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June 21, 2005



On point #4, in your "definition" you either forgot about the trade deficit, or are assuming none exists... That is, national income accounting suggests that the budget deficit, (G-T) = S(pvt) - I - NX. Not sure which it was, but you might want to clarify...


I was overlooking it for three reasons.
First, budget deficits are a worldwide phenomenon; the US, Japan, eurozone etc. As the world has no trade deficit (or at least it shouldn't), we can legitimately see global budget deficits as the counterpart of private savings.
Second, I didn't want to get dragged into the question of whether the global savings glut is causing the UK's budget deficit. You could tell a story whereby massive Asian savings cause the UK to run a current account deficit (by creating a capital inflow), and the counterpart of this is a budget deficit. I'd rather not do this.
Thirdly, it's a rough historical fact that swings in the UK's budget deficit have been highly correlated with swings in the gap between corporate savings and investment, rather than with swings in the external deficit. That's why I preferred to focus on this.


Private savings are interesting. The UK rate is at 6.5% or so of earnings. The US is at 0.8%. Eurozone averages are a little higher at around 8pc. One can argue that European fund managers are investing into the huge profits of US firms (10.1pc US GDP, up from 7.8pc in 2001) and it is hard-working US workers doing 60hour weeks who are funding European pensions.
Also it is European savers (and historically Japanese ones) who bankroll strong US consumer spending (and therefore strong US GDP growth).

BTW Not every country has a budget deficit - a few of the oil-rich ones are having bumper years in 2004 and now 2005! However, it is not really a surprise that most countries will follow the US model.

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