PUBLIC DEBT TUESDAY, JUNE 15, 1965 U.S. SENATE, Washington, D.C. The committee met, pursuant to notice, at 10 a.m., in room 2221, New Senate Office Building, Senator Clinton P. Anderson presiding. Present: Senators Long, Anderson, Douglas, McCarthy, Hartke, Ribicoff, Williams, Carlson, Bennett, Morton, and Dirksen. Also present: Elizabeth B. Springer, chief clerk. Senator ANDERSON. Mr. Secretary, the chairman will be a little late today and has asked that I call the meeting to order. The hearing today is on the bill H.R. 8464, to temporarily increase the public debt ceiling to $328 billion during the period beginning on July 1, 1965 and ending on June 30, 1966. Won't you have a seat, Mr. Secretary, and present your views? STATEMENT OF HON. HENRY H. FOWLER SECRETARY OF THE TREASURY; ACCOMPANIED BY FREDERICK L. DEMING, UNDER SECRETARY FOR MONETARY AFFAIRS, DEPARTMENT OF THE TREASURY Secretary FOWLER. Thank you, Senator. I have with me, at the table this morning, Under Secretary for Monetary Affairs, Mr. Frederick Deming. We appear before you in connection with the public debt limit proposal. Action is essential before the end of this fiscal year to establish a new public debt limit adequate to accommodate our needs in the period ahead. The present temporary ceiling stands at $324 billion. On July 1, the ceiling, in the absence of congressional action, will revert to its permanent level of $285 billion, $32.4 billion below the estimated debt subject to limit at that time. Clearly, we cannot permit the credit of the United States to come under that shadow for a single day, nor doubts arise over the authority of the Treasury to finance in an orderly way the additional needs of the Federal Government that will arise later in fiscal 1966. You will recall that the President's budget submitted to the Congress in January of this year anticipated a deficit of $6.3 billion for fiscal 1965. As you are aware, this outlook has improved significantly since that time. Late in April, the President was able to announce an expected decrease in anticipated expenditures for the fiscal year of $500 million. Meanwhile, accumulating evidence of a larger than expected flow of taxes, particularly of individual income taxes, now indicates that receipts will total at least $1.4 billion more than antici pated in January. As a result, our estimated fiscal 1965 deficit has been reduced to about $4.4 billion. The difference between our debt ceiling needs for fiscal 1966 and the need when the Treasury appeared before this committee a year ago is primarily accounted for by this estimated fiscal 1965 deficit, for that deficit will be reflected in an approximately equivalent increase in the debt between the start of fiscal 1965 and the start of fiscal 1966. Every year, the Treasury faces a large seasonal shortfall in revenues during the first 6 to 8 months of a fiscal year. For instance, we typically collect less than 45 percent of our annual revenues from the end of June to the end of December. Consequently, even in years of balanced budgets, we have substantial seasonal borrowing requirements over that period, and these requirements are relatively little influenced by moderate changes in the budgetary projections for a fiscal year as a whole. The size of an anticipated surplus or deficit does, of course, determine how much of this borrowing can be purely temporary, to be paid off in the spring when revenues are seasonally flush, but it is the earlier peak seasonal needs which must be covered by the debt ceiling. Given this recurrent seasonal pattern, it is plain that the debt ceiling must be raised not so much to take account of any prospective deficit in fiscal 1966 as a whole, but simply to take account of the fact that, as a result of the $4.4 billion deficit anticipated for the current fiscal year, we expect that we will be entering the current fiscal year with the actual debt some $4.7 billion higher than a year earlier. I know the committee is also interested in a review of the prospects for fiscal 1966 as a whole. As you are aware, the President's January budget, in estimating fiscal year 1966 receipts at $94.4 billion, had already taken into account the $134 billion cut in excise taxes proposed for July 1. On the basis of recent experience, and with continued gains in economic activity, that revenue estimate, still assuming only the proposed July 1 reductions in excises, has been raised by $1.6 billion. Further allowance must now also be made for the additional cut in excise taxes of $134 billion on January 1, 1966, which was passed by the House of Representatives recently and upon which your committee has reported. Enactment of that additional cut will offset an estimated $600 million of the $1.6 billion improvement in the revenue outlook. As a result, we now estimate receipts in fiscal 1966 at $95.4 billion, $1 billion higher than projected in the President's January budget. I am informed by the Director of the Bureau of the Budget that, at this stage in the appropriations process, there is no sound basis for changing the expenditure estimate for fiscal 1966 in the January budget, and that the estimated spending total of $99.7 billion still represents a fair appraisal of the spending outlook. Consequently, we now anticipate a deficit in fiscal 1966 of $4.3 billion, as compared with $5.3 billion in the President's budget. The outlook for the public debt at midmonth and month-end dates in fiscal 1966 consistent with this budgetary outlook is shown on table I attached. The debt levels that are shown in the last column of table I are based on