
Current base estimate
-78.5
-67.7
Listed deficit reductions *
1.4
25.9
Economic impact of budget cuts (as above)
---
-4.0
...
Resulting deficit estimate
-77.1
-45.7
Possible adjustments
Estimated deficit reduction if full
GERALE FORD VIBRARY
presently estimated revenue increase
is added
3.4
4.6
Estimated deficit reduction if tax cuts and
the withholding rate are not extended
5.9
17.3
Estimated deficit increase if current
Defense program is used
---
-10.0
The above estimates assume
-- Sudden oil decontrol, elimination of import fees, and a windfall
profits tax (energy) completely redistributed to the economy.
(Alternatively, your 39-month proposal would reduce the deficits
shown by roughly $3 billion in 1976 and $5-1/2 billion in 1977.)
*
After adjustment of 1977 outlay cuts by $2 billion for losses due to
refinements.
3
Continued Congressional inaction on budget reduction proposals
heretofore made, except for success in holding the line on the
Federal pay raise; and
-- Further add-ons by the Congress this session of $2.5 billion
for 1976 (mid-point of a $2 to $3 billion range) and $5.25 bil-
lion for 1977 (mid-point of a $4.5 to $6 billion range).
Importance of Economic Forecasting
As you know, the estimates are highly sensitive to the forecast of
future economic activity. For example, an error of one percent in fore-
casting 1976-77 money GNP can result in a $4 to $5 billion error in our
forecast of the 1977 deficit. Based on past experience, it is quite
possible that errors in forecasting GNP will exceed one percent.
In arriving at the updated figures used in the above table and in Tab A,
we used a Troika II forecast estimate of a couple of weeks ago that
showed results quite different from the May effort (e.g., faster recovery
and higher receipts). There appears to be a wide range of views within
the Administration on the validity of that forecast (primarily based on
econometric modeling). Not only are there differences of opinion on
such matters as unemployment but also as to whether or not furthur stimulus
in various forms, including extension of the tax cut, would increase GNP
or reduce it.
A new econometric model, with somewhat changed assumptions on the input
side, is expected shortly from Troika II, to be followed by an effort by
your economic advisers to arrive at a unified position. Thus it may well
be that both Tab A and the above table are in for some change. Nonetheless,
we decided not to wait to submit this memorandum to you inasmuch as time
is rapidly running out for decisions on whether to work with the depart-
ments and agencies on further cuts for FY 76 and 77. It is our judgment
that even if more refined views on economic assumptions within the next few
days result in somewhat lower deficits, the magnitude of the changes would
not be SO great as to influence materially your judgment on whether to
proceed with departmental and agency work on the cuts. Further, it is far
easier to abandon certain cuts later than to try to work out such cuts at
the last minute.
Outlay Reductions
The 1977 outlay reductions listed in the binder require the following kinds
of actions (in billions) :
FORD LIBRARY &
4
Substantive legislation proposed
$16.5
Lower appropriation requests
5.5
Rescission or deferral of 1976 appropriations
1.5
Administrative actions
1.9
Total outlay reductions listed
25.5
Less "refinements" to substantive legislation
2.0
Total
23.5
A more detailed breakdown is set forth at Tab B.
While we have tried and will continue to try to identify budget cuts that
are clearly justified on programmatic grounds, less than half (in dollars)
of the listed decreases can be explained on that basis. For example, we
have included $3.2 billion in reductions for programs that are tied to
the consumer price index. The cuts are equal to 40% of the percentage
increase each of those programs might otherwise receive. We think this
is better than a fixed percentage increase (like the 5% "cap") because
the latter falls very unequally on the various programs. Frankly, in lieu
of the 40% reduction, which is arbitrary, we would prefer a proposal to
tax social security benefits in excess of contributions with accompanying
repeal of the retirement income credit. This action would reduce the
deficit by a smaller amount -- about $2.4 billion -- but would fall less
heavily on those with low income than the arbitrary limit. However, this
alternative -- while more equitable -- probably is worse politically than
the 40% method, particularly if we are not going to put forward total
social security reform proposals at the same time that would "ease the
blow." We are also exploring an alternative which would limit indexing
increases to wage increases realized by the working sector. This approach
would have worked well for 1976 but application for 1977 may not yield any
cut-back. We will have more on this within a few days.
The reductions also include a repetition of this year's 5% limit on Federal
pay increases and a proposed reduction of 63,800 Federal civilian employees,
including 50,000 in the Department of Defense. Also listed is a cut of
30,000 in military manpower.
The list of actions contains several suggestions to increase receipts. One
possibility is to raise receipts by $6.4 billion or more by repeal of
certain tax exclusions. Because we may want to accept about $4 billion in
offsetting tax "simplifications" initiated by the Ways and Means Committee,
we have included only $2.4 billion in arriving at the $46 billion 1977
deficit estimate. Other suggestions for tax additions identified in the
list total about $14 billion but would be very difficult politically, e.g.
an increase in freight transportation fees (adding $1 billion in receipts)
FORD is LIBRARY GERALD
5
and deferral for one year of the plan to shift 1¢ per gallon of gasoline
taxes to the States (adding $1 billion to receipts) or elimination of
DISC (adding $1.3 billion in receipts). However, if you were to decide
to restore some of the deficit by offering lower taxes to business
generally, some of the present tax incentives might be traded.
