Two years ago, in my first address to the country, I went before the American people to report on the condition of our economy, which had suffered from many years of seriously misguided policies. I made a strong commitment to change the traditional short-sighted view that had previously been taken on economic priorities so that we could achieve our goal of long-term prosperity. I stated that we had a massive job before us.

Government spending was taking a rapidly increasing share of national income, burdensome Government regulation had stunted productivity increases, and excessive tax rates combined with erratic monetary policy resulted in serious disincentives to investment and long-term real economic growth. Inflation was at double-digit levels. Interest rates were at record highs. Real growth and job creation had ceased. New investment, productivity, and personal saving were stagnant. Our economy was in the worst mess in half a century.

To make matters worse, our military strength had been allowed to run down relative to the aggressively expanding military might of the Soviet Union. We were in serious danger of becoming powerless to deter or counter Soviet aggression around the world.

The economic program that I proposed at that time focused on long-range real growth. My tax proposals were designed to provide badly needed private incentives to stimulate savings and productive investment. I supported the Federal Reserve in its pursuit of sound monetary policy. I worked with the Congress to reverse the growth of Government programs that had become too large or outlasted their usefulness. I worked to eliminate or simplify unnecessary or burdensome regulations.

The unprecedented buildup of inflationary forces in the 1970's, however, exacerbated in severity and duration the economic downturn of recent years. One of the key detrimental forces has been the growing Federal budget. Despite our success in reducing the rate of growth of nondefense spending in the last two budgets, spending in 1983 will exceed 1981 levels by 21%, reflecting continued increases in basic entitlement programs, essential increases in defense spending, and rapid growth of interest costs.

Thus, the full effect of the changes we have made is taking time to develop. Over-reactive short-term remedies are not the answer. What is essential now is that we continue to work together to rebuild this country -- without losing sight of the four fundamentals of our economic program:

• Limiting tax burdens to the minimum levels necessary to finance essential Government services, thus maintaining incentives for saving, investment, work effort, productivity, and economic growth.

• Reducing the growth of overall Federal spending by eliminating Federal activities that overstep the proper sphere of Federal Government responsibilities and by restraining the growth of spending for other Federal activities.

• 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.

Over the past 2 years, dramatic improvements have been made in the way the Government affects our economy. The Congress joined with my administration in a cooperative and politically courageous effort to reverse a decade of runaway growth in spending and tax burdens, proliferation of unnecessary regulations and red tape, and erosion of our military strength.

Both the Omnibus Reconciliation Acts of 1981 and 1982 effected fundamental reforms in numerous Federal programs, and demonstrated a greatly heightened level of maturity and responsibility of the congressional budget process that has come to fruition with the help and support of this administration. Although I am disappointed that many administration spending-reduction proposals did not pass last year -- which has resulted in higher deficits -- I believe that the revitalized congressional budget process signifies a refreshing willingness on the part of the Congress to work with my administration to address squarely the many crucial, complex, and politically difficult budgetary dilemmas before us. The results have been impressive:

• Where the growth rate of spending was almost out of control at 17.4% a year in 1980, it is now declining dramatically -- to 10.5% this year, and, with this budget, to 5.4% next year -- which is no more than the projected rate of inflation; in effect, a comprehensive freeze on total Federal spending.

• Where spending growth totaled $220 billion from 1978 to 1981, a 48% increase, spending will rise by only 27% from 1981 to 1984, despite legislated cost-of-living adjustments and the needed defense buildup.

• For the first time since the Second World War, the Federal tax system has been fundamentally restructured. Income tax rates have been substantially reduced, greatly improving the climate for savings and investment. Excessive taxation of business income resulting from depreciation allowances rendered inadequate by inflation has been eliminated through depreciation reform. Tax loopholes have been closed, making the tax structure more equitable. Emphasis is shifting to financing programs through user fees commensurate with benefits and services provided.

• The excessive rates of growth of entitlement programs were curbed. Overly-broad eligibility criteria were tightened to limit benefit awards more to the truly needy, and eliminate or restrict unnecessary and costly payments of welfare-type benefits to those who are relatively well off and are, or ought to be, self-supporting. Overly-generous and unnecessarily frequent cost-of-living adjustments were pared back. Nonetheless, the growth of these programs has proven difficult to control and continues to be the primary cause of higher deficits.

