The government index that is supposed to tell what the economy will be doing six months down the road rose yesterday for the fourth month in a row.

The Commerce Department reported that its index of leading economic indicators rose 0.7 per cent in October and revised upward its estimate of the September rise from 0.3 per cent to 0.4 and the August increase to 1.7 cent from 1.4 per cent.

Meanwhile, Charles L. Schultze, chairman of the President's Council of Economic Advisors, said that cuts in both personal and corporate taxes are needed to increase confidence and stimulate lagging capital investment.

He said that income taxes are taking an increasingly large share of total personal incomes and that Congress should reduce taxes to "provide the wherewithal for consumers to increase their living standards."

Federal income taxes take about 11 per cent of income today and will take 13 per cent by 1981 without a tax reduction because of the progressive nature of the tax system. Congress has typically reduced taxes when they have risen above 11 per cent of income.

Schultze noted that to keep the recovery of track "we will need a particularly large contribution from business investment." That investment will also insure sufficient industrial production capacity in the years ahead, he said.

Cuts in business taxes will help stimulate investment. Schultze said in remarks prepared for the annual meeting of the American Council of Life Insurance in New York.

Schultze's speech was clearly designed to tell businessmen that the administration's long-term policies would be acceptable to them, a theme that Treasury Secretary W. Michael Blumenthal has prepared before.

Last night, in a speech to the New York Board of Trade Blumenthal reemphasized the need to stimulate business investment, the lack of which, he said, has "seriously" hurt the economy's ability to create jobs.

"Because not enough new industrial capacity is being added, full utilization of that capacity no longer means full employment," Blumenthal said. "When there was full capacity in 1968, for example, full employment was only 3.6 per cent. But when we reached full capacity in 1973, unemployment stood at 4.9 per cent - and if we reach full capacity again in 1978 or 1979, the unemployment rate would probably be even higher."

Blumenthal maintained that the "only solution is to encourage real rates of business fixed investment of 9 to 10 per cent until we bring the share of investment up to at least 12 per cent" of total economic output. In the last three months that rate of investment was only 2 per cent and since 1969 has averaged only 2.7 per cent, the Treasury Secretary said.

The Commerce Department's leading indicators point to continuing economic expansion and, as a result, continuing increases in employment until the middle of next year.

In October, seven of the 10 indicators available for the preliminary report rose, two fell and one was unchanged.

Those moving favorably were the length of the average work-week, the layoff rate, changes in prices of sensitive materials, the change in cash-like assets, the real money supply, real orders for consumer goods and building permits.

Stock prices and real, or inflation-adjusted, orders for new plant and equipment fell. Economic policy makers such as Blumenthal and Schultze want to see a large, sustained increase in real orders for plant and equipment.