Public Saving

Definition

Public saving refers to the net saving of the government sector, which is the difference between government revenue and government expenditure. It represents the government's contribution to national saving and investment, and plays a crucial role in the National Saving and Investment Identity.

5 Must Know Facts For Your Next Test

1. Public saving can be positive, indicating a government budget surplus, or negative, indicating a government budget deficit.
2. The level of public saving is influenced by government policies, such as tax rates, government spending, and fiscal policies.
3. Positive public saving can contribute to national saving and investment, while negative public saving (government budget deficits) can reduce national saving and investment.
4. Public saving is an important component of the National Saving and Investment Identity, which states that national saving must equal national investment plus the current account balance.
5. Governments can use public saving as a tool to influence the overall level of national saving and investment, and to achieve macroeconomic goals such as economic growth and stability.

Review Questions

• Explain how public saving relates to the National Saving and Investment Identity.
  • Public saving is a key component of the National Saving and Investment Identity, which states that national saving must equal national investment plus the current account balance. Public saving, which is the net saving of the government sector, contributes to the overall level of national saving. When public saving is positive (a government budget surplus), it can increase national saving and investment. Conversely, when public saving is negative (a government budget deficit), it can reduce national saving and investment.
• Describe how government policies can influence the level of public saving.
  • The level of public saving is directly influenced by government policies, such as tax rates and government spending. Governments can use fiscal policies to increase public saving by raising taxes or reducing government expenditure, leading to a government budget surplus. Alternatively, governments can decrease public saving by lowering taxes or increasing government spending, resulting in a government budget deficit. These policy decisions have a direct impact on the overall level of national saving and investment, as public saving is a crucial component of the National Saving and Investment Identity.
• Analyze the potential macroeconomic implications of changes in public saving.
  • Changes in public saving can have significant macroeconomic implications. When public saving is positive (a government budget surplus), it can contribute to higher national saving and investment, potentially leading to increased economic growth, job creation, and improved economic stability. Conversely, when public saving is negative (a government budget deficit), it can reduce national saving and investment, which may slow economic growth, increase unemployment, and make the economy more vulnerable to external shocks. Governments must carefully consider the potential macroeconomic impacts when making decisions that affect the level of public saving, as it is a critical component of the National Saving and Investment Identity and the overall economic performance of a country.

Related terms

National Saving: The total saving of an economy, which is the sum of private saving and public saving.

Private Saving:

The saving of households and businesses, which is the difference between their disposable income and consumption expenditure.

National Investment: The total investment in an economy, which includes both private investment and public investment.