§ Mr. Knox
asked the Chancellor of the Exchequer if he will show by what formula the functional relationship between fiscal drag and the speed of inflation can be expressed; and whether he will publish it.
§ Mr. Joel Barnett
Fiscal drag can be defined in various ways, and its relationship with the rate of inflation will vary with the definition chosen. One definition of total fiscal drag, and a possible division 829W into real and inflationary components, is given by
RFD = TFD - IFD
where TFD: total fiscal drag
T1, T2: tax receipts in periods 1 and 2
Y1, Y2: personal income in periods I and 2
IFD: inflationary fiscal drag
P: growth of prices
G: growth of personal income
RFD: real fiscal drag.
This definition, as I am sure the hon. Gentleman will appreciate, gives an estimate in the prices ruling in period 2, assuming unchanged tax rates and allowances. The estimate of total fiscal drag would have to be adjusted to allow for the effect on personal income tax receipts of any changes in tax rates or allowances between the two periods.