the same assumptions that have been used in previous debt limit discussions. The first assumption is that the Treasury's cash operating balance will be maintained at a constant level of $4 billion-a figure below our actual average balances in recent years. In practice, there is, of course, a great deal of fluctuation in our actual cash balances, and at various times during the year it is feasible and desirable to achieve cash balances smaller than $4 billion. However, that figure seems to me a necessary and prudent minimum allowance for a cash balance adequate to conduct the operations of the Treasury in an efficient manner, and it has been customary before both the House and Senate committees to use this minimum figure for advance planning. The second assumption provides the usual $3 billion of margin for flexibility and contingencies. This is insurance against the uncertainties that inevitably exist in projections of budgetary receipts and expenditures a year or more ahead, and also recognizes the need for financing flexibility to assure maximum efficiency in debt management operations. For instance, Treasury obviously would prefer to refrain from new financing in an unfavorable market environment; conversely, it would like to anticipate future cash requirements by borrowing when markets are particularly favorable. And, clearly, with receipts and expenditures subject to sharp fluctuations from day to day and week to week, it would be impractical to schedule Treasury financings so as to avoid considerable swings in the cash balance. As table I indicates, our peak requirement-including the allowance for contingencies is estimated at $328.9 billion at the middle of March 1966. Consequently, a debt ceiling of $329 billion, $5 billion higher than the present temporary limit for the current fiscal year was presented to the House Ways and Means Committee as the amount. that was necessary to carry the Treasury through the fiscal year 1966. That committee suggested that this figure instead be rounded down to $328 billion, and the House has since completed action to provide a new temporary ceiling at the $328 billion figure for fiscal 1966. I stated before the House committee that our study had been carefully done and that we believed it would be prudent to fix the ceiling at the requested figure of $329 billion. I added that the process of shaving the assumptions could entail some measured risks. Nevertheless, I told the House committee that I would not enter any strong objection to their then proposed action. In consequence, I appear before you with the same data and estimates as were presented to the House committee, but with a specific request for the $328 billion ceiling as voted by the House rather than the $329 billion we had requested. I should emphasize, in requesting your concurrence in this action, that our peak needs have not been significantly affected by the second stage of the excise tax program recommended by the President. The estimated $600 million revenue impact of the excise tax cuts scheduled for January 1, 1966, will appear in our actual collections only with a lag of 2 to 3 months, with virtually all of the effect coming after our peak debt needs on March 15 have already passed. In fact, substantial reduction of the debt is anticipated during the spring of 1966. I would also like to call your attention to table II, comparing our projections of the debt subject to limitation submitted to this committee last June with actual results. It can be seen that the actual debt in most recent months, adjusted to the assumed cash balance of $4 billion (col. 5) fluctuated close to our earlier estimates. While the unexpected increases in the revenue flow have permitted us to remain under our estimates by a wider margin in April and May, at the peak requirement period of mid-March the debt was only $800 million less than that which was estimated a year ago. It is, of course, this peak seasonal requirement that must be anticipated almost a year ahead. I believe the record is also clear that the $3 billion leeway implicit in the temporary ceiling of $324 billion provided for the current fiscal year has, as intended, been properly reserved as a margin for flexibility and emergencies-a margin that, fortunately, we did not need to draw upon this year. It can also be seen that as a practical matter the operating cash balance has rarely been at or below $4 billion, and that the substantial, and not entirely predictable, monthly variations in our cash flow have occasionally resulted in considerably higher balances for brief periods. These variations, I believe, are a normal consequence of an orderly financing program designed to assure adequate balances over peiods of peak cash drains, adequate flexibility in scheduling our borrowing operations, and our ability to meet the broader economic objectives of our debt management program. It is not the intent of the Treasury to ask for any more borrowing power than is necessary and prudent. To the contrary, our firm objective is to maintain no more debt outstanding than that which is absolutely required to effectively and economically discharge the financial responsibilities of the Government. TABLE I.-Estimated public debt subject to limitation based on constant minimum operating cash balance of $4,000,000,000 $310.2 314.3 314.7 315.7 318.8 313.1 316. 2 318.7 321.3 319.6 322.8 321.5 321.6 321.9 325.9 319.5 323.0 320. 1 322.8 $313.2 316.1 317.3 317.7 318. 7 321.8 316. 1 319.2 321.7 322.7 322.6 324.3 322.6 325.8 324.5 324.6 324.9 328.9 322.5 326.0 322.0 321.3 323.1 325.8 318. 2 |