• Limitation of Federal credit activity and off-budget spending is being achieved.

• The burgeoning growth of Federal regulations and red tape has been capped. The number of proposed new regulations has been reduced by one-third in the past 2 years. Unnecessary costs of Federal regulation to individuals, businesses, and State and local governments have been reduced by $6 billion in annual expenditures and $9 to $11 billion in capital costs. By the end of 1983, the time our citizens spend filling out Federal forms and reports will have been cut by over 300 million hours annually.

• Improvements in the management of Federal operations, such as better procedures for the collection of debts owed the Government and better cash-management practices, are being carried out. These improvements have helped reduce waste, fraud, and abuse in Government programs.

• And by the end of the 1982 fiscal year, the Federal nondefense work force had been reduced by 91,300 employees since I took office.

The improvement in our defense posture includes all of its major elements. Long-overdue modernization of our strategic forces is proceeding with new bomber-, submarine-, and land-based missile programs. Our conventional forces are also being modernized and strengthened, with new ships, tanks, and aircraft. Above all, successful recruiting and retention over the past 18 months have resulted in all of our armed services being more fully manned with capable, high-caliber men and women. The All Volunteer Force is now working well. By any standards, these are accomplishments to be proud of. And I am proud of them. We have come far in restoring order to the chaos prevailing in our economy and Government affairs just 2 years ago.

This is not to say that we do not still face great problems such as excessive unemployment, slower than desired economic growth, and high deficits. During the past 2 years our Nation has labored to purge itself of the inflationary disease that for nearly two decades had progressively undermined the economy's ability to generate growth, capital formation, worker productivity incentives, and financial stability. Those inflationary fevers have largely subsided in the aftermath of my decision 2 years ago to redirect economic policy toward a more modest size and scope for the Federal Government, a series of tax rate reductions to reward productive investment and work effort, and a restrained monetary policy to sustain the purchasing power of individual savings and income.

Accompanying the marked progress in unwinding the damaging inflation spiral that plagued our Nation for so many years, financial markets in 1982 experienced their first sustained improvement in more than 5 years. Interest rates throughout the maturity spectrum declined substantially, and by yearend we can proudly report that key rates for home mortgages, consumer loans, and business investment were able to sustain their lower levels, indicating new confidence in administration policies and bringing much needed relief to the housing and auto industries, the farm community, and the export sector.

Inflationary pressures of the sort experienced during the past two decades extracted a heavy toll from our economy. We have learned that the problems we inherited were far worse than most inside and out of Government had expected; the recession was deeper and longer than most inside and out of Government had predicted. Curing those problems has taken more time and a higher toll than any of us wanted. Unemployment is far too high.

Fortunately, the long nightmare of runaway inflation is now behind us. Slowly, but steadily and unmistakably, our national economy is completing the transition from recession to recovery. The interaction of lower tax rates, reduced inflation, and falling interest rates has placed the consumer and the producer in a much strengthened position with respect to balance sheets, liquidity, after-tax income, and purchasing power.

There are numerous signs that the battered, sputtering inflation-warped economy that we found 2 years ago is on the mend, and that the dislocation and hardship we have suffered in the interim will prove to be a corrective interlude on the path of sustained recovery. But our confidence must also be tempered by realism and patience. Quick fixes and artificial stimulants, repeatedly applied over decades, are what brought on the inflationary disorders that we have now paid such a heavy price to cure.

In part as a result of the difficult period of disinflation, during the past year and one-half our projections of the Federal deficit have steadily risen. They have now reached very high levels, creating uncertainty in the financial markets and threatening to block the economic recovery ahead of us.

But before we consider what is to be done, we must review how we got here. And the truth is that as in the case of the social security fund, the looming gaps in our national budget are the consequence of both the inflation that got out of hand and the correctives that have been unavoidably applied to cure it.

During the 1970's, the share of our national income devoted to domestic programs and transfer payments soared by more than 50% -- from 10 cents to 16 cents on every dollar produced by the American people. For a brief time, it appeared that we could afford all of this generosity because inflation badly misled us.

