0.20 General introduction to savings mobilization  (Page 5/9)

For the economy as a whole, in any given year, ex post .

1. I=S
   Both investment and savings consist of a number of elements
2. I=I _G +I _PD +T _PF
   I breaks down as follows:
   I _G = Government Investments
   I _PD = Domestic Private I
   I _PF – Foreign Private I
3. S = S _D = S _F
   S _D = Domestic Savings
   S _F = Foreign Savings
   But both S _D and S _F may be broken down as follows in (4) and (5)
4. S _D = S _G +S _P (DOMESTIC)
   S _G = Government Saving
   S _P = Private Saving
5. S _F = S _FO +S _FP (FOREIGN), to be discussed in due course
   S _FO = Official Foreign Savings (Foreign Aid)
   S _FP = Private Foreign Savings (Direct Investment Plus Debt)
   Note also, (Private S) S _P can be broken down still further as in
6. S _P = S _PC +S _PH
   S _PH = Household Savings (DOMESTIC)
   S _PC = Corporate Savings (DOMESTIC)
   Not include foreign corporate savings
   S _G can be broken down further into two components, as in (7)
7. S _G = S _GB +S _GE
   S _GB = Budget Savings
   S _GE = Savings of Government-Owned Enterprise
   ( i.e. Mining, textiles, electric, water, etc., etc.)
   (i.e. profits of SOE ^s – almost always zero or negative, except in oil companies)
   S _GB is defined as:
8. S _GB = T-C _G (BUDGET SAVINGS)
   T = Government Tax Revenue (current receipts)
   C _G = Government Consumption Expenditure
   
   To Recapitulate:
9. S = (S _GB + S _GE ) + (S _PC + S _PH ) + (S _FO + S _FP )

What is government consumption? All current government expenditure plus all capital outlays for military spending. So, current government expenditure consists of

1. Salaries- civil servants and military
2. Government supplies – paper, paper clips, electricity
3. Maintenance of public sector K – repair bridges and upkeep of bridges, roads (expensive)
4. Subsidies – water, pesticides, gasoline (subsidies are often 30-50% of budget)
5. Interest on public debt (government debt)

Interest on public debt – This is what countries pay to service past deficits.

Interest on the public debt constitutes a major share of the budget in many emerging nations (see Table 12-2 in text).

Very high (21-27%) in India, Zimbabwe, Greece.

15% in Brazil in some decades.

Note – interest as a % of public debt is higher in U.S. than in Korea, Germany etc. In future is going to be much higher in U.S. Why?

When international or public debt goes above 10% it starts really crowding out other government expenditures. Why? Because this interest must be paid. Is a contractual obligation. You can cut other government C but you cannot cut interest without repudietry debt.

U.S. in next decade with budget deficit going to 13-14% GDP then interest payments on debt will soon have to rise to 15-16% of the federal budget.

There will be much less room for discretionary government spending in the U.S. (spending on education, research, defense etc.).

In any case, important to understand that the relative emphasis placed on different sources of savings vary greatly across nations, both for reasons of ideology as well as opportunism.

Now, consider identity #7, which defines government savings: government savings are two types – G _B Government Budget Savings requires an excess of tax collection over government current expenditure. We will spend considerable time on the quest for government budget savings.

The other part of government savings is the savings of government owned enterprises (SGE).