Major Problems
The planning totals given the agencies in July were already very con-
strained. The adjustments as made since the original levels were
established and shown in Tab A represent mainly uncontrollable changes
in open-ended programs. There is strong agency resistance to those
initial levels even before considering further reductions.
The point is emphasized by the situation for Defense. The current Defense
program for 1977 of $104 billion is $5 billion above the planning target
you approved in July. The reductions identified in this memorandum would
reduce Defense outlays by an additional $5 billion. Thus, there is a
potential gap of $10 billion between the Defense Department internal
planning level and the programs identified in this memorandum. However,
chances of getting the reductions for domestic programs -- small at best --
will be diminished still further if it appears that Defense and foreign
aid were spared. The reduced figures for Defense now result in the fol-
lowing year-to-year comparisons (in billions) :
1976
1977
1975
(Estimated
(With $10 billion
(Actual)
final)
of cuts)
Outlays
86
91
94
Obligational
authority
89
98
104
GERALD FORD VIBRANT
These problems as to Defense are discussed more at Tab C.
Finally, our figures now include only a very modest $1 billion allowance
for agency appeals.
These facts plus the economic forecasting vagaries discussed above plus
other uncertainties (e.g., offshore receipts) make the expenditures,
revenues and deficits shown in this memorandum quite vulnerable to
considerable change between now and January.
Strategy for fiscal year 1976
Last year's experience taught that cutting a budget once a fiscal year
has begun is exceedingly difficult, especially now that Congressional
acquiescence is needed under the Impoundment Control Act for virtually
any proposed reduction.
6
About $5 billion in outlay reductions could be proposed. Cuts of this
magnitude for 1976 would be very difficult in any event and will not be
possible at all unless specific proposals are presented to the Congress
by November 1 and the Congress accepts them in time for an effective
date of January 1. In order for that deadline to be met, you would have
to review and approve a set of proposed reductions no later than
October 15. About $3-1/2 billion of the $5 billion would require sub-
stantive legislation; the remaining $1-1/2 billion would take the form
of deferrals and proposed rescissions.
Alternatively, proposed reductions intended primarily to affect fiscal
year 1977 but with a $1-1/2 billion effect in fiscal year 1976 could be
transmitted with the January budget.
The Congress is not likely to accept much, if any, of a November 1
package and will be antagonized by it. This is not to say that a
November package might not have value; repeated Presidential warnings
about the size of the deficit may be necessary to produce the cumulative
effect essential to their acceptance. The more important disadvantage
of a November package is its potential for diluting the impact of a much
more drastic set of reduction proposals in the 1977 budget, particularly
since the most that would be gained from a November package -- even if
the Congress accepted it -- would be an additional $3 or $4 billion.
Strategy for fiscal year 1977
Several strategies need to be considered. First is the question of a
general strategy with respect to budget cuts. For example, shall we
-- Aim for massive and sometimes arbitrary reductions of
$25 or $30 billion from "Current Services" in a wide variety
GERALD FORC (TENAR)
of programs stressing the lowest possible deficit; or
Seek to make such massive cuts more saleable by packaging
them with one or more "carrots," e.g., tax reduction
proposals, increases in aid to the poor, larger general
revenue sharing, further crime initiatives, new "chronic
unemployment" initiatives, etc.; or
Try to be selective in identifying those reductions that are
most saleable, even though none is easy (limiting reductions
to $10 or $15 billion)?
Secondly, there are questions involving narrower strategies including:
The need to show that cuts in domestic programs are accompanied
by decreases in defense and international programs versus the
fact that budget amounts for defense and international programs
are likely to be cut by the Congress;
7
-- The desirability of proposing no funds for bad or low-priority
programs versus a reduction approach that simply aims to
restrain those programs.
Next Steps
We need your guidance on our approach to budget reductions and request
a meeting with you for this purpose.
Attachments
FORD LIBRARY
TAB A
FORD
TAB A
SALD
DIFFERENCES BETWEEN ORIGINAL PLANNING TOTALS
AND CURRENT BASE ESTIMATES
(In billions)
FY 1976
FY 1977
Deficit
Planning totals
$60.0
$33.6
Outlay increases (net)
12.4
21.4
Receipt decreases (net)
6.1
12.7
Current deficit (base) estimate
78.5
67.7
****
****
Receipts
Planning totals
298.4
364.1
Revised estimates and economic assumptions
3.4
4.7a
Extension of tax cuts (1974 Act)
-4.0
-12.9
Maintenance of lower withholding rates
-1.9
-4.4
Deletion of import tax and other previous
energy proposals
-5.6
-.4
Increased taxes due to decontrol
6.9
6.8
Rebate of increased taxes due to decontrol
-6.2
-5.8
Highway program -- transfer of 1¢ gasoline
tax to States
---
-1.0
Capital formation tax proposals
---
-1.2
Other adjustments including revised
treatment of earned income credit
1.3
1.5
Current base estimate, receipts
292.3
351.4
Outlays
Planning totals
358.4
397.7
Continuation of emergency employment
programs -- initially planned to end in
December 1976
---
3.8
Unemployment benefits -- recent experience
and revised outlook
2.9
-1.3
Interest on the debt -- higher rates and
larger deficit
1.8
6.0
Energy equalization payments -- deletion
-5.8
-7.0
Middle East, Greece and Portugal
initiatives
.5
2.2
2
FY 1976
FY 1977
Outlays -- Continued
Education appropriation (veto override)
.4
.8
Congressional inaction on budget reduction
proposals heretofore made
6.5b/
8.5
Potential Congressional initiatives
2.5C
/
5.25°
Energy (rebate) payments
.7
1.0
Earned income credit (treatment as outlays
instead of receipts)
1.2
1.2
All other changes
1.6
.9
Current base estimate, outlays
370.8
419.1
a
Tentative Treasury estimates would double these amounts; the lower
amounts are used here because of uncertainties in the estimates.
