To the Congress of the United States:
      I present with this message my budget recommendations for the fiscal year 1963, beginning next July 1.
     This is the first complete budget of this administration. It has been prepared with two main objectives in mind:
      First, to carry forward efficiently the activities - ranging from defense to postal services, from oceanographic research to space exploration - which by national consensus have been assigned to the Federal Government to execute;
     Second, to achieve a financial plan - a relationship between receipts and expenditures - which will contribute to economic growth, high employment, and price stability in our national economy.
     Budget expenditures for fiscal 1963 will total $92.5 billion under my recommendations - an increase of $3.4 billion over the amount estimated for the present fiscal year. More than three-quarters of the increase is accounted for by national security and space activities, and the bulk of the remainder by fixed interest charges.
     Because of the increasing requirements for national security, I have applied strict standards of urgency in reviewing proposed expenditures in this budget. Many desirable new projects and activities are being deferred. I am, moreover, recommending legislation which will reduce certain budgetary outlays, such as the postal deficit and the cost of farm price and production adjustments.

     It would not, of course, be sensible to defer expenditures which are of great significance to the growth and strength of the Nation. This budget therefore includes a number of increases in existing programs and some new proposals of high priority - such as improvements in education and scientific research, retraining the unemployed and providing young people with greater employment opportunities, and aid to urban mass transportation.
     Budget receipts in fiscal year 1963 are estimated to total $93 billion, an increase of $10.9 billion over the recession-affected level of the present fiscal year. These receipts estimates are based on the expectation that the brisk recovery from last year's recession will continue through the coming year and beyond, carrying the gross national product during calendar 1962 to a record $570 billion.
     The administrative budget for 1963 thus shows a modest surplus of about $500 million. Federal accounts on the basis of the consolidated cash statement - combining the administrative budget with other Federal activities, mainly the social security, highway, and other trust funds - show an estimated excess of receipts from the public of $1.8 billion over payments to the public. And in the terms in which our national income accounts are calculated - using accrued rather than cash receipts and expenditures, and including only transactions directly affecting production and income - the Federal surplus is estimated at $4.4 billion.
     By all three measures in current use, therefore, the Federal Government is expected to operate in 1963 with some surplus. This is the policy which seems appropriate at the present time. The economy is moving strongly forward, with employment and incomes rising. The prospects are favorable for further rises in the coming year in private expenditures, both consumption and investment. To plan a deficit under such circumstances would increase the risk of inflationary pressures, damaging alike to our domestic economy and to our international balance of payments. On the other hand, we are still far short of full capacity use of plant and manpower. To plan a larger surplus would risk choking off economic recovery and contributing to a premature downturn.
     Under present economic circumstances, therefore, a moderate surplus of the magnitude projected above is the best national policy, considering all of our needs and objectives.

     The total of budget expenditures - estimated at $92.5 billion in fiscal 1963 - is determined in large measure by the necessary but costly programs designed to achieve our national security and international objectives in the current world situation. Expenditures for national defense, international, and space programs account for more than three-fifths of total 1963 budget outlays, and for more than three-fourths of the estimated increase in expenditures in 1963 as compared to 1962. Indeed, apart from the expected increase in interest payments, expenditures for the so-called "domestic civil" functions of government have been held virtually stable between 1962 and 1963.

     Within this total there are important shifts in direction and emphasis. Expenditures for agricultural programs, for the postal deficit, and for temporary extended unemployment compensation are expected to drop. The fact that funds for these purposes can be reduced permits us to make increases in other important areas - notably education, health, housing, and natural resource development - without raising significantly total expenditures for domestic civil functions.
     NATIONAL DEFENSE.-- This budget carries forward the policies instituted within the past 12 months to strengthen our military forces and to increase the flexibility with which they can be controlled and applied. The key elements in our defense program include: a strategic offensive force - which would survive and respond overwhelmingly after a massive nuclear attack; a command and control system which would survive and direct the response; an improved anti-bomber defense system; a civil defense program which would help to protect an important proportion of our population from the perils of nuclear fallout; combat-ready limited war forces and the air and sealift needed to move them quickly to wherever they might have to be deployed; and special forces to help our allies cope with the threat of Communist-sponsored insurrection and subversion.
