ECONOMIC

since general revenue sharing was introduced in October 1972. For instance,of the $3 billion received for the third entitlement period under generalrevenue sharing in April and July 1973, it is estimated that almost half isbeing spent to reduce taxes or prevent an increase in taxes. With State andlocal spending rising at a somewhat accelerated rate of 12 percent from 1972to 1973, the surplus of State and local governments declined progressivelyduring 1973.This decline is somewhat more pronounced if one estimates the fullemploymentbudget surplus for State and local governments. Here essentiallythe same procedure is used as in estimating the Federal budget. Onlya few differences arise. Full-employment receipts from contributions forsocial insurance are assumed to be equal to the actual social insurance contributionsreceived by State and local governments, since these programscover only State and local employees and therefore do not fluctuate cyclically.Full-employment expenditures are assumed to be equal to actual expenditures,since unemployment benefits enter the national accounts only asFederal expenditures.The difference between these full-employment receipts and expendituresyields the crude estimate of the full-employment budget balance of State andlocal governments used in this report for the analysis of fiscal policy. Morerefined estimates might take into account that some State and local expendituresvary automatically with cyclical conditions. There is also some evidencethat tax rates tend to be raised when the gap between actual GNPand potential GNP widens. The average tax rates at full employment maytherefore deviate systematically from the actual tax rates, contrary to theassumption made in estimating full-employment receipts. Nevertheless theState and local budget calculated in this way does give a better estimate ofthe stance of overall fiscal policy than the actual budget.The full-employment budget balance of State and local governments canbe added to the comparable balance of the Federal Government to obtaina rough indicator of the combined fiscal policy changes generated by all layersof government. The result shows that although State and local governmentsreduced their full-employment budget surplus in 1973 the combinedbudget surplus still rose by $9 billion—from $10.8 billion in 1972 to $20.0billion in 1973, on a national income accounts basis. If increases in the fullemploymentbudget surplus produced by an unexpected rise in rates of inflationare not regarded as "discretionary" but as part of the automaticstabilizers, particularly at the Federal level, the increase in the full-employmentsurpus for all levels of government combined would be reduced toabout $6 billion. However, if overwithholding is included in Federal receiptsfor 1972, the full-employment surplus shows a decline from 1972 to 1973.As indicated in Chapter 1, the Council believes that overwithholding shouldbe omitted from the calculation of full-employment receipts. Viewed in thismanner, therefore, the full-employment surpus on a combined governmentalbasis indicates a shift toward restraint from 1972 to 1973, but the shift isless than in the Federal budget alone.81