As inflation reached higher and higher peaks, the Treasury's coffers swelled from its take on inflated incomes and the upward creep of tax rates. For a time, we even financed our trillion dollar national debt on the cheap with interest rates that had not yet caught up with the spiraling inflation.

Meanwhile, defense spending grew at less than 60% of inflation, making room in the budget for extra domestic programs. The real purchasing power available to maintain our readiness, modernize our weapons, and maintain strategic nuclear safety declined by a startling 20%.

But it couldn't last -- and it didn't. Today the Federal budget itself has become a major victim of the economic transition:

• The inflationary revenue windfall has dried up.

• Our staggering national debt until recently was being financed at the highest interest rates in peacetime history.

• The undelayable process of restoring our inflation-eroded military budgets and our decayed military strength has further strained our resources.

• Despite our great strides in reducing the spending growth over the last 2 years, the vast edifice of domestic programs remains significantly in place.

But however obvious the threat of insolvency, one thing is certain: social security cannot and will not be allowed to fail the 36 million Americans who depend on it. With this commitment in mind, it is especially pleasing to me to join with the Speaker of the House and the Senate Majority Leader in urging the Congress to enact the bipartisan compromise plan developed by the National Commission on Social Security Reform.

There are elements in it that none of us prefers, but taken together it forms a package all of us can support. It asks for some sacrifice by all -- the self-employed, beneficiaries, workers, new government employees, and the better-off among the retired -- but it imposes an undue burden on none. And, in supporting it, we keep an important pledge to the American people: the integrity of the social security system will be preserved -- and no one's payments will be reduced.

Toward Economic Recovery

To enhance prospects for sustained economic recovery and lower unemployment, I am proposing a sweeping set of fiscal policy changes designed to reduce substantially the mounting Federal deficits that threaten the renewal of economic growth. My plan is based on these principles:

It must be bipartisan. Overcoming the deficits and putting the Government's house in order will require the best efforts of all of us.

It must be fair. Just as all will share in the benefits that will come from recovery, all should share fairly in the burden of transition.

It must be prudent. The strength of our national defense must be restored so that we can pursue prosperity in peace and freedom, while maintaining our commitment to the truly needy.

Finally, it must be realistic. We cannot rely on hope alone.

With these guiding principles in mind, let me outline a four-part plan to increase economic growth and reduce deficits.

First, I am recommending a Federal spending freeze. I know this is strong medicine, but so far we have cut only the rate of increase in Federal spending. The Government has continued to spend more money each year, though not as much more as it did in the past. Taken as a whole, the budget I am proposing for the next fiscal year will increase no more than the rate of inflation -- in other words, the Federal Government will hold the line on real spending. That is far less than many American families have had to do in these difficult times.

I will request that the proposed 6-month freeze in cost-of-living adjustments recommended by the bipartisan National Commission on Social Security Reform be applied to other Government benefit programs. I will also propose a 1-year freeze on a broad range of domestic spending programs, and for Federal civilian and military pay and pension programs.

Second, I will ask the Congress to adopt specific measures to control the growth of the so-called ``uncontrollable'' spending programs. These are the automatic spending programs, such as food stamps, that cannot be simply frozen -- and that have grown by over 400% since 1970. They are the largest single cause of the built-in or ``structural'' deficit problem. Our standard here will be fairness -- ensuring that the taxpayers' hard-earned dollars go only to the truly needy; that none of them is turned away; but that fraud and waste are stamped out. And, I am sorry to say, there is a lot of it out there. In the food stamp program alone, last year we identified almost $1.1 billion in overpayments. The taxpayers are not the only victims of this kind of abuse; the truly needy suffer, as funds intended for them are taken by the greedy. For everyone's sake, we must put an end to such waste and corruption.

