February 8, 1982

To the Congress of the United States:

One year ago, in my first address to the country, I went before the American people to report on the condition of our economy. It was not a happy occasion.

Inflation, interest, and unemployment rates were at painfully high levels, while real growth, job creation, new investment, personal savings, and productivity gains had virtually ceased. Our economy was staggering under the burden of excessive tax rates, double-digit inflation, runaway Government spending, counter-productive regulations, and uneven money supply growth. The economy, I declared, was in the ``worst mess'' in half a century.

To our great good fortune, there were many in the Congress who understood the nature of our difficulties and who rose with us to meet the challenge. Fundamental and long-overdue remedies were proposed and put in place. Together, we enacted the biggest spending and tax reductions in history. Counter-productive regulations have been swept away, and the Federal Reserve has taken action to bring excessive monetary growth under control.

The first year of the 97th Congress will be remembered for its decisive action to hold down spending and cut tax rates. Today, the question before us is whether the second year of this Congress will bring forward equal determination, courage, and wisdom. Clearly, there is a great deal more to be done.

Some seek instant relief from the economic problems we face. There is no such panacea. Our program began October 1, and it cannot solve in 4 months problems that have been building for more than 4 decades. All the quick fixes tried in the past not only failed to solve but actually aggravated our economic difficulties. They simply ensured a new cycle of boom and bust, of exaggerated hopes and eventual disappointment.

We did not promise the American people a miracle. We did promise them progress, and progress they will get.

Our goal was and remains economic recovery -- the return of non-inflationary and sustained prosperity. We seek a larger economic pie to provide all Americans more jobs, more after-tax income, and a better life. Quick fixes won't get us there.

What will get us there is firm resolve and unwavering adherence to the four fundamentals of our economic recovery program that I outlined to the Congress 1 year ago:

  • Reducing personal and business taxes to stimulate saving, investment, work effort, and productivity.
  • Reducing the growth of overall Federal spending by eliminating Federal activities that overstep the proper sphere of Federal Government responsibilities.
  • Reducing the Federal regulatory burden in areas where the Federal Government intrudes unnecessarily into our private lives or interferes unnecessarily with the efficient conduct of private business or of State or local government.
  • Supporting a moderate and steady monetary policy, to bring inflation under control.

At the same time, I have proposed strengthening the Nation's defenses, to restore our margin of safety and counter the Soviet military buildup.

Congressional response to these proposals has been positive and gratifying. While much remains to be done, we have made a good beginning.

The Nation's fiscal policy is now firmly embarked on a new, sound, and sustainable course. For the first time in 2 decades, the destructive pattern of runaway spending, rising tax rates, and expanding budgetary commitments has been slowed, and with the cooperation of the Congress this year, will finally be broken.

  • Where the growth rate of spending had soared to 17.4% in 1980, it is now declining dramatically -- to 10.4% this year, and, under the budget I am submitting, to 4.5% next year.
  • Where budget growth totaled $166 billion from 1979 to 1981, spending will rise by only 60% of that amount from 1981 to 1983, despite cost-of-living adjustments and the needed defense buildup.
  • After having reached 23% of GNP in 1981, the Federal Government's claim on our economy will steadily recede -- to 22% in 1983 and to below 20% by 1987.
  • After a decade of tax-flation in which fiscal and monetary excess fueled the unrelenting rise of prices and the automatic increase of taxes, significant tax rate reductions have been enacted. A permanent safeguard against bracket creep and Government profiteering on inflation -- income tax indexing -- has also been created.

Where Government had passively tolerated the swift, continuous growth of automatic entitlements and had actively short-changed the national security, a long-overdue reordering of priorities has begun, entitlement growth is being checked, and the restoration of our defenses is underway.@g,w186,d168

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This dramatic progress in reordering fiscal policy has been paralleled by a similar redirection of monetary policy. The excessive, unsustainable, and eventually ruinous growth of money and credit of the past decade has been curbed. The inflation spiral has been broken. The growth of prices is slowing down. Peoples' savings are beginning to flow out of unproductive speculation, tangible assets, and other inflation hedges back into the Nation's financial arteries where they will be available to power economic recovery, more jobs, and growing incomes and opportunities.

The Budget Totals (In Billions of Dollars)
  1981 Actual 1982 Estimate 1983 Estimate 1984 Estimate 1985 Estimate
Budget Receipts 599.3 626.8 666.1 723.0 796.6
Budget Outlays 657.2 725.3 757.6 805.9 868.5
Surplus or deficit (-) -57.9 -98.6 -91.5 -82.9 -71.9
          Budget Authority 718.4 765.5 801.9 858.0 943.5

In short, we are putting the false prosperity of overspending, easy credit, depreciating money, and financial excess behind us. A solid foundation has been laid for a sound dollar, sustained real economic growth, lasting financial stability, and noninflationary prosperity for all Americans.