Of this increase, $2.0 billion has already occurred.
c/ This is the mid-point of a $2 to $3 billion range.
ALO FORD (THRA
This is the midpoint of a $4.5 to $6.0 billion range.
TAB B
TAB B
BASIS FOR JUSTIFICATION
OF OUTLAY REDUCTIONS
(In billions)
Outlay effect
in 1977
Programmatically justifiable
$-9.2
Justifiable on grounds that the Federal role
should be reduced vis-a-vis States, local
governments, or educational institutions
-1.6
Justifiable on grounds of fiscal restraint
(i.e., essentially arbitrary) :
Place limits on increases for
FORD
inflation on programs tied to
cost-of-living:
-- Limit increases of indexed
programs to 60% of what
they would be under current
law
-3.2
-- Limit increase in Federal
salaries to 5%
-3.6
-- Other limits (Medicare and
Medicaid)
-3.7
Total, limits on increases
-10.5
Federal employment reduction
-.9
Other
-3.3
Total outlay reductions listed
-25.5
Less "refinements"
2.0
Total (as included in reduced
budget totals)
-23.5
REDUCTIONS THAT ARE PROGRAMMATICALLY JUSTIFIABLE
(Dollars in billions)
Outlay effect
in 1977
Child nutrition program -- enact block grant program
to reduce participation by non-needy children and
allow use of food stamps for school meals (thereby
reducing duplication of Federal nutritional support)
-1.1
Food stamp program -- seek changes in eligibility
-1.1
Curtail Temporary Employment assistance program
-1.1
Defense program cuts in research and development,
procurement, and intelligence activities. Reduce
overtime and pay-related costs
-1.1
:ALE FORD THE
Veterans programs
-.9
GSA stockpile sales (increase in receipts)
-.8
Eliminate Social Security monthly retirement test and
retroactive payment of actuarially reduced benefits
-.7
Slow spending rate for EPA waste water construction
grants
-.4
Accelerate foreclosure and sale of assigned multi-
family housing mortgages financed by the Federal
Housing Administration fund
-.2
Repeal work incentives law and terminate program
-.2
CCC price support and related programs
-.2
All other
-1.3
Total
-9.2
REDUCTIONS THAT WOULD REDUCE
THE FEDERAL ROLE
(Dollars in billions)
Outlay effect
in 1977
Reduce Federal matching rate for Social Services
(from 75% to 65%)
-.9
Restrict Federal matching rate for AFDC
-.1
Limit amount of grant funds that cities can use for
transit operating expenses
-.2 -
Eliminate non-student assistance programs in
higher education
-.1
Reduce Federal share of college work-study program
...
-.1
GERALD R. FORD (TBRANT
All other
-.3
Total
-1.6
REDUCTIONS THAT ARE JUSTIFIABLE ON
GROUNDS OF FISCAL RESTRAINT
(Dollars in billions)
Outlay effect
in 1977
Limits on increases for inflation on programs
tied to cost-of-living:
Limit increases to 60% of what they would
be under current law:
OASDI
-2.4
Food Stamps
-0.2
SSI
-0.2
Civil Service retirement
-0.1
Railroad retirement
-0.1
Military retired pay
-0.1
Child nutrition
-*
FORD
Black lung benefits
-*
Total, limit of 60%
-3.2
Limit increases in Federal salaries to 5%:
LIBRAR
Civilian agencies
-1.0
Military pay
-2.4
Military wage-board
-0.2
Total, limit in Federal salaries
-3.6
Other limits:
Medicare
-2.5
Medicaid
-1.2
Total, other limits
-3.7
Total, limits on cost-of-living increases
-10.5
Federal employment reduction:
Military programs
-0.7
Civilian programs
-0.2
Total, Federal employment reduction
-0.9
Other actions:
Defense, Operations and Maintenance
-0.8
Defense, Military construction
-0.5
Labor, Summer Youth employment
-0.5
Export-Import Bank direct loan program
-0.4
Space programs
-0.2
Veterans programs
-0.2
Corps of Engineers, construction
-0.2
Other
-0.5
Total, other actions
-3.3
Total
-14.7
*
$50 million or less.
TAB C
DECISION
PRESIDENT
EXECUTIVE OFFICE OF THE PRESIDENT
DHIO
UNITED
OFFICE OF MANAGEMENT AND BUDGET
TAB C
SECUTIVE
WASHINGTON, D.C. 20503
SEP 16 1975
MEMORANDUM FOR: THE DIRECTOR
FROM:
DON OGILVIE
SUBJECT:
FY 1977 Defense Budget Gap
Our best estimates indicate a gap of up to $10 billion between the current
Defense and OMB outlay estimates for 1977. This memo identifies the broad
areas of difference and recommends specific actions required if the lower
outlay levels are to be achieved.