Third, I will adjust our program to restore America's defenses by proposing $55 billion in defense savings over the next 5 years. These are savings recommended to me by the Secretary of Defense, who has assured me they can be safely achieved and will not diminish our ability to negotiate arms reductions or endanger America's security. We will not gamble with our national survival. As a percent of GNP, the level I am requesting for defense spending in 1984 is less than the United States spent during the decade of the 1960's. As a percent of the total Federal budget it is far less than was allocated for national defense in those years. We are 2 years into the program to re-arm America. Sustaining the momentum of this program is essential if we are to avoid slipping back into the inefficient and counterproductive pattern of wildly fluctuating defense spending levels.

Fourth, because we must ensure reduction and eventual elimination of deficits over the next several years, I will propose a stand-by tax limited to no more than 1% of the gross national product to start in fiscal year 1986. It would last no more than 3 years and would start only if the Congress has first approved our spending freeze and budget control program. You could say that this is an insurance policy for the future -- a remedy that will be at hand if needed, but resorted to only if absolutely necessary.

In the meantime, we will continue to study ways to simplify the tax code and make it more fair for all Americans. This is a goal that every American who has ever struggled with a tax form can understand.

At the same time, however, I will oppose any efforts to undo the basic tax reforms we have already enacted -- including the 10% tax break coming to taxpayers this July and the tax indexing that will protect all Americans from inflationary bracket creep in the years ahead.

This plan is urgently needed and is geared toward solving the problems of the growing deficits. But it naturally requires the cooperation of both branches of Government, both Houses, and both parties. Thus, our plan is aimed at bridging the institutional, philosophical, and political differences that separate us -- which are not as important as the overriding common objective of economic recovery and sustained prosperity for America.

After 2 years of reducing much of the overspending, we have now reached the bone in many places -- programs where we will not propose further reductions. My administration will now work with the Congress in an effort to accommodate those special concerns of the legislative branch that have caused unnecessary strains in the past.

Thus, we will propose $3 billion more for education programs than was proposed last year, and almost $2 billion more for employment and training. Proposals for new rescissions of already-enacted budget authority will be held to an absolute minimum.

This budget process must be a two-way street, for the problem of large deficits is very real. Even when all reasonable measures are applied to the vast detail of the budget, the resulting deficits are large and progress toward reducing them slow. The political risks entailed in these deficit-containment measures are considerable. But the risk of doing nothing at all due to partisanship or legislative stalemate is much greater. I therefore urge the Congress to join with my administration behind this common-sense strategy.

Meeting -- and Reshaping -- Federal Responsibilities

My administration seeks to limit the size, intrusiveness, and cost of Federal activities as much as possible, and to achieve the needed increase in our defense capabilities in the most cost-effective manner possible. This does not mean that appropriate Federal responsibilities are being abandoned, neglected, or inadequately supported. Instead, ways are being found to streamline Federal activity, to limit it to those areas and responsibilities that are truly Federal in nature; to ensure that these appropriate Federal responsibilities are performed in the most cost-effective and efficient manner; and to aid State and local governments in carrying out their appropriate public responsibilities in a similarly cost-effective manner. The Nation must ask for no more publicly-provided services and benefits than the private sector can reasonably be asked to finance.

Education. -- One of the high priorities I have set for my administration is the return to a more appropriate role for the Federal Government in the Nation's education systems and policies. We have slowed the alarming rate of growth of Federal spending for education, an area that is rightfully and primarily a family and State and local government responsibility. From 1974 to 1981, Federal spending for education increased by 172%. From 1981 to 1982, however, outlays declined by more than $1 billion. My administration has accomplished a major consolidation of small fragmented education programs into a flexible education block grant to States and localities. We have cut back on unnecessary regulation and Federal intrusion in local affairs.

The 1984 budget seeks to stabilize education spending, requesting $13.1 billion in budget authority for 1984. It reflects several important new initiatives to strengthen American education:

• Passing of tuition tax credits for parents who want to send their children to qualified private or religiously-affiliated schools.

• Establishing education savings accounts to give middle- and lower-income families an incentive to save for their children's college education and, at the same time, to encourage a real increase in savings for economic growth.

• Reorienting student aid programs to ensure that students and families meet their responsibilities for financing higher education, while making funds available across a wider spectrum of schools for the low-income students most in need.

• Allowing States or localities, if they so choose, to use their compensatory education funds to establish voucher programs to broaden family choice of effective schooling methods for educationally disadvantaged children.