We are also moving to shackle the regulatory juggernaut that burdened production, consumed jobs, and diminished productivity growth. During the past year no significant new regulatory statutes were enacted and few major new regulations were imposed. Additions to the Federal Register declined by 23,000 pages. Benefit-cost analysis was made mandatory for regulations. Dozens of existing regulations were reviewed, modified, or eliminated. Without taking into account billions of dollars of savings from regulations never formally proposed because of the changed climate our program has created, quantifiable one-time cost savings of over $3 billion and recurring annual savings of nearly $2 billion have been realized. And the effort has just begun.

A Year of Historic Achievement

These remarkable achievements are the cornerstones of our national economic recovery program. They far exceed anything that the skeptics and critics ever dreamed possible just 1 year ago. They occurred because the executive and legislative branches of our Government joined together to respond to the mandate of the American people and overcome the impediments that had paralyzed Washington for a decade. Together, we have launched a process of reform and change that can transform the course of events.

The Economic Recovery Tax Act of 1981 is the largest, most comprehensive, and most constructive tax bill ever adopted. With the cooperation of the Congress and support of the public, it was enacted in just 5 7E7Emonths. 7E7EIt 7E7Eaddressed 7E7Eand 7E7Esubstantially remedied most of the tax system's shortcomings and disincentives that had accumulated over decades -- distortions that were imposing an increasingly heavy toll on investment, economic growth, and job creation.

  • The penalty tax rate on investment income has been eliminated. By dropping the top rate from 70 to 50%, the attractiveness of tax shelters will be reduced and the incentives for productive investment in stocks, bonds, new business ventures, and other financial assets will be increased. Our Nation's capital will again flow to the growth of business and jobs rather than to the vendors of protection from punitive taxation.
  • Marginal tax rates have been significantly lowered for the first time in two decades. The 23% across-the-board rate reduction will mean $183 billion in lower taxes for individuals over the first 3 years. The financial reward for savings, work effort, and new production will stop diminishing and start rising once again.
  • Powerful new incentives for savings have been established. Beginning this year, 50 million workers will be eligible for the first time to set aside tax-free up to $2,000 per year for Individual Retirement Accounts. The annual limit for existing Keogh and IRA investors will also be raised. By sharply altering the incentives for saving as opposed to consumption, a huge new flow of current income will be channeled toward restoring our productivity and lifting our national savings rate from last place in the industrial world.
  • The taxation of phantom corporate profits has also been significantly curtailed. The new accelerated cost recovery system will shorten depreciation periods to 5 years for machinery and 15 years for structures. This will permit fuller recovery of asset costs, a more valid accounting of taxable profits, and a reasonable after-tax return on investments for the first time in years. By eliminating the drastic under-depreciation provided in previous tax law, after-tax business cash flow will be increased by $10\1/2\ billion this year and $211 billion over the next 6 years. This growing stream of funds for modernization, new machinery, new technology, new products, and new plants will revive our lagging productivity, restore our competitiveness in world markets, and spur the steady growth of jobs, production, and real incomes.
  • The confiscatory taxing of estates and inheritances has been halted as well. By raising the exemption to $600,000, by lowering the rate to 50%, and by removing the limits on the marital deduction, 99.7% of all estates will eventually be exempt from estate taxation. Hard-working American farmers, small businessmen, investors, and workers can once again be confident that the sweat, sacrifices, and accumulations of a lifetime will belong to their heirs rather than their Government.
  • Government profiteering on inflation has been abolished. Beginning in 1985, the individual income tax brackets, the zero-bracket amount, and the personal exemption will be corrected annually for inflation. Bracket creep will never again systematically plunder the rewards for production and effort. Government will never again use inflation to take a rising share of the people's income without a vote of their representatives.@g,w186,d168

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The past year's achievements on spending control and the reestablishment of budgetary discipline are no less impressive than the sweeping tax changes. For the first time ever, the Congress activated its central budgetary machinery and overcame the spending impulses of its fragmented parts. The Omnibus Budget Reconciliation Act of 1981 was a watershed in fiscal history -- a giant step toward the restoration of fiscal discipline. By the accounting of its own Congressional Budget Office, spending will be $35 billion lower this year and about $130 billion lower over the next 3 years due to just one bill passed in only 5 months after having been considered by 30 different committees, a bill that reduced, reformed or eliminated hundreds of programs. The growth of budgetary outlays is at last being brought in line with the growth of the tax base and the national income. Excess spending commitments, unnecessary programs and overlapping activities were meaningfully addressed in the Reconciliation Act for the first time in decades.

