chapter  9
8 Pages

Net private savings in relation to the government’s financial balance: some basic principles of macroeconomics disregarded by the European Union’s economic policy makers


Looking at a national economy from both the income and expenditure sides, one gets the following identity:

YD + T + M = CP + IP + G + X (9.1)

where YD denotes the disposable income of the private sector, T is the disposable income of the government (all taxes net of all monetary transfers to the private sector) and M is the income of the rest of the world (RoW) from imports of the national economy in question (the left-hand side of (9.1)). On the righthand side of (9.1) we have private sector expenditures on consumption (CP) and that sector’s gross investment (IP), government expenditure on goods and services (G) and RoW expenditure on the national economy’s exports (X). By simple rearrangement, we get

[(YD – CP) – IP)] = (G – T) + (X – M)

This is equivalent to:

(SP – IP) = (G – T) + (X – M)

or, finally:

NPS = D + E (9.2)

Private savings (SP = YD – CP) comprise household savings and profits retained by firms. In (9.2) we denote by NPS = (SP – IP) the net private savings, by

D = (G – T) the budget deficit and by E = (X – M) the RoW deficit (or the current account of the country concerned). Ex post, the formula (9.2) always holds because it is an identity. However, even as an identity it points up interesting relationships between sectors, especially when statistical data covering longer periods are available. For the world as a whole, we obviously have NPS = D. This is an identity which links the financial balances of the private and government sectors aggregated globally. Budget surpluses (D < 0) and even balanced budgets (D = 0) do occur, albeit rarely; thus, for monetary economies worldwide, budget deficits (D > 0) seem to be the rule rather than an exception. This applies not only to times of war and disasters, but – at least for the industrial countries disposing of longer statistical records – also to periods of peace as well.1