What is the likely magnitude of the The "balanced budget multiplier"?

The MPC has been estimated at 0.9, and MPZ is 0.32, giving an import-adjusted MPC of 0.58. The multiplier would be thus:

1/(1-(MPC-MPZ) = 1/(1-0.58)=1/0.42=2.4.

This, though, takes no account of tax, which is necessary to find the balanced budget multiplier.

In 1996,  there were three marginal rates of taxation, 20%, 24%, and 40%, but it is likely that the average was 24%. National Insurance is another leakage and thus a form of taxation that also has to be taken account of, and in 1996 it was 9%. This gives a figure of 33% for overall taxation.

The balanced budget multiplier will therefore be:

1/{1-[(MPC*0.77)-0.32]} = 1/[1-(0.693-0.32)] = 1/(1-0.373) = 1/0.627 =1.59

1.59 is likely to be the magnitude for the balanced budget multiplier. Unfortunately, it is only an estimate. It ignores the effects of firms selling or keeping inventories, and there are uncertainties about the accuracy of the data. Moreover, it assumes that unused capital and labour resources can be utilised, where as there may be good reason why they cannot be.

[1] Adapted from  Dornbusch/Fischer/Startz, Macroeconomics, Mcgraw-Hill, 2001

[2] Adapted from Begg, Fischer, Dornbusch, Economics, Mcgraw-Hill, 2000