  • As a result of congressional action in 1981, the growth of entitlements will be reduced by $41 billion during the next 3 years. For the first time, eligibility standards for food stamps and student loans have been tightened. Unemployment benefits have been targeted to States where they are needed. Subsidies for non-needy students have been reduced in the school lunch program. Abuses of the medicaid, nutrition, and AFDC programs have been curtailed, saving $14.4 billion over the next 3 years. Overly generous and unaffordable twice-a-year cost-of-living adjustments for Federal retirees have been eliminated. The ``uncontrollables'' are being brought under control, and benefits have been retargeted where they are most needed.
  • Dozens of ineffective or counter-productive programs have been eliminated or reduced. The $4 billion make-work CETA public sector jobs program was abolished. Extravagant dairy subsidies have been cut substantially. The ineffective $700 million Economic Development Administration is being phased out. The Community Services Administration has been eliminated. An unnecessary $2 billion in Government subsidies for new energy supplies and technologies has been cut. The excessively-funded impact aid program was substantially scaled back. In short, a long-overdue housecleaning of excess budgetary commitments was accomplished.
  • Inappropriate Federal subsidies have been withdrawn. Legislation to return Conrail to the private sector has been enacted. The National Consumer Cooperative Bank has been privatized. Subsidies to the auto industry for new technology demonstrations have been eliminated. Operating subsidies to local mass transit systems are being phased out. Subsidies to exporters have been sharply curtailed. Subsidized disaster loans to financially viable businesses have been eliminated.
  • A major stride toward rationalizing the structure, reducing the cost, and increasing State and local flexibility in the Nation's $91 billion grant-in-aid system has been enacted. Fifty-seven narrow, redtape-ridden categorical grants programs have been replaced with 9 block grants. The pages of regulation imposed on State and local governments have been reduced from over 300 to 6, while the cost to the Federal budget has been reduced.
  • Total funding for nondefense discretionary programs has been reduced. After continuous growth for two decades, the budget cost of these programs will actually decline from $137 billion in 1981 to $130 billion in 1982.
  • An impressive start at reducing fraud, waste, abuse, and unnecessary Government overhead was made. The President's Council on Integrity and Efficiency, established to coordinate a Government-wide attack on fraud and waste, saved $2 billion in the last 6 months of 1981 alone. A comprehensive effort to collect $33 billion in delinquent debts has been launched and will recover $1.5 billion in 1982 and $4.0 billion in 1983. These estimates include recoveries of delinquent taxes due to the Internal Revenue Service. Federal nondefense employment has been reduced by 35,000 since January 1981. The cost of Government travel, publications, and consultants has been reduced substantially.

At the same time that the Congress joined in these long-overdue efforts to pare back the size of the Federal budget and slow its momentum of growth, it has fully supported our ambitious but essential plan to rebuild our national defense. A year ago every component of military strength was flashing warning lights of neglect, under-investment, and deteriorating capability. Today, health is being restored.

  • Pervasive deficiencies in readiness -- including too many units not ready for combat, too many weapons systems out of commission, too few people with critical combat skills, and too few planes and ships fully capable of their missions -- are being corrected. Funds for operations and maintenance, including training and aircraft flying hours, have been boosted. Backlogs of combat equipment needing repair are being eliminated. Adequate supplies of spare parts necessary to support high operating rates for training, as well as to provide war reserves, are being purchased.
  • The serious inadequacy in pay and benefits that threatened the all-volunteer force, caused an exodus of skilled personnel, and sapped morale throughout the armed services has been corrected. Last year's 14.3% pay increase has improved recruit quality, boosted reenlistment rates, stopped the drain of critical skills, and contributed to the dramatic revival of morale in our military services. End-strength goals are now being exceeded. In addition, the percentage of recruits with higher test scores has risen in the past year.
  • Critical investments in conventional and strategic force modernization are now moving rapidly forward. A new bomber for early deployment and an advanced (Stealth) bomber for the 1990's have been approved to retain our capability to penetrate Soviet air defenses. Development of a new, larger, and more accurate MX missile to preserve our land-based deterrent is proceeding. A 5-year shipbuilding program including 133 new ships and a total investment of $96 billion -- double the 5-year program of the previous administration -- has been launched. Rapid production of new combat systems including the M-1 Abrams tank, the AV-8B Marine Corps attack aircraft and the F/A-18 Navy tactical fighter have been approved. Improvements in our airlift and sealift forces to transport equipment and soldiers rapidly to counter military aggression anywhere in the world, are moving forward.

No Time To Retreat

These achievements of the first year truly constitute a new beginning. In every major dimension of national strength and well- being we have launched the redirection of policy that was so desperately needed and so long overdue. We are ending the destructive inflation and the financial disorder built up over a decade. We have removed the yoke of over-taxation from our workers and our business enterprises. We have begun to dismantle the regulatory straitjacket that impeded our commerce and sapped our prosperity. And we have reversed the dangerous erosion of our military capabilities.

The task before us now is a different one, but no less crucial. Our task is to persevere; to stay the course; to shun retreat; to weather the temporary dislocations and pressures that must inevitably accompany the restoration of national economic, fiscal, and military health.

The correction of previous fiscal and monetary excesses has come too late to avert an unwelcome, painful, albeit temporary business slump. In the months ahead there will be temptation to resort to pump-priming and spending stimulus programs. Such efforts have failed in the past, are not needed now, and must be resisted at every turn. Our program for permanent economic recovery is already in place. Artificial stimulants will undermine that program, not reinforce it.

