7.3 Government Budgets

A budget surplus is defined as a situation where the government collects more money than it spends. This occurs when

[latex]T> G+TR[/latex]

On the other hand, the government can also spend more money than it collects. This occurs when

[latex]T< G+TR[/latex]

When the government runs a surplus, public savings is positive. On the other hand, when the government runs a deficit, public savings is negative.

When public savings are negative, total savings in the economy will be smaller than it otherwise could have been. A reduction in total savings will lead to a reduction in total investment since savings equals investment. When savings fall, so does investment.