ECONOMIC

about $14 billion from deficit to surplus between the 2 years on the assumptionof a constant rate of economic activity at full employment. Over $3billion of that swing would have been due to the higher rate of inflation in1973, but the remaining $10 billion would represent an independent fiscalpolicy force restraining even the normal rate of growth. Such restraint wasappropriate, given the inflationary condition of the time. Since we had in1973 both a reduction of unemployment and an increase in the rate of inflation,the actual swing from deficit to surplus was larger—about $17billion, or about $26 billion if overwithholding is excluded from actual1972 receipts.If the overwithheld amount is treated like any other tax receipt, little shiftin the full-employment budget position appears between 1972 and 1973.However, exclusion of the overwithholding from receipts seems to us tocome closer to representing the economic effect of the budget, and the fullemploymentestimates in Table 1 are calculated in that way. On this basisit appears that whereas the direction of fiscal policy was significantly restrictivefrom 1972 to 1973 it is fairly neutral from 1973 to 1974, offering supportif the economy declines but otherwise not exerting any upward or downwardpush.The foregoing observations relate to the balance of Federal receipts andexpenditures in the national income and product accounts. These accountsare more useful for analysis of overall economic impact than the unifiedbudget accounts stressed in the Budget Message, primarily because theyexclude certain expenditufes which do not enter directly into the streamof U.S. income or expenditure. The references to the behavior of the surplusor deficit at a constant rate of economic activity are to calculations of thesurplus as it would be at the actual or forecast rate of inflation if the economywere operating at 4 percent unemployment and at an annual growthrate of 4 percent (rather than the 4.3 percent used in Council Reports ofthe past 4 years). The level of these surpluses depends on the unemploymentrate chosen, but the year-to-year changes in the surplus are not sensitive tothe unemployment rate chosen if the chosen rate is approximately stablefrom year to year. Reference to a higher unemployment rate would reducethe levels of the surpluses but not have much effect on the year-to-yearchanges.It is also useful to try to take the effect of changing inflation rates out ofthe change in the surplus because such a procedure gives a clearer pictureof the budget changes that are autonomous, that is, not responses to economicfluctuations. An increase in the inflation rate will affect both receipts andexpenditures, but it will affect receipts much more promptly and hence increasethe surplus. This increase in the surplus tends to restrain the expansionand thus the increase of the inflation rate. But it is also a symptom ofnot having prevented a rise of the inflation rate and so is evidence of antiinflationarypolicy only in a rather negative sense. Unfortunately, the effectof the change in the inflation rate can be measured only very approximately.Table 1 shows the annual surpluses and changes according to four differentmethods of measurement.30