     Increases in expenditures for the Nation's defense are largely responsible for the rise in the budget of this administration compared to that of its predecessor. For fiscal years 1962 and 1963, expenditures for the military functions of the Department of Defense are estimated at about $9 billion higher, and new obligational authority at $12 to $15 billion more, than would have been required to carry forward the program as it stood a year ago.
     For the coming year, the budget provides for further significant increases in the capabilities of our strategic forces, including additional Minuteman missiles and Polaris submarines. These forces are large and versatile enough to survive any attack which could be launched against us today and strike back decisively. The programs proposed in this budget are designed to assure that we will continue to have this capability in the future. This assurance is based on an exhaustive analysis of all the available data on Soviet military forces and the strengths and vulnerabilities of our own forces under a wide range of possible contingencies.
     To strengthen the defenses of the North American Continent, this budget proposes additional measures to increase the effectiveness of our anti-bomber defense system, continued efforts to improve our warning of ballistic missile attack, and further research and development at a maximum rate on anti-missile defense possibilities.
     The budget for the current year provides for identifying and marking available civilian shelter space for approximately 50 million people. This phase of the civil defense program is proceeding ahead of schedule. For 1963, I am requesting nearly $700 million for civil defense activities of the Department of Defense, including $460 million for a new cost-sharing program with State and local governments and private organizations to provide shelters in selected community buildings, such as schools and hospitals.
     Although a global nuclear war poses the gravest threat to our survival, it is not the most probable form of conflict as long as we maintain the forces needed to make a nuclear war disastrous to any foe. Military aggression on a lesser scale is far more likely. If we are to retain for ourselves a choice other than a nuclear holocaust or retreat, we must increase considerably our conventional forces. This is a task we share with our free world allies.
     The budget recommendations for 1963 are designed to strengthen our conventional forces substantially. I am proposing:
     An increase in the number of regular Army divisions from 14 to 16. The two new divisions would replace the two National Guard divisions now on active duty and scheduled to return to reserve status prior to October 1962.
     A substantial increase in the number of regular tactical fighter units of the Air Force and in the procurement of new fighter and reconnaissance aircraft. These steps will provide more effective air support for our ground forces.
     Revision of the programs for organization and training of the reserve components so they will be better adapted and better prepared to serve in any emergency which requires mobilization.
     Significant increases in procurement for all of our conventional forces. These forces must be equipped and provisioned so they are ready to fight a limited war for a protracted period of time anywhere in the world.
     INTERNATIONAL AFFAIRS AND FINANCE.-- A significant change has taken place in our international assistance programs in recent years. Military assistance expenditures are declining to an estimated $1.4 billion in 1963 compared with $2.2 billion 5 years earlier. The more industrialized European countries have almost completely taken over the cost of their own armament. In less developed countries, the military assistance program continues to provide essential maintenance, training, and selective modernization of equipment, with increased emphasis on internal security, including anti-guerrilla warfare.
     On the other hand, expenditures for economic and financial assistance to the developing nations of the world have been increasing and are estimated at $2.5 billion in 1963. These expenditures, largely in the form of loans, will rise further in later years as development loan commitments being made currently are drawn upon. A corresponding increase is taking place in the contributions of other industrialized countries.
     The new Agency for International Development has been providing needed leadership in coordinating the various elements of our foreign aid programs throughout the world. A consistent effort is being made to relate military and economic assistance to the overall capabilities and needs of recipient countries to achieve economic growth and sustain adequate military strength. To make our assistance more effective, increasing emphasis is being placed on self-help measures and necessary reforms in these countries. The authority provided last year to make long-term loan commitments to developing countries will be of invaluable assistance to orderly long-range planning. Efforts will also be made to foster more effectively the contribution of private enterprise to development, through such means as investment guarantees and assistance for surveys of investment opportunities.
