ECONOMIC

Comparisons between 1972 and 1973 show that the full-employment balanceincreased by $14 billion. On a quarterly basis, however, the increasewas uneven; the large rise in social security benefits ahead of taxes in thefourth quarter of 1972 and the phase-in of revenue sharing contributed tothe full-employment deficit for that year. Furthermore, if the $9 billion ofoverwithholding of individual income taxes that started in 1972 and haspersisted since is included in full-employment receipts, as it is in actualreceipts, the change amounts to only $5 billion instead of $14 billion. In 1972overwithheld taxes were about $9 billion, but in 1973 refunds of overwithheld1972 taxes were offset by overwithholding of 1973 taxes.The limitations of the traditional measures of potential output were discussedearlier in this chapter. Despite these limitations, the full-employmentsurplus calculation based on the traditional concept of the potential GNPthat is consistent with 4 percent unemployment is useful in the long run forevaluating changes in fiscal policy. At a constant price level, changes in thebalance at full employment—whatever consistent definition of full employmentone may choose—reflect changes in full-employment expenditures,discretionary changes in tax receipts, that is, those produced bychanges in tax laws, and changes in tax receipts along the full-employmentpath of output under given tax laws. When prices rise over time, changes inthe full-employment budget surplus can also be produced automatically. Asexplained in the next section, this is particularly likely to occur in the shortrun when unexpected increases in the rate of inflation raise receipts morethan expenditures.INFLATION AND THE FEDERAL BUDGET AT FULL EMPLOYMENTThe increase in the Federal full-employment budget surplus from calendar1972 to 1973 is reduced further if one takes account of the high ratesof inflation that materialized in 1973. At the start of that year, the pricelevel measured by the implicit GNP price deflator was expected to continueto rise by about 3 percent during the year, as it had during 1972. In fact, itrose by about 7 percent from the fourth quarter of 1972. Thus, for the yearas a whole the level of the deflator was 2 percent above the level that hadbeen assumed in budget planning.In the short run, Federal receipts respond much more promptly thanFederal expenditures to an unexpected increase in the rate of inflation. Thebases for most taxes are raised automatically, but less than half of totalexpenditures will respond within a few months to an increase in the rateof inflation. Thus for each additional 1 percent rise in the price level, fullemploymentreceipts increase by about 1.1 percent, but expenditures growby perhaps only 0.5 percent in the short run. With the magnitudes of calendar1973, a price level that is 2 percent higher on the average for theyear raises full-employment receipts by around $3 billion more than expenditures,leaving the full-employment surplus shown in Table 17 higher bythat amount for the year than it would have been if the rate of inflation hadnot grown.79