1977 Defense Outlays
ALD
FORD
A table summarizing the 1977 Defense outlay picture follows:
LIBHA
1977 Defense Budget Development
(outlays - $ billions)
1977
1975
1976
OMB
DOD
FY 1976 President's Budget
85
93
104
104
Outlay reestimates
+1
+2
Estimated FY 1976 Congressional Action.
-3
-2
-2
OMB Planning Target
-3
Defense Program Review
+2
September Reduction Exercise
-1
-5
Current Projection
86
91
94
104
In January Defense and OMB reached agreement on 1977 Defense and MAP outlays
of $104 billion. Since that time the following has occurred:
Actual 1975 outlays were $1 billion higher than anticipated; an
increase of $2 billion in 1976 outlays is anticipated.
Congressional action on the FY 1976 budget is expected to reduce
outlays by $3 billion in 1976 and by $2 billion in 1977.
2
The Defense internal program review has just been completed and
calls for 1977 outlays of $104 billion, in effect adding $2 billion
in program to offset anticipated congressional reductions.
The OMB planning target for Defense included anticipated congres-
sional cuts and further Defense/MAP reductions of $3 billion.
These adjustments are still considered realistic.
The recent $25 billion reduction exercise would require $5 billion
in Defense outlay reductions below the 1977 planning target. The
resulting $94 billion Defense level would be about $3 billion below
the 1976 outlay level in real terms. Proposed actions include a
maximum 5% pay raise for both October 1975 and October 1976. All
existing force levels are preserved but lower operating and invest-
ment cost levels will have some adverse impact upon readiness.
In summary, Defense has assumed, incorrectly in our opinion, that the
January planning target is independent of congressional action and that
program additions can be substituted for congressional reductions. The
OMB planning target, by contrast, accepts the congressional reduction and
includes further program adjustments. Thus, there is a $5 billion gap
between Defense and OMB initial planning levels. The September outlay
reduction exercise widens this gap to $10 billion. These are extremely
large differences that will require major changes to the Defense budget
submission. This, in turn, requires understanding and acceptance on the
part of Secretary Schlesinger if these kinds of reductions are to be
achieved.
1977 President's Budget Presentation
Also of considerable importance are the year by year Defense totals which
will appear in the President's Budget and the signals the President desires
to send with his Defense budget. The FY 1977 level will be, in large measure,
closely related to what Defense receives in 1976. This is normally true in
any year, but the emphasis is now even greater with the current services
budget serving as a potential baseline for congressional review.
The 1977 Defense budget request should start from the 1976 level allowed by
Congress, and then add factors for inflation, real program growth and
congressional cut insurance.
The current projection of TOA and outlays for Defense is as shown:
($ billions)
1977
1975
1976
OMB
DOD
Defense TOA (see attached table)
89
98
104
117
Defense outlays
86
91
94
104
3
These are the amounts that would appear in the President's Budget for 1977.
The FY 1976 program will be about $10 billion in TOA and $5 billion in
outlays higher than the actual FY 1975 experience. Recognizing continued
inflation, real program growth and congressional cut insurance, the FY 1977
growth over FY 1976 should probably be a minimum of $12 billion in TOA and
$6 billion in outlays unless real program reductions are acceptable. However,
the FY 1977 Defense internal planning growth of $19 billion in TOA and
$13 billion in outlays appears clearly excessive in the absence of any major
emergency or dramatic change in the world situation. If the President decides
on a $2-3 billion TOA increase in strategic programs as the result of unsatis-
factory progress in the SALT II negotiations, this would increase FY 1977
Defense outlays by up to $1 billion.
Recommendations
Because of the magnitude of the gap between Defense and OMB in FY 1977, I
recommend:
1. That you seek explicit Presidential guidance on Defense planning
levels in your upcoming meeting on the FY 1977 budget.
Approve
Disapprove
2. That you meet with the Secretary of Defense and reach closer
accord on the FY 1977 Defense budget level within the next
two weeks, prior to the October 1 start of the OMB/DOD joint
review.
Approve
Disapprove
FORD & LIBRARY GERALD
1977 Defense Budget Development
(TOA - $ billions)
1977
1975
1976
OMB
DOD
FY 1976 President's Budget
89
105
117
117
Estimated FY 1976 congressional
action
-7
-1
OMB Planning Target
-6
Defense Program Review
+1
September reduction exercise
-7
Current Projection
89
98
104
117
GE GERAUD ? FORD
THE PRESIDENT HAS SEEN
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
WASHINGTON, D.C. 20503
Drr
SEP 1 6 1973
ACTION
MEMORANDUM FOR:
THE PRESIDENT
FROM:
James T. Lynn
SUBJECT:
Further Action to Hold Down the 1977
Budget Deficit
On August 8 you asked that we prepare suggestions for keeping down the
1977 budget deficit. The attached binder identifies specific reduction
possibilities, mainly by cutting back on Federal expenditure growth
but also, to a small extent, by increasing revenues through tax law
revisions. Given current economic forecasts, these approaches would
result in a 1977 budget presentation in January showing Federal
expenditures of about $395 billion with a deficit of around $46 billion
if tax cuts are extended or around $29 billion if they are not extended.
This reduction from the earlier figures we have given you results from
both the cuts and new estimates of a "starting point" for such cuts.
