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The extra government expenditure is a new injection and income will rise until a matching flow of withdrawals has been generated. Since taxes are only one of several withdrawals, it follows that the rise in taxes must be less than the rise in government expenditure.

It is not clear that we can talk not only about the actual (or “current”) budget deficit or surplus at the present level of national income, but also about the potential budget deficit or surplus at any other level of national income, given current rates of taxes and expenditures. The potential deficit or surplus of particular interest is the one that would occur if the economy were at full employment; it is called the full-employment balance. Notice that the current deficit will be larger than the full-employment deficit for any economy whose current income is less than full-employment income; the reason is that as income rises, the yield from a given set of tax rates rises and hence the deficit falls.

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