Likewise, previous excesses in money and credit growth have resulted in financial strain in many regions and sectors of our national economy. The adjustment to lower inflation and a more moderate money and credit policy did not come soon enough to avoid interest rates and unemployment far higher than we would like, and that we are working to reduce. But these effects are temporary. They cannot be remedied by a return to rapid, unsustainable expansion of Federal spending and money growth, which would drive inflation and interest rates to new highs. Our hard-won gains in reducing inflation must be preserved and extended -- because permanent reduction of interest rates and unemployment is impossible if the fight against inflation is abandoned, just when it is being won.

Similarly, our budget deficits will be large because of the current recession, and because it is impossible in a short period of time to correct the mistakes of decades. But our incentive-minded tax policy and our security-based defense programs are right and necessary for long-run peace and prosperity, and must not be tampered with in a vain attempt to cure deficits in the short-run. The answer to deficits is economic growth and indefatigable efforts to control spending and borrowing. These principles we dare not abandon.

The Deficit Problem: Its Origins

Despite the new course we have charted and the gains we have achieved, the voices of doubt, retreat, and rejection are beginning to rise. They conveniently forget that the present business slump was not caused by our program but is the result of the accumulated burdens of past policy errors, which we have taken action to redress. They fail to comprehend that our spending cuts and tax reductions were not designed to redistribute the output of a stagnant economy, but to revive the economy's growth and to increase its size -- for the jobless as well as the affluent, for those who aspire to get ahead as well as those who have already arrived.

Increasingly, the larger budget deficits that we unavoidably face are offered as evidence that our entire course should be recharted. The matter of budget deficits, therefore, must be addressed squarely. We must fully comprehend why they have grown from our original projections, why they may remain with us for some time to come, what dangers they pose if not vigorously combatted and what steps we can and must take to steadily reduce their size and drain on our available savings.

Our original plan called for a balanced budget in 1984. Balance is no longer achievable in 1984, but the factors that have postponed its realization are neither permanent nor cause for abandoning the goal of eventually living within our means.

In the near term, the most important setback to our budgetary timetable is the recession now underway. During 1982, receipts will decline by $31 billion and outlays rise by $8 billion due to the fall-off of business activity and the increase of unemployment-related payments. This factor alone accounts for nearly all of the difference between the $45 billion 1982 deficit we projected last year and our current estimate of $98.6 billion.

While the recession will end before this fiscal year is over, its budgetary impact will spill over for many years into the future. It will take time for the unemployment rate to come down and safety net payments to diminish. The growth of receipts will recover, but not at the levels previously projected. This will add billions to deficits for 1983 and 1984.

The second major factor widening the deficit projection is interest payments on our trillion dollar debt. Here we are being penalized doubly for the misguided policies of the past.

The discredited philosophy of spend and spend, borrow and borrow, saddled us with a permanent debt burden of staggering dimensions. This year's interest payment of $83 billion exceeds the size of the entire Federal budget as recently as 1958.

In addition, past fiscal, monetary, and credit excesses have resulted in temporarily high interest rates -- rates that will come down, but only as inflation abates, private and public financing practices adjust, and long-term confidence rebuilds. Since market confidence has been so badly shaken by runaway inflation and interest rates in the past 3 years, it is apparent that interest rates over the next several years will fall less rapidly than we had originally anticipated. Between the huge inherited base of national debt, the higher interest rates, and the large prospective additions to the national debt in the next several years, our total debt service costs will rise substantially.

Interest payments on the debt will exceed our original projections by $18 billion in 1982, $32 billion in 1983, and $182 billion over 1982-86 taken as a whole. The interest rate/debt service factor, then, constitutes a major source of the setback to our budget timetable. But let us be clear about its origins: it arises primarily from a legacy of past excesses, not from a shortfall in our current budget control efforts, nor from a flaw in our overall program.

The third and most important factor contributing to the growth in deficit projections is quite simply the ironic by-product of our rapid and decisive success in bringing down the rate of inflation. Our economic forecast last February projected a 9.5% inflation rate in calendar year 1981 and a further decline to 7.7% in 1982. This projection was scorned by many as too rosy just 1 year ago. Yet the actual inflation rate in 1981 turned out to be lower than our projection, and the inflation decline this year and next year almost certainly will exceed our earlier projections.

This is welcome news to every American and we have adjusted our inflation forecast accordingly. But lower rates of price increase also mean lower inflation components in wages and incomes and a reduced flow of inflation-swollen tax receipts to the Treasury.

This point is not merely academic. Over the next 5 years, our forecast projects a 9.9% average rate of growth in nominal GNP reflecting a steady fall of inflation to about 4 1/2 % by 1987. If nominal GNP growth were just 2% higher each year, reflecting a continuation of higher inflation, Federal receipts would be enlarged by the staggering sum of $353 billion over the 5 years. On paper, at least, the budget would be nearly balanced in 1987 rather than more than $50 billion in deficit.