• Helping States to train more mathematics and science teachers.

Research. -- My administration recognizes the Federal responsibility to maintain U.S. leadership in scientific research. Although support of basic scientific research represents a small share of the Federal budget, it is a vital investment in the Nation's future. Such research lays the foundation for a strong defense in the years to come, and for new technologies and industries that will help maintain our industrial competitiveness, create new jobs, and improve our quality of life. By carefully establishing budget priorities, my administration has been able to reinvigorate Federal support for basic scientific research. With my 1984 budget proposals, such support across the Government will have increased by more than 20% over the 1982 level.

Health care. -- A major problem for both individuals and the Federal Government in meeting health care needs is the rapid inflation of health care costs. The rate of increase in health care costs is excessive and undermines people's ability to purchase needed health care. Federal policies have contributed significantly to health care cost increases. The budget contains several major initiatives to reduce cost increases. We must eliminate the tax incentive for high-cost employee health insurance programs. Savings from medicare cost controls will be used to protect the aged from catastrophic hospital costs. Incentives will also be proposed to slow the growth of medicaid costs.

Agriculture. -- The administration seeks to move agricultural supply toward a better balance with demand by reducing farm production and Government program stocks. The budget proposes a four-part approach to solving the current surplus supply problem:

• establishing a payment-in-kind (PIK) program, under which farmers would receive surplus commodities now held for Federal loans, or owned by the Government, in return for reducing their production;

• freezing farm crop target prices at current levels;

• donating Government-held commodities through international humanitarian organizations for needy people around the world; and

• selling our agricultural produce abroad, both through commercial channels and through governmental negotiation.

Transportation. -- In the transportation area, my administration has made major strides in implementing one of the fundamental principles in my program for economic recovery: having users pay for program costs that are clearly allocable to them. During the past year, I signed into law two administration-backed proposals to increase excise taxes on aviation and highway users and thereby provide funding needed to revitalize and modernize these important segments of the Nation's transportation system. The 1984 budget reflects the administration's continued commitment to the ``users pay'' principle by again proposing user fees for:

• construction and maintenance of deep-draft ports;

• the inland waterway system;

• selected direct Coast Guard services; and

• nautical and aviation maps and charts.

Fully capable ports and channels are essential to make U.S. coal exports competitive in world markets. My administration will work with the Congress to provide for timely and efficient port construction. We propose a system of user fees for existing port maintenance and new port construction. Local governments would be empowered to set up their own financing arrangements for the immediate construction of facilities in their areas.

Reducing the Federal presence in commercial transportation, currently regulated by the Interstate Commerce Commission, the Civil Aeronautics Board, and the Federal Maritime Commission, will improve the efficiency of the industry. To this end, my administration will seek further deregulation of trucking, airlines, and ocean shipping. Experience since the adoption of initial transportation deregulation legislation has shown clearly that both consumers and industry benefit from reduced Federal involvement in these activities.

Energy. -- The administration has significantly reoriented the country's approach to energy matters in the past 2 years. Reliance on market forces -- instead of Government regulation and massive, indiscriminate Federal spending -- has resulted in greater energy production, more efficient use of energy, and more favorable energy prices. For example:

• The U.S. economy today is using 18% less energy to produce a dollar's worth of output than it did in 1973 when energy prices first began to rise.

• The price of heating oil and gasoline has actually fallen in real terms by 12% in the past 2 years -- confounding past theories that insisted that these prices could only increase.

• Federal energy programs and policies have been refocused and made more productive:

• Wasteful spending on large, unprofitable technology demonstrations has been curtailed.

• At the same time, spending has increased in areas where the Government has a key role to play -- for example, in supporting long-term energy research.

• The strategic petroleum reserve has more than doubled in size over the past 2 years.

International affairs. -- Our foreign policy is oriented toward maintaining peace through military strength and diplomatic negotiation; promoting market-oriented solutions to international economic problems; telling the story abroad of America's democratic, free-enterprise way of life; and increasing free trade in the world while assuring this country's equitable participation in that trade.

• The security assistance portion of the international affairs program has been increased to assist friendly governments facing threats from the Soviet Union, its surrogates, and from other radical regimes.