Background
My memorandum to you of July 1 noted that the planning guidance to the
agencies was aimed at holding the 1977 budget deficit to $34 billion
in comparison to a $60 billion target this fiscal year. I also noted
that by the time your budget is to be submitted next January we might
be looking at deficits of $70 billion (or more) in fiscal 1976 and
$56-$60 billion in fiscal 1977 (assuming continuation of the tax cuts).
However, our "starting points" for the July 1 memo and this latest
cutting effort have changed due to a number of factors. These
differences are summarized in Tab A, which should be read.
The table below summarizes the deficit outlook if the ideas for deficit
cuts suggested in the attached binder are adopted (after taking out
about $2 billion from the binder expenditure cuts to cover possible
losses as such ideas are refined) :
FORD
GERALD
2
(In billions)
FY 1976
FY 1977
Outlays
Current base estimate
$370.8
$419.1
Listed deficit reductions *
-1.4
-23.5
Resulting outlay estimate
369.4
395.5
Receipts
Current base estimate
292.3
351.4
Listed deficit reductions
2.4
Economic impact of budget cuts (rough and
disputed)
-4.0
Resulting receipts estimate
292.3
349.8
Deficit
Current base estimate
-78.5
-67.7
Listed deficit reductions
*
1.4
25.9
Economic impact of budget cuts (as above)
-4.0
Resulting deficit estimate
-77.1
-45.7
Possible adjustments
Estimated deficit reduction if full
GERALD FORD LIBSARY
presently estimated revenue increase
is added
3.4
4.6
Estimated deficit reduction if tax cuts and
the withholding rate are not extended
5.9
17.3
Estimated deficit increase if current
Defense program is used
-10.0
The above estimates assume
Sudden oil decontrol, elimination of import fees, and a windfall
profits tax (energy) completely redistributed to the economy.
(Alternatively, your 39-month proposal would reduce the deficits
shown by roughly $3 billion in 1976 and $5-1/2 billion in 1977.)
*
After adjustment of 1977 outlay cuts by $2 billion for losses due to
refinements.
3
Continued Congressional inaction on budget reduction proposals
heretofore made, except for success in holding the line on the
Federal pay raise; and
Further add-ons by the Congress this session of $2.5 billion
for 1976 (mid-point of a $2 to $3 billion range) and $5.25 bil-
lion for 1977 (mid-point of a $4.5 to $6 billion range)
Importance of Economic Forecasting
As you know, the estimates are highly sensitive to the forecast of
future economic activity. For example, an error of one percent in fore-
casting 1976-77 money GNP can result in a $4 to $5 billion error in our
forecast of the 1977 deficit. Based on past experience, it is quite
possible that errors in forecasting GNP will exceed one percent.
In arriving at the updated figures used in the above table and in Tab A,
we used a Troika II forecast estimate of a couple of weeks ago that
showed results quite different from the May effort (e.g., faster recovery
and higher receipts). There appears to be a wide range of views within
the Administration on the validity of that forecast (primarily based on
econometric modeling). Not only are there differences of opinion on
such matters as unemployment but also as to whether or not furthur stimulus
in various forms, including extension of the tax cut, would increase GNP
or reduce it.
A new econometric model, with somewhat changed assumptions on the input
side, is expected shortly from Troika II, to be followed by an effort by
your economic advisers to arrive at a unified position. Thus it may well
be that both Tab A and the above table are in for some change. Nonetheless,
we decided not to wait to submit this memorandum to you inasmuch as time
is rapidly running out for decisions on whether to work with the depart-
ments and agencies on further cuts for FY 76 and 77. It is our judgment
that even if more refined views on economic assumptions within the next few
days result in somewhat lower deficits, the magnitude of the changes would
not be SO great as to influence materially your judgment on whether to
proceed with departmental and agency work on the cuts. Further, it is far
easier to abandon certain cuts later than to try to work out such cuts at
the last minute.
Outlay Reductions
The 1977 outlay reductions listed in the binder require the following kinds
of actions (in billions) :
FORD
4
Substantive legislation proposed
$16.5
Lower appropriation requests
5.5
Rescission or deferral of 1976 appropriations
1.5
Administrative actions
1.9
Total outlay reductions listed
25.5
Less "refinements" to substantive legislation
2.0
Total
23.5
A more detailed breakdown is set forth at Tab B.
While we have tried and will continue to try to identify budget cuts that
are clearly justified on programmatic grounds, less than half (in dollars)
of the listed decreases can be explained on that basis. For example, we
have included $3.2 billion in reductions for programs that are tied to
the consumer price index. The cuts are equal to 40% of the percentage
increase each of those programs might otherwise receive. We think this
is better than a fixed percentage increase (like the 5% "cap") because
the latter falls very unequally on the various programs. Frankly, in lieu
of the 40% reduction, which is arbitrary, we would prefer a proposal to
tax social security benefits in excess of contributions with accompanying
repeal of the retirement income credit. This action would reduce the
deficit by a smaller amount -- about $2.4 billion -- but would fall less
heavily on those with low income than the arbitrary limit. However, this
alternative -- while more equitable -- probably is worse politically than
the 40% method, particularly if we are not going to put forward total
social security reform proposals at the same time that would "ease the
blow.' We are also exploring an alternative which would limit indexing
increases to wage increases realized by the working sector. This approach
would have worked well for 1976 but application for 1977 may not yield any
cut-back. We will have more on this within a few days.