     In August 1961, the United States formally joined with its neighbors to the south in the establishment of the Alliance for Progress, an historic cooperative effort to speed the economic and social development of the American Republics. For their part, the Latin American countries agreed to undertake a strenuous program of social and economic reform and development through this decade. As this program of reform and development proceeds, the United States is pledged to help. To this end, I am proposing a special long-term authorization for $3 billion of aid to the Alliance for Progress within the next 4 years. In addition, substantial continued development loans are expected from the Export-Import Bank and from U.S. funds being administered by the Inter-American Development Bank. These, together with the continued flow of agricultural commodities under the Food for Peace program, will mean support for the Alliance for Progress in 1963 substantially exceeding $1 billion.
     SPACE RESEARCH AND TECHNOLOGY.-- Last year I proposed and the Congress agreed that this Nation should embark on a greater effort to explore and make use of the space environment. This greater effort will result in increased expenditures in 1962 and 1963, combined, of about $1.1 billion above what they would have been under the policies of the preceding administration; measured in terms of new obligational authority, the increase is $2.4 billion for the 2 years. With this increase in funds there has been a major stepup in the programs of the National Aeronautics and Space Administration in such fields as communications and meteorology and in the most dramatic effort of all - mastery of space symbolized by an attempt to send a man to the moon and back safely to earth.
     Action is being taken to develop the complex Apollo spacecraft in which the manned lunar flights will be made, and to develop the large rockets required to boost the spacecraft to the moon. The techniques of manned space flight, particularly those of long-term flight and of rendezvous between two spacecraft in earth orbit, are being studied both in ground research and in new flight programs.
     Our space program has far broader significance, however, than the achievement of manned space flight. The research effort connected with the space program - and particularly the tremendous technological advances necessary to permit space flight - will have great impact in increasing the rate of technical progress throughout the economy.
     DOMESTIC CIVIL FUNCTIONS.-- Despite the necessary heavy emphasis we are giving to defense, international, and space activities, the budget reflects many important proposals to strengthen our national economy and society. It has been possible to include these proposals without any substantial increase in the total cost of domestic civil functions mainly because of proposed reductions in postal and agricultural expenditures. Some of the more important proposals in domestic civil programs are mentioned below.
     Agriculture and agricultural resources.-- In the development of farm programs we are striving to make effective use of American agricultural abundance, to adjust farm production to bring it in line with domestic and export requirements, and to maintain and increase income for those who are engaged in farming. The steps taken thus far, including the temporary wheat and feed grain legislation enacted in the last session of the Congress, contributed significantly to the rise in farm income last year and to some reduction - the first in 9 years - in surplus stocks. However, new long-range legislation is needed to permit further adaptation of our farm programs to the rapidly increasing productive efficiency in agriculture and to avoid continuing high budgetary costs. The reduction in agricultural expenditures in this budget (from $6.3 billion in 1962 to $5.8 billion in 1963) reflects the proposals to this end which I shall be presenting to the Congress in a special message.
     The 1963 budget also provides for expansion of the food stamp plan into additional pilot areas, and for a substantial increase in Rural Electrification Administration loan funds - to permit financing of additional generation and transmission facilities where that is necessary. The adequacy of the funds recommended will depend on the willingness of other power suppliers to meet the requirements of the rural electric cooperatives on a reasonable basis.
     Natural resources.-- Estimated expenditures of $2.3 billion in this budget for the conservation and development of our natural resources are higher than in any previous year.
     The 1963 budget makes provision for the Corps of Engineers, the Bureau of Reclamation, and the Tennessee Valley Authority to start construction on 43 new water resources projects with an estimated total Federal cost of $600 million. The long-range programs for the national parks and forests are also being strengthened.
     One of our most pressing problems is the adequate provision of outdoor recreational facilities to meet the needs of our expanding population. The Federal Government, State and local agencies, and private groups must all share in the solution. By the end of this month the comprehensive report of the Outdoor Recreation Resources Review Commission is expected to be available. The Secretary of the Interior, at my request, is preparing a plan for the Federal Government to meet its share of the responsibility for providing outdoor recreational opportunities, including those related to fish and wildlife.
     Commerce and transportation.-- Budget expenditures for commerce and transportation programs are estimated to decline from $2.9 billion in 1962 to $2.5 billion in 1963. This decline reflects mainly a drop of $592 million for the postal service, based on my legislative proposal to increase postal rates to a level that will cover the costs of postal operations, except for those services properly charged to the general taxpayer.
