Dean Rosovsky told the Faculty Council yesterday he expects this year's Faculty budget to show a slight surplus for the third year in a row.

Presenting the first draft of his annual budget letter to the Faculty, Rosovsky warned that if inflation continues at its current pace, the Faculty may not be able to balance its budget in the next fiscal year.

The council spent much of yesterday's meeting discussing the financial aid system in the Graduate School of Arts and Sciences as part of an ongoing review of Rosovsky's annual report which deals with GSAS and will be published next week.

The surplus in the Faculty's budget for 1977-78 was about $300,000, or less than one per cent of the Faculty's $45 million main operating budget. Rosovsky said he expects a comparable surplus this year.

The Faculty ran deficits for seven straight years before 1976-77, with one year's deficit reaching $2 million. The Faculty met its goal of balancing the budget by June 30, 1977 through a series of budget cuts, most of them in non-teaching areas such as energy costs. Last year the Faculty received slightly more income from tuition and government contracts than expected, adding to the surplus.

Rosovsky's budget letter, to be released next week, recommends no further cut backs in order to balance the budget this year and does not treat the issue of possible tuition increases. The council yesterday did not discuss the possible impact of President Carter's new wage and price guidelines on the budget.

Dean Rosovsky could not be reached for comment after the closed meeting yesterday.

William J. Skocpol, professor of Physics and a council member, said yesterday Rosovsky's letter mentions that inflation boosts costs and cuts into income from the endowment. The state of the economy may also have a negative effect on alumni gifts.

Government policy changes which may affect the budget next year include the increase in social security taxes and the raised mandatory age of retirement, Skocpol said. Harvard may have to spend more to pay older professors at the top of the salary scale, if they take advantage of the higher mandatory retirement age.

During the discussion of GSAS financial aid, officials told the council that some graduate students are having increasing difficulties obtaining funds because outside sources of aid, such as foundation fellowships and government contracts, are drying up. Also, Harvard can no longer afford to increase its aid contribution to make up the difference.

Edward L. Keenan '57, dean of GSAS said last night that outside financing for graduate students reached its peak in 1968 and has been declining ever since. Non-science fields feel the financial pinch most strongly. The English department, for example, relies almost entirely on the GSAS for its fellowship funds.

Although a central GSAS financial office determines each student's financial need, the individual departments allocate their own aid funds and have some flexibility to reward students with particular academic merit. Some GSAS students have said a uniform allocation system throughout the GSAS would be more equitable.

Keenan said that while some science departments have high levels of outside support enabling them to grant more aid, they also face heavy competition with other schools and private industry for the most qualified students, and they need the financial resources to attract them.

Non-science departments also need resources to attract good students, and Harvard wants to continue to enable them to do so, Keenan added.

He said, however, that "practical imperatives have to be considered too," adding, "There is only a certain number of English professors that society is willing to support and that number is probably less than the number of chemistry professors society is willing to support."

Rosovsky's report on GSAS and the council's talk yesterday did not produce recommendations for change in the aid system. The report is designed "to generate discussion," Keenan said, and recommendations may grow out of it later