But if the last decade offers any lesson, it is that we cannot inflate our way to budget balance. Indeed, every budget from 1975 forward projected a balanced budget 2 years into the future and growing surpluses in the out-years. Not one of these surpluses materialized for a very compelling reason: the monetary excesses needed to finance inflationary growth of wages and incomes are the enemy of savings, investment, real economic growth, and fundamental business confidence and financial stability. They lead to the kind of pervasive economic breakdown that we experienced during 1979 - 81 -- a breakdown that swells Government spending, interrupts the flow of receipts, and causes prospective budgetary surpluses to vanish in a flow of red ink.

Thus, we cannot and will not pursue the will-o'-the-wisp of reflation nor the phantom of future budget surpluses premised on a continuance of high inflation.

Instead, we must recognize that for a period of time, success in our unyielding battle against inflation will appear to work against our goal of a balanced budget. Thus, while our current revenues will reflect the decline of inflation today, part of our current outlays will reflect the higher rates of inflation in years past. This is especially true in the case of some $249 billion in indexed programs. Generally, the inflation rate used to adjust indexed benefits lags a year or more behind the current payment period. During 1983, for example, an inflation rate of 6.5% is projected, but cost-of-living adjustments to social security and other program benefits will be 8.1% based largely on the actual inflation experience of 1981. Much the same is true of the $96.4 billion in debt service for 1983. Some part of that will reflect the higher cost of debt securities issued in 1980 - 82 when inflation and interest rates will have been higher than is now projected for 1983.

Thus, the conquest of inflation will contribute to budgetary imbalance for some years to come. But these deficits will prove manageable if we understand why we have them and redouble our efforts to reduce them.

The final factor contributing to the worsening of the deficit outlook is that all of the budget savings we had planned for last year were not actually achieved. Most importantly, our plan to ensure the short- and long-run solvency of social security was discarded by the Congress. In an effort to eliminate partisanship and facilitate movement toward a constructive solution, our reform proposal has been withdrawn in favor of a bipartisan commission charged with developing a plan to rescue the social security system by next fall. I am confident that the commission will do just that, but in the meanwhile our outlay projections must be increased by $6 billion in 1983 and $18 billion for 1987.

Likewise, the Congress failed to adopt all of the reforms we proposed for medicaid, guaranteed student loans, food stamps and other entitlements. Without further action, about $4 billion would be added to the 1983 deficit in these areas alone. While major and unprecedented action was taken to curb the growth of entitlements last year, the shortfall is still substantial. Entitlement reforms not acted upon by the Congress last year will add nearly $20 billion to the deficit over the next 3 years. When this is combined with substantial added outlays for farm subsidies and for discretionary programs that were not reformed, it is clear that the task of budget control is far from complete.

The Budget Deficit in Perspective

Taken together, the effects of recession, higher interest rates, declining inflation, and incomplete congressional action will mean high, continuing, and troublesome Federal budget deficits. Constant vigilance and relentless efforts to pare back future spending and borrowing will be imperative to ensure that they are not permitted to worsen and add further pressure to financial markets and interest rates.

Nevertheless, three features of these high deficit numbers must not be lost sight of even as we seek eventually to eliminate them.

First, even the 1982 deficit of $98.6 billion is not unprecedented in the context of a recession and recovery cycle. Relative to the present size of the U.S. economy, the budget deficit would have been $94 billion for 1975, followed by deficits of $139 billion, $91 billion and $97 billion in the next 3 years, respectively.

Second, these deficits reflect the excess spending commitments of past rather than new spending programs with potential to grow in the future. That means that by remaining firm in our efforts to reduce waste and excess, reform entitlements, reduce low priority spending, and gradually return domestic programs back to State and local governments, the gap between spending subject to firm fiscal discipline and revenues being lifted by steady economic expansion will gradually diminish.

Finally, the share of GNP taken in taxes will be substantially lower and the incentives for savings markedly stronger. This expansion of the total savings supply will increase our capacity to absorb deficits and give us additional time to work toward their elimination.@g,w186,d168

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$239 Billion Deficit Reduction Plan

The prospect of high deficits during the transition to strong economic growth and low inflation contains a profound warning: any relaxation of our budget control efforts, any backsliding to spending politics as usual, any retreat to time-worn excuses about ``uncontrollables'' -- that results in spending growth significantly above our projections, will mean a serious threat to the progress of our entire economic recovery program. There is precious little margin for shirking or diluting the task the American people have charged us with. That task is nothing less than a constant, comprehensive, ceaseless search for ways to reduce the size of Government and the future growth of its spending.

The 1983 budget I am presenting to the Congress faithfully adheres to that mandate. If all proposed measures are adopted, the prospective deficit will be reduced by $56 billion next year, $84 billion in 1984, and $99 billion in 1985. In short, the budget this year represents much more than simply a tabulation of accounts or a compilation of spending decisions, large and small. Instead, it represents a far-reaching, resourceful, and integrated blueprint for reducing the prospective deficit by $239 billion over the next 3 years. It is a bold action plan that, if faithfully implemented, can cut the prospective deficits over that period by nearly 50%.