     Outlays for the Federal-aid highway program are financed almost entirely through the highway trust fund and are not included in the budget total. Combined, Federal budget and trust fund expenditures for commerce and transportation programs in 1963 will amount to almost $6 billion.
     Substantially increased expenditures are provided in the 1963 budget for the new program to assist the redevelopment of areas with persistent unemployment and underemployment and for the expanding development and operation of the Federal airways system.
     Housing and community development. The long strides forward in housing and community development programs authorized by the Housing Act of 1961 are making it possible to accelerate progress in renewing our cities, in financing needed public facilities, in preserving open space, and in supplying housing accommodations, both public and private, within the means of low- and middle-income families and elderly people. The major new proposal I expect to make in this field will extend the authority for Federal aids to urban mass transportation.
     Health, labor, and welfare.-- Budget expenditures for health, labor, and welfare programs are estimated at $5.1 billion and trust fund expenditures at $21.6 billion in 1963. The budget includes increased funds for health research and for a major strengthening of the programs of the Public Health Service, the Office of Vocational Rehabilitation, and the Food and Drug Administration. The budget and trust accounts also reflect the legislative recommendations which are pending in the Congress to provide a substantial increase in aid for medical education and to enact health insurance for the aged through social security.
     I have given particular attention in this budget to strengthening the labor and manpower functions of the Department of Labor and related agencies. In addition to increased funds for the United States Employment Service and for other existing Federal programs, the budget includes funds for the urgently needed legislation providing for Federal aid for training or retraining unemployed workers, and for the training of our young people through an experimental youth employment opportunities program.
     Many American families rely for help and for a new start in life upon the public assistance programs. Yet these programs frequently lack both the services and the means to discharge their purpose constructively. This budget includes substantial increases for public assistance. I am also proposing a significant modernization and strengthening of the welfare programs to emphasize those services which can help restore families to self-sufficiency.
     Education.-- Expenditures for existing and proposed education programs are estimated to be $1.5 billion in 1963, an increase of $327 million over 1962. A strong educational system providing ready access for all to high quality free public elementary and secondary schools is indispensable in our democratic society. Moreover, able students should not be denied a higher education because they cannot pay expenses or because their community or State cannot afford to provide good college facilities. This budget therefore includes funds for the legislative recommendations pending before the Congress to provide loans for the construction of college academic facilities and funds for college scholarships, and assistance to public elementary and secondary education through grants for the construction of classrooms and for teachers' salaries. The budget also includes funds for a new program of financial aid to improve the quality of education by such means as teacher training institutes. Continuing our policy of building the research effort of the Nation, funds are recommended for the National Science Foundation to expand support for basic research and the construction of research facilities, particularly at colleges and universities, and to strengthen programs in science education.
     Veterans benefits and services.-- Our first concern in veterans programs is that adequate benefits be provided for those disabled in the service of their country. The last increase in compensation rates for service-disabled veterans was enacted in 1957. To offset increases in the cost of living since that time, I again recommend that the Congress enact legislation to establish higher rates, particularly for the severely disabled. The 1963 budget provides $64 million for this proposal.

     Before Federal funds can be spent, the Congress must enact authority for each agency to incur financial obligations. For the current year, it now appears that $3.8 billion of new obligational authority over the amount already enacted will be required. Of this amount, $2 billion represents standby authority for lending in case of need to the International Monetary Fund - in accordance with the recently concluded agreement under which other countries will make available twice this amount of standby authority. This will make a total of $95.7 billion of new obligational authority for fiscal 1962.
     For 1963, my recommendations for new obligational authority total $99.3 billion. This includes substantial sums needed for forward funding of programs - such as those of the Department of Defense and the National Aeronautics and Space Administration - under which commitments are made in one year and expenditures often occur in later years.

     The estimate of budget receipts for fiscal year 1963 rests on projections of economic recovery and growth which will be discussed in the Economic Report. In brief, the revenue estimates are based on the assumption that the gross national product will rise from $521 billion in the calendar year 1961 to $570 billion in calendar 1962. At this level of output, corporate profits in calendar 1962 would be about $56.5 billion and personal income about $448 billion. These figures do not reflect the additional stimulus which would be given to investment and incomes in the economy by the investment tax credit now pending before the Congress.
