to be avoided.The Theory Behind ItWe assume that an addition to government expenditure increases the gross domestic product (GDP) directly while a cut in the tax rate adds to private disposable income, thereby increasing GDP indirectly. We maintain that the overall impact of the government's fiscal operations on the economy can be measured by combining these two policy instruments into a single constructed variable - the total flow of government expenditure divided by the average tax rate, which we call "the fiscal stance," the definition of which implies that it would exactly equal GDP if the budget were balanced.(1) The budget deficit, measured ex-post facto, is a bad measure of the impact of fiscal policy because it notoriously fails to distinguish the effect of the budget on the economy from the effect of the economy on the budget.This concept of fiscal stance is not new. It is thirty years since Carl Christ, of Johns Hopkins University, had the brilliant insight that should an economy ever reach stationary equilibrium, all stock variables as well as all flow variables would be constant; and that if all stock variables, including government debt, were constant, government receipts would have to equal government payments. It would then follow that if the economy were moving toward stock-flow equilibrium and if taxes were levied as a proportion of income, the GDP of a (closed) economy would always be tracking, perhaps with a long lag, government outlays divided by the average tax rate - the very same concept that we call fiscal stance. Therefore, a necessary condition for the expansion of the economy, at least in the long term, is that the fiscal stance should rise: Government expenditure must rise relative to the average tax rate. If the tax rate were held constant, government expenditure would have to rise absolutely for output to grow; if government expenditure were held constant, the tax rate would have to fall....
