Mr. President, Mr. Speaker, Members of the 95th Congress, ladies and gentlemen: Two years ago today we had the first caucus in Iowa, and one year ago tomorrow, I walked from here to the White House to take up the duties of President of the United States. I didn't know it then when I walked, but I've been trying to save energy ever since.

  I return tonight to fulfill one of those duties of the Constitution: to give to the Congress -- and to the Nation -- information on the state of the Union. Militarily, politically, economically, and in spirit, the state of our Union is sound. We are a great country, a strong country, a vital and a dynamic country -- and so we will remain.

  We are a confident people and a hardworking people, a decent and a compassionate people -- and so we will remain. I want to speak to you tonight about where we are and where we must go, about what we have done and what we must do. And I want to pledge to you my best efforts and ask you to pledge yours. Each generation of Americans has to face circumstances not of its own choosing, but by which its character is measured and its spirit is tested.

  There are times of emergency, when a nation and its leaders must bring their energies to bear on a single urgent task. That was the duty Abraham Lincoln faced when our land was torn apart by conflict in the War Between the States. That was the duty faced by Franklin Roosevelt when he led America out of an economic depression and again when he led America to victory in war.

  There are other times when there is no single overwhelming crisis, yet profound national interests are at stake. At such times the risk of inaction can be equally great. It becomes the task of leaders to call forth the vast and restless energies of our people to build for the future. That is what Harry Truman did in the years after the Second World War, when we helped Europe and Japan rebuild themselves and secured an international order that has protected freedom from aggression.

  We live in such times now, and we face such duties. We've come through a long period of turmoil and doubt, but we've once again found our moral course, and with a new spirit, we are striving to express our best instincts to the rest of the world. There is all across our land a growing sense of peace and a sense of common purpose.

  This sense of unity cannot be expressed in programs or in legislation or in dollars. It's an achievement that belongs to every individual American. This unity ties together, and it towers over all our efforts here in Washington, and it serves as an inspiring beacon for all of us who are elected to serve.

  This new atmosphere demands a new spirit, a partnership between those of us who lead and those who elect. The foundations of this partnership are truth, the courage to face hard decisions, concern for one another and the common good over special interests, and a basic faith and trust in the wisdom and strength and judgment of the American people.

  For the first time in a generation, we are not haunted by a major international crisis or by domestic turmoil, and we now have a rare and a priceless opportunity to address persistent problems and burdens which come to us as a nation-quietly and steadily getting worse over the years. As President, I've had to ask you, the Members of Congress, and you, the American people, to come to grips with some of the most difficult and hard questions facing our society.

  We must make a maximum effort, because if we do not aim for the best, we are very likely to achieve little. I see no benefit to the country if we delay, because the problems will only get worse. We need patience and good will, but we really need to realize that there is a limit to the role and the function of government.

  Government cannot solve our problems, it can't set our goals, it cannot define our vision. Government cannot eliminate poverty or provide a bountiful economy or reduce inflation or save our cities or cure illiteracy or provide energy. And government cannot mandate goodness. Only a true partnership between government and the people can ever hope to reach these goals.

  Those of us who govern can sometimes inspire, and we can identify needs and marshal resources, but we simply cannot be the managers of everything and everybody. We here in Washington must move away from crisis management, and we must establish clear goals for the future-immediate and the distant future -- which will let us work together and not in conflict.

  Never again should we neglect a growing crisis like the shortage of energy, where further delay will only lead to more harsh and painful solutions. Every day we spend more than $120 million for foreign oil. This slows our economic growth, it lowers the value of the dollar overseas, and it aggravates unemployment and inflation here at home.

  Now we know what we must do -- increase production. We must cut down on waste. And we must use more of those fuels which are plentiful and more permanent. We must be fair to people, and we must not disrupt our Nation's economy and our budget. Now, that sounds simple. But I recognize the difficulties involved.

  I know that it is not easy for the Congress to act. But the fact remains that on the energy legislation, we have failed the American people. Almost 5 years after the oil embargo dramatized the problem for us all, we still do not have a national energy program. Not much longer can we tolerate this stalemate.

  It undermines our national interest both at home and abroad. We must succeed, and I believe we will. Our main task at home this year, with energy a central element, is the Nation's economy. We must continue the recovery and further cut unemployment and inflation. Last year was a good one for the United States.