Our plan for deficit reduction consists of five parts. It addresses each area of the budget where actions to reduce the gap between spending and revenues are possible and desirable.

The first area concerns nonsocial security entitlements. Despite the heartening progress we made toward reform last year, the cost of these automatic spending programs will rise to $201 billion in 1983 without further action. This figure compares to only $119 billion in 1979.

Thus, our 1983 budget proposals continue the objective set out previously: to reduce the swift growth of automatic entitlements while preserving benefits for the truly needy. If acted upon fully by the Congress, these new reform measures will save $12 billion next year and $52 billion over the next 3 years. They include new steps to tighten eligibility, reduce errors and abuse and curtail unwarranted benefits in the welfare, medical, and nutrition programs. The explosive growth of medical programs -- 16.7% per year since 1978 -- will be contained with tighter reimbursement standards for providers, modest copayment requirements for medicaid beneficiaries, and, later in the year, a comprehensive plan to reform the health care reimbursement system and provide new cost control incentives for all participants. We have also proposed measures to target guaranteed student loans better to those with financial need and to limit the cost growth of Federal military and civilian retirement programs.

Nevertheless, let me be clear on this point. Our administration has not and will not turn its back on our elderly or needy citizens. Under our new budget, funding for social insurance programs will be more than double the amount spent only 6 years ago. For example, the Federal Government will subsidize 95 million meals every day. That is one of every seven of all meals served in America. Headstart, senior nutrition programs, and child welfare programs will not be cut from the levels we proposed last year.

The second component of our deficit reduction plan covers domestic discretionary and other programs for purposes ranging from agricultural research to housing subsidies and manpower training. Our proposed savings here total $14 billion next year and $76 billion over the next 3 years.

These savings measures involve two essential principles. First, where programs are unnecessary, can be better targeted or can be significantly streamlined, we have proposed substantial reductions. Our proposals to convert the fragmented and wasteful CETA training program to a block grant, to target low-income energy assistance to the colder States where it is needed, to combine the WIC program with the child and maternal health block grant, and to further reduce subsidies to business for energy technology development and commercialization are all examples of this principle.

The other principle governing discretionary programs is that we have generally not provided inflation allowances for them. This will provide a powerful incentive to reduce overhead, waste, and low-priority activities and ensure that the money we spend for many worthwhile purposes in the areas of education, transportation, community development, and research is utilized in the most efficient and productive manner possible. Our deficit problem is simply too severe to permit business as usual to continue any longer.

The third component of the deficit reduction program involves user fees, or more appropriately, the recovery of costs borne by the taxpayers generally, but that predominantly benefit a limited group of businesses, communities or individuals. Total savings would amount to $2.5 billion in 1983 and $10 billion over the next 3 years.

While the Congress made great strides on most of our proposed budget cuts last year, the user fees proposals were a noticeable and disappointing departure from this pattern. The case for action now is even stronger than it was last year. With sacrifices required of almost every beneficiary of Federal programs, it is simply inexcusable and intolerable that yacht owners escape without paying even a small part of the Coast Guard services; or that commercial and general aviation are not paying the cost of the air traffic control system that ensures their safety; or that ship and barge operators do not pay a fair share of the costs of waterways maintained by the Federal Government. Our user fee package corrects these and similar shortcomings in current budget policy and will contribute significantly toward reducing the deficit.

The fourth part of the plan is aimed at the executive branch and the most inexcusable of all forms of spending: lax management, the toleration of fraud and abuse, the failure to recover debts owed the Government or to dispose of properties it does not need, and outdated, inefficient, procurement practices.

Our fiscal plan has always assumed that our new management would take hold, and that savings would be possible in areas we have simply never looked at before. After 1 year, our new mangement team has indeed taken hold, the results to date have been impressive, and our plans for future savings are bold and farreaching. All told, these efforts will reduce the budget deficit by $20 billion next year and $68 billion over the next 3 years.

We will collect the debts we are owed and the taxes we are due. New legislation will be needed in some cases, but much of these savings will flow from tighter, more aggressive management throughout executive branch agencies.

Likewise, we will move systematically to reduce the vast Federal holdings of surplus land and real property. It is estimated that the Federal Government owns approximately 775 million acres, and 405,000 buildings, covering about 2.6 billion square feet. Some of this real property is not in use and would be of greater value to society if transferred to the private sector. During the next 3 years we will save $9 billion by shedding these unnecessary properties while fully protecting and preserving our national parks, forests, wildernesses and scenic areas.

Our management efforts will also be directed toward the more cost-effective procurement of the goods and services required by the Federal Government. The changes we seek will increase competition for the Government's business, reduce and simplify paperwork and regulations, and develop better standards for our procurement processes and personnel. Over time these efforts will yield large outyear savings not included in the budget totals.

Finally, our emphasis thus far has been on reducing excessive tax rates and shrinking the Government's take from the paychecks of workers and the profits of business. On that principle we will not waver. But that does not mean unintended loopholes should go uncorrected, that obsolete tax incentives should be continued, or that profitable business should not contribute at least some minimum fair share to the cost of financing Government. Thus, our deficit reduction plan includes $34 billion over the next 3 years in additional receipts from new initiatives in these areas.

