Government Surpluses Threaten Consumers’ Savings.

In politics today, there is too much misinformation associated with economics and too many opportunities for politicians to hoodwink people into believing something because it sounds right, rather than something else, which is right.

If people understood the principle of the three sectoral balances, which is an accounting principle not a matter of opinion, they would be immune from comments that are simply false and misleading.

A better informed public would force politicians to temper some of the more inaccurate and misleading things they say.

The key to understanding the three sectoral balances can be realised through the application of a simple formula, one that can be understood easily by the ordinary person in the street.

People are not so stupid as to be beyond grasping the fundamentals. They just need to have them explained in simple terms, in a way they can relate to, in their ordinary everyday lives.

Explaining firstly, that in a national economy their savings, as consumers, represent one of the three sectoral balances would immediately stimulate their interest.

Consumer savings are the most important of the three and collectively, the biggest contributor of the three.

The other two are a) what the government spends minus taxation receipts, and b) the net value of our exports minus our imports.

So, if we give each of the three sectoral balances an identity, we can refer to consumer savings as C, government spending minus taxation as G, and the value of our exports minus our imports expressed as XM. We can then construct a simple formula expressed as:

G + XM = C

But what does this mean? It means that the deficit of one sector must equal the surplus of (at least) one of the other sectors. It means the private sector balance plus the government balance plus the foreign balance must equal zero.

Let’s look at each of them separately.

C (consumer savings) represents total private savings of the nation minus private investments.

G is government spending minus taxes collected.

XM is net export value (the difference between what we export and import).

Therefore, as an accounting principle, consumer savings minus investments must equal government spending minus taxes plus the net value of exports.

We can express this as: (G-T) + XM = (S-I).

So, if we just took some random figures to demonstrate the formula, we can say that if (G-T) is $1 billion and XM is minus $200,000,000, then (S-I) would be $800,000,000.

That is because the government spent $1 billion more than it received in taxes (a deficit) but there was also a trade deficit that saw $200,000,000 given away to overseas suppliers which left the remaining $800,000,000 in the hands of consumers.

Note that all spending goes somewhere and all savings come from somewhere. Put another way, someone’s surplus is someone else’s deficit.

Now, if we take another example and say that (G-T) is minus $1 billion (i.e. a government surplus), and XM is -$200,000,000, then we can calculate that (S-I) is -$1.2 billion.

This demonstrates that consumer spending has had to make up for the government surplus and the only way this can happen is if consumers draw down on savings and/or take on debt.

The only way this can be avoided is if the government spending is increased and/or we have a external surplus. If we assume our external trade remains in deficit, which it usually does, then to avoid consumers sacrificing their savings or going into debt, government spending needs to be greater than the amount it raises in taxes.

This is particularly so in times where economic activity is sluggish, like now. Yet our government, and to its shame the Opposition, insist on a fiscal path that will bring us back to surplus.

Such austerity will only force the private sector to become more indebted at a time when our private debt is already at record levels.

This is a recipe for a recession. That is why most economists are telling us in blogs and other means that if we continue along this path, a recession is unavoidable.

A recession means people stop spending other than for essentials, demand falls, businesses downsize and people are put out of work.

What is difficult to grasp is that this is not new. We have known this for decades. Yet, neo liberal governments spurred on by the IMF (International Monetary Fund) insist that only austerity economics will help restore growth.

This is the economic rubbish we have to eliminate if we are to return to growth patterns that lead to near or full employment.

If the government does not spend enough to enable every person who wants a job to get one, all the goods and services provided by both the government and the private sector will be underutilised, meaning demand will be lower than it could be and the unit production costs of those goods and services will be higher than they could be.

This means higher retail prices that inhibit the average worker’s ability to save.

Explaining to people that surplus budgets threaten peoples’ savings is probably the best way to improve their understanding of a national economy and help rid us of the false statements that our politicians spew forth.

It’s not rocket science.