     Since the spring of calendar year 1961, the average gain in gross national product has been about 2½% per quarter. The economic assumptions underlying the budget estimates will be realized with a somewhat more modest rate of gain of approximately 2% per quarter. This pace of advance would reduce the rate of unemployment to approximately 4% of the civilian labor force by the end of fiscal 1963.

     There are, of course, uncertainties in any estimates of economic developments so far ahead. If private demand gains greater strength than we now foresee and the current expansion accelerates, there would be a larger Federal surplus, which would be a valuable means of restraining potential inflationary pressures. If, on the other hand, the economic recovery unexpectedly halts or is reversed, revenues would fall below the current estimates and a deficit would inevitably result, moderating the economic slowdown.
     Aside from revenue gains based on economic expansion, there will be larger revenue collections as a result of strengthening the Internal Revenue Service with additional enforcement personnel. Collections are estimated to be increased $300 million during 1963 because of this effort.
     Tax reform proposals.-- Extensive and careful consideration has already been given to the proposals enumerated in my special tax message to the Congress last April. These tax reform proposals, as I noted last year, represent a first step in improving our tax system. The House Committee on Ways and Means has made action on a similar set of recommendations its first order of business this year. I hope they will be enacted early in this session.
     I particularly urge enactment of the tax credit for investment in depreciable equipment. The 8% credit as formulated by the Committee on Ways and Means, together with administrative revision of guidelines for depreciation now underway, will encourage modernization of productive equipment in private industry desirable alike to improve the Nation's potential for economic growth and the ability of our producers to compete with those abroad.
     Any net reduction in fiscal 1963 revenues resulting from adoption of the investment credit is expected to be offset by additional revenues resulting from the enactment of measures to remove defects and inequities in the tax structure, including:
     Corrective legislation with respect to the tax treatment of gains on depreciable property, including both real and personal property, which would prevent abuses that now occur and permit greater flexibility in the rules for salvage value in determining depreciation.
     A system of tax withholding on dividend and interest income, needed to overcome the serious loss of revenue and the unfairness resulting from the failure of some individuals to report these types of income on their tax returns.
     Repeal of the exclusion from an individual's taxable income of the first $50 of dividends and the credit against tax of 4% of additional dividends.
     Statutory provisions to cope with the problem of business deductions for entertainment and gifts and other expense account items.
     Legislation to eliminate unwarranted tax preferences now received by several special types of institutions. Earnings of cooperatives reflecting business activities should be currently taxed either to the cooperatives or to the patrons; special provisions now applicable to mutual fire and casualty insurance companies should be repealed; and the tax deductible reserve provisions applicable to mutual savings banks and savings and loan associations should be amended to assure nondiscriminatory taxation among competing financial institutions.
     Revision of the tax treatment of foreign income to serve the overall objective of tax neutrality between domestic and foreign operations. This requires eliminating tax deferral privileges except in less-developed countries, and tightening up on other preferences given to foreign income under existing law. These involve (a) tax haven operations, (b) taxation of foreign investment companies, (c) taxation of American citizens who are resident abroad, (d) estate tax on real property abroad, (e) computation of allowances for foreign tax credits on dividends, and (f) taxation of foreign trusts.
     Extension of present tax rates.-- The budget outlook for 1963 requires that the present tax rates on corporation income and certain excises be extended for another year beyond their scheduled expiration date of June 30, 1962. Existing law calls for changes which would lower the general corporation income tax rate from 52% to 47%; reduce the excise rates on distilled spirits, beers, wines, cigarettes, passenger automobiles, and automobile parts and accessories; and allow the tax on general telephone services to expire. I recommend postponement of these changes for another year to prevent a revenue loss of $2.8 billion in 1963.
     Transportation tax and user charges.-- Under existing law, the 10% tax on transportation of persons is scheduled for reduction to 5% on July 1, 1962. This tax poses special problems for common carriers which must compete with private automobiles not subject to the tax. At the same time it is clearly appropriate that passengers and shippers who benefit from special Government programs should bear a fair share of the costs of these programs.