About one-third of this total is attributable to our proposal to strengthen the minimum corporate tax, and a substantial share of the other tax revisions will also affect business. In every case, these measures involve the collection of a tax that is owed now or that was intended by the Congress, or elimination of incentives that are no longer needed due to the sweeping reform of business taxation contained in the Economic Recovery Tax Act of 1981.

These new proposals will have no adverse impact on our economic recovery program, are fair and equitable, and will contribute significantly to the reduction of future deficits.

Continuing the Restoration of National Defense

Our 1983 budget plan continues the effort begun last year to strengthen our military posture in four primary areas: strategic forces, combat readiness, force mobility, and general purpose forces.

A thorough 8-month review of U.S. strategic forces and objectives preceded my decision this past October to strengthen our strategic forces. The review found that the relative imbalance with the Soviet Union will be at its worst in the mid-1980's and hence needs to be addressed quickly. It also concluded that the multiple protective structure basing proposal for MX did not provide long-term survivability since the Soviets could counter it (at about the same cost) by simply deploying more warheads.

In addition, our review pointed to serious deficiencies in force survivability, endurance, and the capability to exercise command and control during nuclear war. Current communications and warning systems were found to be vulnerable to severe disruption from an attack of very modest scale.

The 1983 budget funds programs to correct these deficiencies. The 1983 strategic program of $23.1 billion, an increase of $6.9 billion over 1982, provides for both near-term improvements and longer-term programs. These initiatives include:

  • Early deployment of cruise missiles on existing bombers and attack submarines.
  • Acquisition of a new bomber (the B-1B) and development of advanced technology (Stealth) bomber for deployment in the 1990's to provide a continued capability to penetrate Soviet defenses.
  • Development and procurement of a new, larger, and more accurate land-based missile, the MX.
  • Continued deployment of Trident ballistic missile submarines to strengthen the sea-based leg of our strategic deterrent.

Longer-term programs include: development of a survivable deployment plan for the MX missile, development of a new submarine-launched ballistic missile, continued improvements in the survivability of warning and communications systems, and improvements in strategic defenses against both bomber and missile attacks.

The 1983 budget provides $114.3 billion in operations and military personnel costs, an increase of over $13 billion from the 1982 level to improve the combat readiness of our forces.

Today a major conflict involving the United States could occur without adequate time to upgrade U.S. force readiness. Our concerns with military readiness reflect both the long lead time required to procure sophisticated equipment (both parts and finished equipment) and past failures to provide adequate peacetime support for combat units. We cannot wait for a period of rising tensions before bringing forces up to combat readiness.

My program will continue to bolster combat readiness by increasing training, operating rates, and equipment support. There will be increased aircraft flying hours and supply inventories. In addition, backlogs of combat equipment and real property awaiting maintenance will be reduced. Also, the 1983 budget will provide levels of military compensation that will improve the readiness and capability of the All Volunteer Force.

Current U.S. mobility forces cannot move the required combat or combat support units fast enough to counter effectively military aggression in Europe, Korea or in the Southwest Asia/Persian Gulf region. For example, at present only a small light combat force could be moved rapidly to the Southwest Asia region. Major mobility shortages include wide-body military cargo aircraft; fast logistics ships; and prepositioned ships and associated support equipment. Elimination of these shortages is an essential first step toward improving U.S. military capability during the first 30 days after the beginning of a crisis.

The 1983 budget provides $4.4 billion for:

  • Initial procurement of a fleet of improved C-5 cargo aircraft, and additional KC-10A tanker/cargo aircraft that will double our wide-bodied military airlift capability by the 1990's.
  • Continued upgrading of existing C-5A aircraft to extend their effectiveness beyond the year 2000.
  • Conversion of four additional fast logistic ships that will provide the capability to move heavy combat forces rapidly.
  • Chartering a fleet of supply ships that can be stationed with equipment and supplies in Southwest Asia to reduce the time required for deployment of heavy forces.

In the last decade, the Soviet Union introduced large quantities of highly capable, new-generation tactical equipment including combat ships, tanks and aircraft, which must be countered by modernized U.S. forces. Also, the traditional U.S. superiority in system quality has been considerably narrowed, making Soviet quantitative advantages more serious. The Soviet military force buildup has increased the risk that they may rely on military power to support their foreign policy goals. For the U.S. to maintain, in concert with our allies, sufficient conventional forces to deter potential aggression, our forces must be provided with adequate numbers of new, modern tactical equipment.

My 1983 budget includes $106.2 billion for general purpose forces (including both operations and investment), an $18 billion increase over 1982. A key initiative is an expanded shipbuilding program. The United States, dependent on open seas for commerce and military resupply, must have the naval capability to maintain control of vital sea lanes. While our naval forces have declined from the mid-1960's, the Soviets have in existence or under construction eight new classes of submarines and eight new classes of major surface warships, including nuclear-powered cruisers and new aircraft carriers.