The reductions also include a repetition of this year's 5% limit on Federal
pay increases and a proposed reduction of 63,800 Federal civilian employees,
including 50,000 in the Department of Defense. Also listed is a cut of
30,000 in military manpower.
The list of actions contains several suggestions to increase receipts. One
possibility is to raise receipts by $6.4 billion or more by repeal of
certain tax exclusions. Because we may want to accept about $4 billion in
offsetting tax "simplifications" initiated by the Ways and Means Committee,
we have included only $2.4 billion in arriving at the $46 billion 1977
deficit estimate. Other suggestions for tax additions identified in the
list total about $14 billion but would be very difficult politically, e.g.
an increase in freight transportation fees (adding $1 billion in receipts)
10RD
5
and deferral for one year of the plan to shift 1¢ per gallon of gasoline
taxes to the States (adding $1 billion to receipts) or elimination of
DISC (adding $1.3 billion in receipts). However, if you were to decide
to restore some of the deficit by offering lower taxes to business
generally, some of the present tax incentives might be traded,
Major Problems
The planning totals given the agencies in July were already very con-
strained. The adjustments as made since the original levels were
established and shown in Tab A represent mainly uncontrollable changes
in open-ended programs. There is strong agency resistance to those
initial levels even before considering further reductions.
The point is emphasized by the situation for Defense. The current Defense
program for 1977 of $104 billion is $5 billion above the planning target
you approved in July. The reductions identified in this memorandum would
reduce Defense outlays by an additional $5 billion. Thus, there is a
potential gap of $10 billion between the Defense Department internal
planning level and the programs identified in this memorandum. However,
chances of getting the reductions for domestic programs -- small at best --
will be diminished still further if it appears that Defense and foreign
aid were spared. The reduced figures for Defense now result in the fol-
lowing year-to-year comparisons (in billions) :
1976
1977
1975
(Estimated
(With $10 billion
(Actual)
final)
of cuts)
Outlays
86
91
94
Obligational
authority
89
98
104
These problems as to Defense are discussed more at Tab C.
Finally, our figures now include only a very modest $1 billion allowance
for agency appeals.
These facts plus the economic forecasting vagaries discussed above plus
other uncertainties (e.g., offshore receipts) make the expenditures,
FORD
revenues and deficits shown in this memorandum quite vulnerable to
considerable change between now and January.
Strategy for fiscal year 1976
Last year's experience taught that cutting a budget once a fiscal year
has begun is exceedingly difficult, especially now that Congressional
acquiescence is needed under the Impoundment Control Act for virtually
any proposed reduction.
6
About $5 billion in outlay reductions could be proposed. Cuts of this
magnitude for 1976 would be very difficult in any event and will not be
possible at all unless specific proposals are presented to the Congress
by November 1 and the Congress accepts them in time for an effective
date of January 1. In order for that deadline to be met, you would have
to review and approve a set of proposed reductions no later than
October 15. About $3-1/2 billion of the $5 billion would require sub-
stantive legislation; the remaining $1-1/2 billion would take the form
of deferrals and proposed rescissions.
Alternatively, proposed reductions intended primarily to affect fiscal
year 1977 but with a $1-1/2 billion effect in fiscal year 1976 could be
transmitted with the January budget.
The Congress is not likely to accept much, if any, of a November 1
package and will be antagonized by it. This is not to say that a
November package might not have value; repeated Presidential warnings
about the size of the deficit may be necessary to produce the cumulative
effect essential to their acceptance. The more important disadvantage
of a November package is its potential for diluting the impact of a much
more drastic set of reduction proposals in the 1977 budget, particularly
since the most that would be gained from a November package -- even if
the Congress accepted it -- would be an additional $3 or $4 billion.
Strategy for fiscal year 1977
Several strategies need to be considered. First is the question of a
general strategy with respect to budget cuts. For example, shall we
Aim for massive and sometimes arbitrary reductions of
$25 or $30 billion from "Current Services" in a wide variety
of programs stressing the lowest possible deficit; or
-- Seek to make such massive cuts more saleable by packaging
them with one or more "carrots," e.g., tax reduction
proposals, increases in aid to the poor, larger general
revenue sharing, further crime initiatives, new "chronic
unemployment" initiatives, etc.; or
Try to be selective in identifying those reductions that are
most saleable, even though none is easy (limiting reductions
to $10 or $15 billion) ?
Secondly, there are questions involving narrower strategies including:
The need to show that cuts in domestic programs are accompanied
by decreases in defense and international programs versus the
fact that budget amounts for defense and international programs
are likely to be cut by the Congress;
7
The desirability of proposing no funds for bad or low-priority
programs versus a reduction approach that simply aims to
restrain those programs.
Next Steps
We need your guidance on our approach to budget reductions and request
a meeting with you for this purpose.
Attachments:
CC:
DO Records
Director's Chron.