     Accordingly, I recommend that the present 10% tax as it applies to passenger transportation other than by air be repealed effective July 1, 1962. I also recommend enactment of new systems of user charges for commercial and general aviation and for transportation on inland waterways.
     More specifically, I recommend that the following user charges be enacted, effective January 1, 1963, with the receipts to be retained in the general fund: (a) a 5% tax on airline tickets and on airfreight waybills; (b) a 2-cents-per-gallon tax on all fuels used in commercial air transportation, including jet fuels; and (c) a 3-cents-per-gallon tax on all fuels used in general aviation. The January 1, 1963, effective date will allow time for review by the Civil Aeronautics Board of fare adjustments that might be required by these user charges. Pending the proposed tax changes, the present 10% tax on air transportation and the 2-cents-pergallon aviation gasoline tax should be continued until December 31, 1962.
     To extend the principle of user charges to inland waterways, a tax of 2 cents per gallon should be applied to all fuels used in transportation on these waterways, effective January 1, 1963.

     Changes in the public debt from year to year reflect mainly the amount of the budget surplus or deficit. With a budget surplus of $500 million proposed for 1963, the public debt on June 30, 1963, is expected to be $294.9 billion compared with $295.4 billion at the end of the current year.
     The limit on the public debt now stands at $298 billion until June 30, 1962, after which the permanent ceiling of $285 billion again becomes effective. The present temporary limit was established last June before the Berlin situation required additional defense expenditures which used up the margin of flexibility included in the $298 billion limit.

     The current limit would impose serious operating difficulties on the Treasury during the remainder of fiscal 1962. The critical stage in functioning under the present limit is upon us and the Treasury is without any margin to meet unexpected contingencies. Although the total debt will decline to $295.4 billion after the receipt of taxes in June, customary seasonal patterns of expenditures in excess of receipts can be expected to raise the total debt above the present $298 billion temporary limit at times during the intervening months.
     Despite the expectation of budget balance for fiscal 1963 as a whole, with the debt expected to return to the $295 billion level on June 30, 1963, seasonal requirements will temporarily raise the outstanding debt during the course of the year to nearly $305 billion. To make the usual allowance for a margin of flexibility in fiscal 1963, and to restore immediately needed flexibility for operations over the remainder of fiscal 1962, I urge prompt enactment of a temporary increase of the debt limit to $308 billion, to be available for the remainder of this year and throughout fiscal 1963.

     Beyond the specific elements of budget expenditures and receipts, it is necessary to consider the relationship of the budget as a whole to the national economy. Three aspects of this relationship have been given particular attention in the preparation of this budget.
     THE BUDGET AND ECONOMIC GROWTH AND STABILITY.-- Our national economic policy is to achieve rapid economic progress for the Nation, with the benefits widely distributed among all parts of the population, to achieve and maintain levels of employment and output commensurate with our growing labor force and productive capacity, and at the same time to maintain reasonable price stability.
     The Federal budget has a major role to play in achieving these objectives. Basic investments and services of large importance to the Nation are provided through the Government. Striking evidence of this contribution is that the Federal budget today supports about two-thirds of all the scientific research and development going forward in the Nation. The budget also supports education, transportation, and other developmental activities contributing to national growth.
     Federal budget policy also has a major role to play in economic stabilization. This role was evident in fiscal years 1961 and 1962, when deficits were incurred in turning the business cycle from recession to recovery, as had been true in 1958-59 and in earlier recessions.
     We do not expect another economic recession during the period covered by this budget. However, experience has taught us that periodic fluctuations in the economy cannot be completely avoided, and that Federal fiscal policy should work flexibly and promptly in such situations. For this, we need standby plans, the merits and mechanics of which have been explored ahead of time by the Congress and the administration.
     Three proposals particularly merit congressional consideration at this time:
     First, the President should be given standby discretionary authority, subject to congressional veto, to reduce personal income tax rates on clear evidence of economic need, for periods and by percentages set in the legislation.
     Second, he should have standby power to initiate, when unemployment rises sharply, a temporary expansion in Federal and federally aided public works programs including authority for new Federal grants and loans for State and local capital improvements. The legislation providing for such an anti-recession program should ensure that projects to be financed will meet high-priority needs, will be started promptly and completed rapidly, and will result in a net addition to Federal, State, or local expenditures.