  We reached all of our major economic goals for 1977. Four million new jobs were created -- an all time record and the number of unemployed dropped by more than a million. Unemployment right now is the lowest it has been since 1974, and not since World War II has such a high percentage of American people been employed.

  The rate of inflation went down. There was a good growth in business profits and investments, the source of more jobs for our workers, and a higher standard of living for all our people. After taxes and inflation, there was a healthy increase in workers' wages. And this year, our country will have the first $2 trillion economy in the history of the world.

  Now, we are proud of this progress the first year, but we must do even better in the future. We still have serious problems on which all of us must work together. Our trade deficit is too large. Inflation is still too high, and too many Americans still do not have a job. Now, I didn't have any simple answers for all these problems.

  But we have developed an economic policy that is working, because it's simple, balanced, and fair. It's based on four principles: First, the economy must keep on expanding to produce new jobs and better income, which our people need. The fruits of growth must be widely shared. More jobs must be made available to those who have been bypassed until now.

  And the tax system must be made fairer and simpler. Secondly, private business and not the Government must lead the expansion in the future. Third, we must lower the rate of inflation and keep it down. Inflation slows down economic growth, and it's the most cruel to the poor and also to the elderly and others who live on fixed incomes.

  And fourth, we must contribute to the strength of the world economy. I will announce detailed proposals for improving our tax system later this week. We can make our tax laws fairer, we can make them simpler and easier to understand, and at the same time, we can-and we will -- reduce the tax burden on American citizens by $25 billion.

  The tax reforms and the tax reductions go together. Only with the long overdue reforms will the full tax cut be advisable. Almost $17 billion in income tax cuts will go to individuals. Ninety-six percent of all American taxpayers will see their taxes go down. For a typical family of four, this means an annual saving of more than $250 a year, or a tax reduction of about 20 percent.

  A further $2 billion cut in excise taxes will give more relief and also contribute directly to lowering the rate of inflation. And we will also provide strong additional incentives for business investment and growth through substantial cuts in the corporate tax rates and improvement in the investment tax credit.

  Now, these tax proposals will increase opportunity everywhere in the Nation. But additional jobs for the disadvantaged deserve special attention. We've already passed laws to assure equal access to the voting booth and to restaurants and to schools, to housing, and laws to permit access to jobs. But job opportunity-the chance to earn a decent living -- is also a basic human right, which we cannot and will not ignore.

  A major priority for our Nation is the final elimination of the barriers that restrict the opportunities available to women and also to black people and Hispanics and other minorities. We've come a long way toward that goal. But there is still much to do. What we inherited from the past must not be permitted to shackle us in the future.

  I'll be asking you for a substantial increase in funds for public jobs for our young people, and I also am recommending that the Congress continue the public service employment programs at more than twice the level of a year ago. When welfare reform is completed, we will have more than a million additional jobs so that those on welfare who are able to work can work.

  However, again, we know that in our free society, private business is still the best source of new jobs. Therefore, I will propose a new program to encourage businesses to hire young and disadvantaged Americans. These young people only need skills and a chance in order to take their place in our economic system.

  Let's give them the chance they need. A major step in the right direction would be the early passage of a greatly improved Humphrey-Hawkins bill. My budget for 1979 addresses these national needs, but it is lean and tight. I have cut waste wherever possible. I am proposing an increase of less than 2 percent after adjusting for inflation-the smallest increase in the Federal budget in 4 years.

  Lately, Federal spending has taken a steadily increasing portion of what Americans produce. Our new budget reverses that trend, and later I hope to bring the Government's toll down even further. And with your help, we'll do that. In time of high employment and a strong economy, deficit spending should not be a feature of our budget.

  As the economy continues to gain strength and as our unemployment rates continue to fall, revenues will grow. With careful planning, efficient management, and proper restraint on spending, we can move rapidly toward a balanced budget -- and we will. Next year the budget deficit will be only slightly less than this year.

  But one-third of the deficit is due to the necessary tax cuts that I've proposed. This year the right choice is to reduce the burden on taxpayers and provide more jobs for our people. The third element in our program is a renewed attack on inflation. We've learned the hard way that high unemployment will not prevent or cure inflation.

  Government can help us by stimulating private investment and by maintaining a responsible economic policy. Through a new top-level review process, we will do a better job of reducing Government regulation that drives up costs and drives up prices. But again, Government alone cannot bring down the rate of inflation.

