The top blog post of the day:
Overspending is fairly straightforward when it comes to households. It’s a little more nuanced with corporates, but its a lot more convoluted when it comes to governments and nation states.
Here’s a quick rule of thumb, when it comes to governments:
- A country is living beyond its means when its running a current account deficit
- A country is living within its means when its running a current account surplus
How does this relate to governments? It doesn’t.
A country can be running a surplus or a deficit irrespective of whether the government is running a surplus or deficit. It’s really about the balance in the flow of funds between the different sectors in an economy – governments, households and corporations. Just because a government runs a deficit says nothing about whether the country as a whole is living beyond its means.
The role of the government here is really as a counterbalance to the private sector and households – ensuring that national welfare is maximised. In that context:
- A country where both the current account and the government are running a deficit is truly living beyond its means, and you can with ample justification blame the government;
- In a country where the current account is in deficit but the government is running a surplus, you can blame households or corporations, whichever one happens to be running a deficit (and by construction, one of those sectors MUST be running a deficit);
- In a country where the current account is in surplus but the government is running a deficit, the government is absorbing the excessive savings of either households or corporations (i.e. one or both of these sectors are in surplus), without which economic activity would be below potential (i.e. social welfare won’t be maximised);
- In a country running a surplus on the current account as well as the fiscal budget, the government is effectively failing to fully provide for its citizens. One or both corporations and households are saving excessively, and the government is making the situation worse by not dissaving – social welfare is not being maximised, and there is a good argument for expanding government consumption and investment (yes, I’m looking at you, Singapore).
So, what’s the best situation?
Read more HERE for the answers.