3 Apr 2013

National Accounting

In his excellent blog on national accounting, Edward Harrison makes the point that when the private sector is in surplus the government must run a deficit. Very clear evidence of this can be found in today ONS Economic Review for March 2013. By regraphing chart 4 we can see the inverse relationship between public and private finances. At present the private sector are running a large (but diminishing) surplus. And the government is not saving but borrowing. This graph only shows from 2008 onwards, but it is striking how closely these two amounts mirror each other.

Harrison argues (from the Austrian school of economic thought) that the sum of the sectoral financial balances must net to zero. And he points out that a government deficit is an effect of activity in the private sector, not a cause
"Budget deficits are the result of the ex-post accounting identity between the sectoral balances and should not be a primary goal of public policy."

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Keep is seemly & on-topic. Thanks.