The budget provides an $18.6 billion shipbuilding program including full funding for two nuclear-powered aircraft carriers, to be constructed during 1983 - 87. Other ships included in my 1983 program are three large cruisers equipped with an advanced air defense system; two nuclear-powered attack submarines; two frigates for convoy protection and four mine countermeasure ships to improve fleet capability to operate in mined waters. My longer term objective is to increase the deployable battle force from 513 ships in 1982 to over 600 by the end of the decade.

In addition, the budget provides for increased production of ground and tactical air force weapons. Production rates will be increased for a variety of new systems such as the M-1 Abrams tank, light armored vehicles, and the AV - 8B Marine Corps attack aircraft.

All of this will be done with a major reform of the acquisition process and vastly improved management of defense operations, which will save $51 billion by 1987. In a continuing fight against fraud, waste, and inefficiency, the Secretary of Defense has appointed an Assistant for Review and Oversight and a Council on Integrity and Management Improvement.

Revitalization of American Federalism

The Constitution provides clear distinctions between the roles of the Federal Government and of the States and localities. In their wisdom, our founding fathers provided for considerable flexibility so that in following centuries these responsibilities could be adapted to new conditions. But in recent years we have not adapted well to new conditions. We have created confusion as to who is responsible for what. During the past 20 years, what had been a classic division of functions between the Federal Government and the States and localities has become a confused mess. Traditional understandings about the roles of each level of government have been violated.

Governments at all levels have had and will continue to face various problems. But, as Governor of California, I learned that a problem in one part of the country does not automatically mean that we need a new Federal program in all 50 States. Yet that is what has happened.

In 1964, total Federal grants to State and local governments were $10 billion. By 1980, total Federal grants to States and localities exceeded $90 billion, meaning that 18% of Federal tax receipts were being passed through to States and localities for one reason or another. However, these funds were not passed through entirely benignly. Attached to them were Federal rules, mandates, and requirements. This massive Federal grantmaking system has distorted State and local decisions and usurped State and local functions.

I propose that over the coming years we clean up this mess. I am proposing a major effort to restore American federalism. This transition over nearly 10 years will give States and localities the time they need to plan for themselves when and how to meet State and local needs that are now being met with Federal Government funds. My proposal will also make available to the States and localities the tax resources that would otherwise fund these programs by the Federal Government.

In coming weeks, we will have intensive discussions with local and State officials, the Congress, and many others to hammer out a proposal I will soon send to the Congress. Essentially, I believe the Federal Government should assume full responsibility for the medicaid program which assures adequate health care for the poor. In contrast, financial assistance to the poor is a legitimate responsibility of States and localities. I am proposing, therefore, that the aid to families with dependent children (AFDC) and food stamp programs be turned over to the States. This swap will clarify responsibilities substantially because these programs will become the clear responsibility of one level of government or another. That responsibility is now mixed.

In addition, I propose that more than 40 current grant-in-aid programs costing the Federal Government about $30 billion a year be turned back to the States and localities, along with the funds to pay for them. During the period 1984 - 87, these programs will be funded by a specially designated set of taxes to be used exclusively for financing this transition program. These taxes will be deposited in a fund that will belong to the States. Each State will be able to make its own decision on how rapidly to phase out the turnback programs. This is because each State will have two options: it may use its share of the federalism trust fund to reimburse Federal agencies for continuing to carry out turnback programs, or it may ask that the programs be terminated and then use the funds directly for whatever purposes it desires.

Beginning in 1987, the federalism trust fund will gradually be dissolved and the tax sources themselves will be made available to the States.

The key to this program is that the States and localities make the critical choices. They have the time to make them in an orderly way. A major sorting out of Federal, State and local responsibilities will occur, and the Federal presence and intervention in State and local affairs will gradually diminish.


While some administration proposals have been turned down, turned aside, or compromised by the Congress, the overall assessment of the past year's action on the budget is heartening. Cooperation, support, goodwill, and a genuine sense of national purpose have enabled us to make significant progress in setting the Federal Government's affairs in order and America on the road to economic recovery.

I urge the Congress to approach the new, or renewed, proposals in this budget in the same spirit and with the same goodwill as it did my proposals of a year ago. Much has been accomplished. This budget proposes that more be done.

The proposals set forth in this budget will not be accepted readily. They are a second challenging installment of a politically difficult, yet necessary, program. In their specifics, these proposals will undoubtedly be altered by the Congress. The general direction we must travel, however, is clear. I urge the Congress to weigh these budget proposals thoughtfully, and to join me, and my administration, in a constructive effort to curb the growth of Federal spending and to provide for the Nation's security. We must, in the end, roll up our sleeves, face our responsibilities squarely, and persevere at the unending task of setting, and keeping, the Nation's affairs in order.

Ronald Reagan

February 8, 1982.

Note: The President's message is printed in the report entitled ``Budget of the United States Government, Fiscal Year 1983 -- Executive Office of the President, Office of Management and Budget'' (Government Printing Office).