     Third, legislation should be enacted to strengthen considerably the Federal-State unemployment insurance system, including a permanent system of extended unemployment benefits for workers whose regular benefits expire - in good times or bad for workers with long work experience and in recession periods for all workers. These recommendations will be discussed in the Economic Report.
     THE BUDGET AND THE BALANCE OF PAYMENTS.-- In formulating this budget, careful consideration has been given to the impact on our international balance of payments of Federal expenditures abroad for defense, foreign assistance, and the conduct of foreign affairs. During the coming year, U.S. Government expenditures abroad are estimated to be $4.4 billion, compared with $4.6 billion in the current year, mainly for construction and procurement of goods and services for U.S. military and civilian operations abroad; military and civilian salaries; and the fraction of foreign assistance which does not directly finance U.S. exports. The 1963 estimate reflects many actions which have been taken to reduce the level of Government expenditures abroad. We are managing to strengthen our military defenses overseas without increasing our foreign exchange outlays, and with respect to economic aid we are stressing even further the procurement of American goods and services.
     This budget also reflects other measures we are taking to improve the balance of payments, including tax measures to encourage the modernization of productive equipment and consequent increases in our competitive ability in world markets, stepped up export promotion activities, greater encouragement to foreign travel in the United States, and reduced tax inducements to invest in developed areas abroad rather than at home. To improve further our balance of payments position, we are continuing negotiations with other industrialized countries with the objective of increasing their purchases of defense materiel in the United States and their contributions to the economic advance of the developing countries.
     Basic improvement in our balance of payments will depend primarily upon our ability to continue a high degree of overall price stability and to improve the competitive position of U.S. goods in world markets. The dynamic development and prospective expansion of the European Economic Community are resulting in fundamental changes in world commerce. This pattern of growth presents us with unparalleled export opportunity as well as a continuing challenge. We must meet these changes boldly, confident in our continuing ability to compete on the world markets and to participate in the enormous benefits to all concerned which accrue from the worldwide division of labor and expansion of trade. These are the objectives of the legislative recommendations concerning trade expansion which I shall be sending to the Congress shortly in a special message.
     THE BUDGET AND FEDERAL CAPITAL OUTLAYS.-- In contrast with the practice of many businesses, State and local governments, and foreign governments, the budget of the U.S. Government lumps together expenditures for capital investment and for current operations. Nevertheless it is clearly of importance, in analyzing the significance of the Federal budget to the Nation, to recognize that the budget includes substantial expenditures for loans, public works, and other durable assets and capital items which will yield benefits in future years.
     Furthermore, increasing attention has been given in recent years to the significance of "developmental" expenditures - outlays for education and training, and for research, which have the effect of adding to the Nation's level of knowledge and of skill, and thereby increase the capacity to produce a larger national output in future years.
     In the 1963 budget, expenditures for Federal civil public works are estimated to be $2.5 billion, and another $1.5 billion is estimated for additions to State, local, and private physical assets. About $7 billion of loan disbursements, to be repaid later, will be made in 1963 (including mortgage purchases); repayments in 1963 of loans previously made are expected to total $5 billion, resulting in net budget expenditures Of $2 billion for civil loans. An estimated $4.8 billion will be spent for civil developmental purposes such as education, training, health, and research and development.
     Certain trust fund transactions add to the Nation's assets, as well. For example, in 1963, $3.2 billion will be spent for grants to States for highways through the highway trust fund.

     The effort to increase the degree of efficiency with which the public business is conducted requires constant and unremitting effort on many fronts. This budget reflects continuing improvement in many agencies in productivity per employee, brought about through better training, better supervision, more effective organization, and more efficient equipment.
     The first requirement for efficiency and economy in Government is highly competent personnel. In this regard we face one very important problem on which I am placing a new recommendation before the Congress.
     This is the urgent need to achieve a reform of white-collar salary systems to enable the Government to obtain and keep the high quality personnel essential for its complex and varied programs. Such a reform should bring career employee salaries at all except the very top career levels into reasonable comparability with private enterprise salaries for the same level of work, and provide salary structures with pay distinctions more adequately reflecting differences in degree of responsibility. These two fundamental standards have been widely supported in the past as proper objectives in determining Government salary structures and I now urge that they be given practical effect.