Director
Deputy Director
Mr. Collier
Mr. Mitchell
Mr. Ogilvie
Mr. Penner
Mr. McOmber
Mr. Modlin
Mr. Mathiasen
Ms. Walker
DO:JTLynn:1h 9/17/75
FORD
TAB A
DIFFERENCES BETWEEN ORIGINAL PLANNING TOTALS
AND CURRENT BASE ESTIMATES
(In billions)
FY 1976
FY 1977
Deficit
Planning totals
$60.0
$33.6
Outlay increases (net)
12.4
21.4
Receipt decreases (net)
6.1
12.7
Current deficit (base) estimate
78.5
67.7
****
****
Receipts
Planning totals
298.4
364.1
Revised estimates and economic assumptions
3.4ᵃ
4.7ª/
Extension of tax cuts (1974 Act)
-4.0
-12.9
Maintenance of lower withholding rates
-1.9
-4.4
Deletion of import tax and other previous
energy proposals
-5.6
-.4
Increased taxes due to decontrol
6.9
6.8
Rebate of increased taxes due to decontrol
-6.2
-5.8
Highway program -- transfer of 1¢ gasoline
tax to States
---
-1.0
Capital formation tax proposals
---
-1.2
Other adjustments including revised
treatment of earned income credit
1.3
1.5
Current base estimate, receipts
292.3
351.4
Outlays
Planning totals
358.4
397.7
Continuation of emergency employment
programs -- initially planned to end in
December 1976
3.8
Unemployment benefits -- recent experience
and revised outlook
2.9
-1.3
Interest on the debt --- higher rates and
larger deficit
1.8
6.0
Energy equalization payments -- deletion
-5.8
-7.0
Middle East, Greece and Portugal
initiatives
.5
2.2
2
FY 1976
FY 1977
Outlays -- Continued
Education appropriation (veto override)
.4
.8
Congressional inaction on budget reduction
proposals heretofore made
6.5b/
8.5
Potential Congressional initiatives
2.5C
5.259
Energy (rebate) payments
.7
1.0
Earned income credit (treatment as outlays
instead of receipts)
1.2
1.2
All other changes
1.6
.9
Current base estimate, outlays
370.8
419.1
a
Tentative Treasury estimates would double these amounts; the lower
amounts are used here because of uncertainties in the estimates.
b/ Of this increase, $2.0 billion has already occurred.
c/ This is the mid-point of a $2 to $3 billion range.
This is the midpoint of a $4.5 to $6.0 billion range.
FORD
SERALD
TAB
B
TAB B
BASIS FOR JUSTIFICATION
OF OUTLAY REDUCTIONS
(In billions)
Outlay effect
in 1977
Programmatically justifiable
$-9.2
Justifiable on grounds that the Federal role
should be reduced vis-a-vis States, local
governments, or educational institutions
-1.6
Justifiable on grounds of fiscal restraint
(i.e., essentially arbitrary) :
Place limits on increases for
inflation on programs tied to
cost-of-living:
-- Limit increases of indexed
programs to 60% of what
they would be under current
law
-3.2
-- Limit increase in Federal
salaries to 5%
-3.6
-- Other limits (Medicare and
Medicaid)
-3.7
Total, limits on increases
-10.5
FORD
Federal employment reduction
-.9
CLRALD
Other
-3.3
Total outlay reductions listed
-25.5
Less "refinements"
2.0
Total (as included in reduced
budget totals)
-23.5
REDUCTIONS THAT ARE PROGRAMMATICALLY JUSTIFIABLE
(Dollars in billions)
Outlay effect
in 1977
Child nutrition program -- enact block grant program
to reduce participation by non-needy children and
allow use of food stamps for school meals (thereby
reducing duplication of Federal nutritional support)
-1.1
Food stamp program -- seek changes in eligibility
-1.1
Curtail Temporary Employment assistance program
-1.1
Defense program cuts in research and development,
procurement, and intelligence activities. Reduce
overtime and pay-related costs
-1.1
Veterans programs
-.9
GSA stockpile sales (increase in receipts)
-.8
Eliminate Social Security monthly retirement test and
retroactive payment of actuarially reduced benefits
-.7
Slow spending rate for EPA waste water construction
grants
-.4
Accelerate foreclosure and sale of assigned multi-
family housing mortgages financed by the Federal
Housing Administration fund
-.2
Repeal work incentives law and terminate program
-.2
CCC price support and related programs
-.2
All other
-1.3
Total
-9.2
ORL
REDUCTIONS THAT WOULD REDUCE
THE FEDERAL ROLE
(Dollars in billions)
Outlay effect
in 1977
Reduce Federal matching rate for Social services
(from 75% to 65%)
-.9
Restrict Federal matching rate for AFDC
-.]
Limit amount of grant funds that cities can use for
transit operating expenses
-.2
Eliminate non-student assistance programs in higher
education
-.1
Reduce Federal share of college work-study program
-.1
All other
-.3
Total
-1.6
REDUCTIONS THAT ARE JUSTIFIABLE ON
GROUNDS OF FISCAL RESTRAINT
(Dollars in billions)
Outlay effect
in 1977
Limits on increases for inflation on programs
tied to cost-of-living:
Limit increases to 60% of what they would
be under current law:
OASDI
-2.4
Food Stamps
-0.2
SSI
-0.2
Civil Service retirement
-0.1
Railroad retirement
-0.1
Military retired pay
-0.1
Child nutrition
-*
Black lung benefits
-*
Total, limit of 60%
-3.2
Limit increases in Federal salaries to 5%:
Civilian agencies
-1.0
Military pay
-2.4
Military wage-board
-0.2
Total, limit in Federal salaries
-3.6
Other limits:
Medicare
-2.5
Medicaid
-1.2
Total, other limits
-3.7
Total, limits on cost-of-living increases
-10.5
Federal employment reduction:
Military programs
-0.7
Civilian programs
-0.2
Total, Federal employment reduction
-0.9
Other actions:
Defense, Operations and Maintenance
-0.8
Defense, Military construction
-0.5
Labor, Summer Youth employment
-0.5
Export-Import Bank direct loan program
-0.4
Space programs
-0.2
Veterans programs
-0.2
Corps of Engineers, construction
-0.2
Other
-0.5
Total, other actions
-3.3
Total
-14.7
* $50 million or less.