• Development aid emphasizes encouraging the private sectors of developing nations and increasing U.S. private sector involvement in foreign assistance.

• A major expansion of international broadcasting activities aimed primarily at communist countries is planned, and a new initiative will be undertaken to strengthen the infrastructure of democracy around the world.

• Special attention is being given to assuring adequate financing of U.S. exports while my administration seeks to obtain further reductions in the export subsidies of other governments.

Although now less than 2% of the budget, international programs are critical to American world leadership and to the success of our foreign policy.

Minority-owned businesses. -- My administration will also assist in the establishment or expansion of over 120,000 minority-owned businesses over the next 10 years. The Federal Government will procure an estimated $15 billion in goods and services from minority business during the 3-year period 1983 - 1985. It will make available approximately $1.5 billion in credit assistance and $300 million in technical assistance to promote minority business development during this period.

Civil service retirement. -- The 97th Congress made some improvements in the civil service retirement system. However, civil service retirement still has far more generous benefits and is much more costly than retirement programs in the private sector or in State and local governments. Accordingly, this budget proposes fundamental changes in civil service retirement designed to bring benefits into line with those offered in the private sector and reduce the cost of the system to affordable levels. Retirement benefit changes will be phased in over a period of years in order to avoid upsetting the plans of those at or near retirement.

Unemployment Demands Specific Attention

My administration seeks to provide appropriate assistance to the unemployed. There are three major groups who need help: the largest, those who are unemployed now but will find jobs readily as the economy improves; those whose jobs have permanently disappeared; and youth who have trouble finding their niche in the labor market.

Those in the first group need interim help because, historically, increases in jobs always lag in an economic recovery. Last year we provided a temporary program to give the long-term unemployed up to 16 added weeks of unemployment compensation, in addition to the up to 39 weeks available from our permanent unemployment insurance. This temporary program expires March 31, 1983. I propose to modify and extend the program for 6 more months, and provide an option for recipients to receive assistance in securing work through a system of tax credits to employers. This will give employers a significant incentive to hire the long-term unemployed, while workers will get full wages rather than the lower unemployment benefit.

Those whose jobs have permanently disappeared must be helped to find new long-term occupations. The Job Training Partnership Act, enacted last year, authorizes grants to States to help retrain such workers and assist them in locating and moving to new jobs. The Congress appropriated $25 million to start this new program in 1983. I am requesting $240 million to implement the program fully in 1984. In addition, I propose that the Federal unemployment law be changed to allow States to use a portion of the unemployment taxes they collect to provide such retraining and job search assistance to their unemployed workers. Regulatory reform and passage of enterprise zone legislation will also create new incentives for jobs and opportunity.

Those youth who have problems finding jobs after they leave school are often condemned to a lifetime of intermittent employment and low earnings. The new Job Training Partnership Act is designed to help disadvantaged youth acquire the basic skills potential employers look for when they hire. I am requesting $1.9 billion for the block grant to States under that Act. The States must use at least 40% of that for youth.

One of the problems hampering youth is inability to get meaningful work experience during school vacations. Such experience is invaluable to demonstrate their qualifications to potential permanent employers. The budget provides for 718,000 public summer job opportunities for disadvantaged youth. But we must also make it possible for youth to experience work in the private sector. The minimum wage law now frequently prevents this. Inexperienced youth cannot produce enough of value to make it worthwhile for employers to pay them the full minimum wage during short periods of employment. I therefore propose that the minimum wage for summer jobs for youth be reduced to $2.50 an hour. Limitation of the reduced minimum wage to the summer months will make it unlikely that employers will substitute youths for older workers.

I remain adamantly opposed to temporary make-work public jobs or public works as an attempted cure for non-youth unemployment. There are several reasons for this. The cost per ``job'' created is excessive; we cannot afford major new programs, particularly in our current budgetary straits; the actual number of new jobs ``created'' is minimal; the jobs created tend to be temporary and of a dead-end nature; and most such jobs do not materialize until after recovery is well underway.

Improving the Efficiency of Government

The proposed freeze on program funding levels will compel program managers in every agency of the Government to find more efficient ways of carrying out their programs. For too long, costs of Federal operations have been mounting unchecked.