     The legislation I am proposing provides for some adjustment in nearly all salary grades, but it is clear that the higher grades have fallen farthest below the level of reasonable comparability and must therefore be given the greatest percentage increases to make the Government competitive.
     There is also a need for more equitable recognition than is presently provided for postal employees, most of whom spend their entire careers in a single pay level. The proposed reform meets this need directly by increasing the number and size of in-grade steps and by replacing the present longevity increases with additional step increases. The proposal takes into account the career character of the large postal carrier and clerk employee group, recruited at grade PFS-4, by linking their pay with employees paid under the Classification Act at GS-5.
     To ease the budget impact, and to provide ample time for the Congress to study the matter in the light of additional information which will become available annually, I am suggesting that the new pay scales take effect in three annual stages, beginning January 1, 1963.
     Important steps to improve the military pay structure, particularly for higher ranking officers, have been taken in recent years, first in 1955 and, more significantly, in 1958. However, the adjustments now being recommended in civilian compensation require study of the possible need for further changes in military compensation. Consequently, I am directing that a thorough review be made which will permit an up-to-date appraisal of the many elements of military compensation and their relationship to the new proposed levels of civilian compensation. There is one area, however, which has already been adequately reviewed. To reflect an acknowledged rise in housing costs, I am proposing legislation to provide selective increases in the basic allowance for quarters payable to military personnel. As in the case of the civilian pay adjustments, these increases should take effect January 1, 1963.
     Pay adjustments alone will not assure high standards of employee competence. There must be scrupulous fairness in recruiting and assigning personnel - and we have given renewed emphasis to equality of opportunity in the Federal service. There must be absolute integrity in all dealings with the public and with policy questions - and we have established clearer and stronger guides on ethical standards and recommended improvement in the conflict of interest statutes. There must be careful attention to the views of employees and their organizations - and we are placing into effect the recommendations of the task force on employee-management relations in the Federal service.
     Efficiency and economy require also steady improvement in the organization of the Executive Branch. Notable advances were made this past year, with the cooperation of the Congress: new and stronger organizations for foreign aid, for disarmament, for civil defense, and for maritime activities were established; a number of regulatory commissions were substantially strengthened; and new centralized agencies were established in the Department of Defense for intelligence and for supply activities. A number of further recommendations are pending in the Congress, notably the proposal to establish a new Department of Urban Affairs and Housing, on which I urge early action.
     Finally, increased efficiency requires systematic study of ways and means to accomplish the public business more effectively and at less cost. This work goes forward continually in all fields. I cite by way of illustration a few current examples:
     The study, now well along toward completion, of the use of contracts with educational institutions, nonprofit corporations, and private business concerns for the management of Government research and development activities. This study of "contracting-out" is being made by the Bureau of the Budget with the cooperation of the principal agencies concerned, and is expected to provide much more information on these matters than has been available heretofore.
     Studies, recently completed or in progress, of the operations and management of the Export-Import Bank and the Federal Communications Commission. These studies are made by management consulting firms, and are similar to those completed in recent years for the Federal Trade Commission, the Civil Aeronautics Board, and the Interstate Commerce Commission, all of which produced recommendations of considerable value.
     The study, organized at the request of the Department of State by the Carnegie Endowment for International Peace, of personnel requirements - and ways of meeting those requirements - for U.S. activities overseas in the light of present-day conditions in the world.
     Studies of this kind normally do not produce headlines, but they are typical of the effort continually underway to raise the efficiency and reduce the cost of conducting the public business.

     This budget represents a blending of many considerations which affect our national welfare. Choices among the conflicting claims on our resources have necessarily been heavily influenced by international developments that continue to threaten world peace. At the same time, the budget supports those activities that have great significance to the Nation's social and economic growth - the mainsprings of our national strength and leadership. In my judgment, this budget meets our national needs within a responsible fiscal framework - which is the test of the budget as an effective instrument of national policy. I recommend it to the Congress for action, in full confidence that it provides for the prudent use of our resources to serve the national interest.