TAB
C
NECLUON
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
TAB C
WASHINGTON, D.C. 20503
SEP 16 1975
MEMORANDUM FOR: THE DIRECTOR
FROM:
DON OGILVIE
Dr
SUBJECT:
FY 1977 Defense Budget Gap
Our best estimates indicate a gap of up to $10 billion between the current
Defense and OMB outlay estimates for 1977. This memo identifies the broad
areas of difference and recommends specific actions required if the lower
outlay levels are to be achieved.
1977 Defense Outlays
A table summarizing the 1977 Defense outlay picture follows:
1977 Defense Budget Development
(outlays - $ billions)
1977
1975
1976
OMB
DOD
FY 1976 President's Budget
85
93
104
104
Outlay reestimates
+1
+2
Estimated FY 1976 Congressional Action.
-3
-2
-2
OMB Planning Target
-3
Defense Program Review
+2
September Reduction Exercise
-1
-5
Current Projection
86
91
94
104
In January Defense and OMB reached agreement on 1977 Defense and MAP outlays
of $104 billion. Since that time the following has occurred:
Actual 1975 outlays were $1 billion higher than anticipated; an
increase of $2 billion in 1976 outlays is anticipated.
Congressional action on the FY 1976 budget is expected to reduce
outlays by $3 billion in 1976 and by $2 billion in 1977.
GLRALOR FORD LIBRARY
2
The Defense internal program review has just been completed and
calls for 1977 outlays of $104 billion, in effect adding $2 billion
in program to offset anticipated congressional reductions.
The OMB planning target for Defense included anticipated congres-
sional cuts and further Defense/MAP reductions of $3 billion.
These adjustments are still considered realistic.
The recent $25 billion reduction exercise would require $5 billion
in Defense outlay reductions below the 1977 planning target. The
resulting $94 billion Defense level would be about $3 billion below
the 1976 outlay level in real terms. Proposed actions include a
maximum 5% pay raise for both October 1975 and October 1976. All
existing force levels are preserved but lower operating and invest-
ment cost levels will have some adverse impact upon readiness.
In summary, Defense has assumed, incorrectly in our opinion, that the
January planning target is independent of congressional action and that
program additions can be substituted for congressional reductions. The
OMB planning target, by contrast, accepts the congressional reduction and
includes further program adjustments. Thus, there is a $5 billion gap
between Defense and OMB initial planning levels. The September outlay
reduction exercise widens this gap to $10 billion. These are extremely
large differences that will require major changes to the Defense budget
submission. This, in turn, requires understanding and acceptance on the
part of Secretary Schlesinger if these kinds of reductions are to be
achieved.
GERALD FORD
1977 President's Budget Presentation
Also of considerable importance are the year by year Defense totals which
will appear in the President's Budget and the signals the President desires
to send with his Defense budget. The FY 1977 level will be, in large measure,
closely related to what Defense receives in 1976. This is normally true in
any year, but the emphasis is now even greater with the current services
budget serving as a potential baseline for congressional review.
The 1977 Defense budget request should start from the 1976 level allowed by
Congress, and then add factors for inflation, real program growth and
congressional cut insurance.
The current projection of TOA and outlays for Defense is as shown:
($ billions)
1977
1975
1976
OMB
DOD
Defense TOA (see attached table)
89
98
104
117
Defense outlays
86
91
94
104
3
These are the amounts that would appear in the President's Budget for 1977.
The FY 1976 program will be about $10 billion in TOA and $5 billion in
outlays higher than the actual FY 1975 experience. Recognizing continued
inflation, real program growth and congressional cut insurance, the FY 1977
growth over FY 1976 should probably be a minimum of $12 billion in TOA and
$6 billion in outlays unless real program reductions are acceptable. However,
the FY 1977 Defense internal planning growth of $19 billion in TOA and
$13 billion in outlays appears clearly excessive in the absence of any major
emergency or dramatic change in the world situation. If the President decides
on a $2-3 billion TOA increase in strategic programs as the result of unsatis-
factory progress in the SALT II negotiations, this would increase FY 1977
Defense outlays by up to $1 billion.
Recommendations
Because of the magnitude of the gap between Defense and OMB in FY 1977, I
recommend:
1. That you seek explicit Presidential guidance on Defense planning
levels in your upcoming meeting on the FY 1977 budget.
Approve
Disapprove
2. That you meet with the Secretary of Defense and reach closer
accord on the FY 1977 Defense budget level within the next
two weeks, prior to the October 1 start of the OMB/DOD joint
review.
Approve
Disapprove
1977 Defense Budget Development
(TOA - $ billions)
1977
1975
1976
OMB
DOD
FY 1976 President's Budget
89
105
117
117
Estimated FY 1976 congressional
action
-7
-1
I
OMB Planning Target
-6
Defense Program Review
+1
September reduction exercise
-7
Current Projection
89
98
104
117
RALD 4817 R. FOND