  When a level of high inflation is expected to continue, then companies raise prices to protect their profit margins against prospective increases in wages and other costs, while workers demand higher wages as protection against expected price increases. It's like an escalation in the arms race, and understandably, no one wants to disarm alone.

  Now, no one firm or a group of workers can halt this process. It's an effort that we must all make together. I'm therefore asking government, business, labor, and other groups to join in a voluntary program to moderate inflation by holding wage and price increases in each sector of the economy during 1978 below the average increases of the last 2 years.

  I do not believe in wage and price controls. A sincere commitment to voluntary constraint provides a way -- perhaps the only way -- to fight inflation without Government interference. As I came into the Capitol tonight, I saw the farmers, my fellow farmers, standing out in the snow. I'm familiar with their problem, and I know from Congress action that you are too.

  When I was running Carters Warehouse, we had spread on our own farms 5-10-15 fertilizer for about $40 a ton. The last time I was home, the price was about $100 a ton. The cost of nitrogen has gone up 150 percent, and the price of products that farmers sell has either stayed the same or gone down a little.

  Now, this past year in 1977, you, the Congress, and I together passed a new agricultural act. It went into effect October 1. It'll have its first impact on the 1978 crops. It will help a great deal. It'll add $6 1/2 billion or more to help the farmers with their price supports and target prices. Last year we had the highest level of exports of farm products in the history of our country -- $24 billion.

  We expect to have more this year. We'll be working together. But I think it's incumbent on us to monitor very carefully the farm situation and continue to work harmoniously with the farmers of our country. What's best for the farmers, the farm families, in the long run is also best for the consumers of our country.

  Economic success at home is also the key to success in our international economic policy. An effective energy program, strong investment and productivity, and controlled inflation will provide our trade balance and balance it, and it will help to protect the integrity of the dollar overseas. By working closely with our friends abroad, we can promote the economic health of the whole world, with fair and balanced agreements lowering the barriers to trade.

  Despite the inevitable pressures that build up when the world economy suffers from high unemployment, we must firmly resist the demands for self-defeating protectionism. But free trade must also be fair trade. And I am determined to protect American industry and American workers against foreign trade practices which are unfair or illegal.

  In a separate written message to Congress, I've outlined other domestic initiatives, such as welfare reform, consumer protection, basic education skills, urban policy, reform of our labor laws, and national health care later on this year. I will not repeat these tonight. But there are several other points that I would like to make directly to you.

  During these past years, Americans have seen our Government grow far from us. For some citizens, the Government has almost become like a foreign country, so strange and distant that we've often had to deal with it through trained ambassadors who have sometimes become too powerful and too influential -- lawyers, accountants, and lobbyists.

  This cannot go on. We must have what Abraham Lincoln wanted -- a government for the people. We've made progress toward that kind of government. You've given me the authority I requested to reorganize the Federal bureaucracy. And I am using that authority. We've already begun a series of reorganization plans which will be completed over a period of 3 years.

  We have also proposed abolishing almost 500 Federal advisory and other commissions and boards. But I know that the American people are still sick and tired of Federal paperwork and redtape. Bit by bit we are chopping down the thicket of unnecessary Federal regulations by which Government too often interferes in our personal lives and our personal business.

  We've cut the public's Federal paperwork load by more than 12 percent in less than a year. And we are not through cutting. We've made a good start on turning the gobbledygook of Federal regulations into plain English that people can understand. But we know that we still have a long way to go. We've brought together parts of 11 Government agencies to create a new Department of Energy.

  And now it's time to take another major step by creating a separate Department of Education. But even the best organized Government will only be as effective as the people who carry out its policies. For this reason, I consider civil service reform to be absolutely vital. Worked out with the civil servants themselves, this reorganization plan will restore the merit principle to a system which has grown into a bureaucratic maze.

  It will provide greater management flexibility and better rewards for better performance without compromising job security. Then and only then can we have a government that is efficient, open, and truly worthy of our people's understanding and respect. I have promised that we will have such a government, and I intend to keep that promise.

  In our foreign policy, the separation of people from government has been in the past a source of weakness and error. In a democratic system like ours, foreign policy decisions must be able to stand the test of public examination and public debate. If we make a mistake in this administration, it will be on the side of frankness and openness with the American people.

  In our modern world, when the deaths of literally millions of people can result from a few terrifying seconds of destruction, the path of national strength and security is identical to the path of peace. Tonight, I am happy to report that because we are strong, our Nation is at peace with the world. We are a confident nation.