Good management has not always been a priority of the executive branch. I have been correcting that situation.

My administration has redirected programs to improve their efficiency and to achieve cost savings Government-wide. My administration is committed to improving management and reducing fraud, waste, and abuse. The President's Council on Integrity and Efficiency (PCIE), made up of 18 Inspectors General, reported that almost $17 billion has been saved or put to better use in the past 2 years.

In 1982, I signed into law the Federal Managers' Financial Integrity Act. Under this Act, my Cabinet officers and other agency heads will report to me and the Congress annually on the status of their efforts to improve management controls that prevent fraud and mismanagement. A number of agencies have already begun to make significant improvements in this important area.

But the Government can go only so far with the seriously outdated and inefficient management/administrative systems that are currently in place. One-third of our large-scale computers, for example, are more than 10 years old. A comprehensive management improvement program was needed, so ``Reform '88'' was initiated. We intend to upgrade and modernize our administrative systems to make them more effective and efficient in carrying out the Government's business and serving the public.

We are already saving tax dollars by managing our almost $2 trillion yearly cash flow more effectively, collecting the Government's $250 billion of just debts, cutting Government administrative costs, modernizing Federal procurement systems, reducing internal regulations, controlling our office space and equipment more prudently, and streamlining the workforce in many departments and agencies. These cost-reduction efforts will continue.

Continuing Reform of Our Federal System

The overall efficiency of Government in the United States can also be improved by a more rational sorting out of governmental responsibilities among the various levels of government -- Federal, State, and local -- in our Federal system, and eliminating or limiting overlapping and duplication.

In 1981, the Congress responded to my proposals by consolidating 57 categorical programs into 9 block grants. In 1982, block grants were created for job training in the Jobs Training Partnership Act, and for urban mass transit in the Surface Transportation Act. The initiatives to be proposed this year will expand on these accomplishments.

Four new block grants will be proposed, with assured funding for major functions now addressed through categorical grants:

• A general Federal-State block grant covering approximately 15 categorical programs.

• A Federal-local block grant that would include the entitlement portion of the community development grant program and the general revenue sharing program.

• A transportation block grant.

• A rural housing block grant.

Through the President's Task Force on Regulatory Relief and the regulatory review process, the administration is eliminating and simplifying regulations affecting State and local governments that are burdensome, unnecessary, and counter-productive. These changes have improved local efficiency and accountability and reduced program costs. Twenty-five reviews were completed during the past 2 years by either the Task Force or by various Federal agencies. Available data indicate that regulatory relief actions will save State and local governments approximately $4 to $6 billion in initial costs, and an estimated $2 billion on an annual basis. My administration is also simplifying selected, generally applicable crosscutting requirements that are imposed on State and local governments as a condition of accepting financial assistance.

Federal Credit Programs: More Selective

The administration continues its strong commitment to control Federal credit assistance, which has serious effects on the Nation's financial markets. To this end, I propose a credit budget that reverses the accelerated rate of growth in direct and guaranteed lending by the Federal Government that occurred during the second half of the 1970's and the first years of the 1980's.

Federal intervention through guarantees and provision of direct lending misdirects investment and preempts capital that could be more efficiently used by unsubsidized, private borrowers. Because federally assisted borrowers are frequently less productive than private borrowers, large Federal credit demands must be reduced in order to improve prospects for economic growth.

Conclusion

The stage is set; a recovery to vigorous, sustainable, noninflationary economic growth is imminent. But given the underlying deterioration in the overall budget structure that has occurred over the past 2 years, only the most sweeping set of fiscal policy changes could help to reverse the trend and set the budget on a path that is consistent with long-term economic recovery.

If the challenge before us is great, so, too, are the opportunities. Let us work together to meet the challenge. If we fail, if we work at cross purposes, posterity will not forgive us for allowing this opportunity to slip away.

Ronald Reagan

January 31, 1983.

Note: The President's message is printed in the report entitled ``Budget of the United States Government, Fiscal Year 1984 -- Executive Office of the President, Office of Management and Budget'' (Government Printing Office).