⁽¹⁾ This article was written when the author was a Hallsworth Fellow at the University of Manchester. He is grateful to Professor M. J. Artis for helpful comments on an earlier draft.

⁽¹⁾ Budget Statement, Weekly Hansard, No. 996, p. 285.

⁽²⁾ The Treasury forecast published in the Financial Statement and Budget Report foresaw 2½ per cent growth between the first half of 1975 and the first half of 1976; in the event, GDP fell slightly. Leading independent forecasters, such as the London Business School and the National Institute were similarly over-optimistic at this time.

⁽¹⁾ Revisions to the national accounts have considerably altered our picture of 1976. The original estimates (at 1970 prices) showed a 1.2 per cent year-on-year increase in the compromise measure of GDP; the latest estimate (at 1975 prices) is 2.8 per cent. The current account deficit, first estimated at £1,423 million, is now put at £881 million.

⁽²⁾ Increases for the 1976-7 wage round were limited to £2.50 for those earning up to £50 a week, to 5 per cent for those earning between £50 and £80, and to a maximum of £4 a week at all higher levels of earnings. For all full-time and part-time workers, the average increase permitted was calculated at 4½ per cent.

⁽¹⁾ Dow (1964), Musgrave and Musgrave (1968), and Price (1978).

⁽¹⁾ Artis and Green (1982).

⁽²⁾ A particular weakness in the models lies in the treatment of the company sector—a weakness which stems no doubt from a failure to uncover firm empirical relationships between company income, taxes, prices, dividends and investment. Changes in the level of taxation of company income are usually assumed to have little effect on dividend payments and none at all on prices. Direct linkages between fiscal policies and investment and stockbuilding also tend to be either weak or non-existent.

⁽³⁾ The public sector borrowing requirement, which is more relevant to monetary policy, is on a payments rather than on an accruals basis. It includes financial transactions—net lending and purchases (less sales) of existing assets—which, while contributing to the government's demand for finance from the rest of the economy, do not have any direct impact on the private sector's income or saving.

⁽⁴⁾ The full employment budget deficit concept has a long history. It seems to have originated from a proposal made in 1947 by the Committee of Economic Development in the United States that the budget should ‘yield a moderate surplus at high employment national income’. The concept found official favour in the United States during the early 1960s and Annual Reports of the Council of Economic Advisors regularly analyse the Budget in terms of the full employment balance.

⁽⁵⁾ See Appendix.

⁽¹⁾ Such calculations are part of the conventional ‘budget arithmetic’ carried out at the Treasury and National Institute for many years. See, for example, Shepherd and Surrey (1968).

⁽²⁾ See Taylor and Threadgold (1979).

⁽³⁾ Notes on the method of calculation can be found in the Appendix. The unweighted real deficit (shown in table A1) presents a very different picture from the indicators shown in chart 1; with large fluctuations in the inflation rate in recent years, the ‘inflation tax’ yield has varied enormously from year to year. However, in the calculation of weighted real deficit, the ‘inflation tax’ yield is assigned a relatively low weight (table A2).

⁽¹⁾ Artis and Green assumed a constant exchange rate.