3.3: Public vs. Private Saving

Saving plays a central role in supporting investment and economic growth. In macroeconomics, national saving is composed of two distinct components: private saving and public saving. These categories reflect the behaviors of households and governments, respectively, and their ability to contribute to the financial resources available for investment.

Private Saving: Individual Choices and Economic Incentives

Private saving refers to the portion of household income that is not spent on current consumption or taxes.

For instance, consider a household with an annual income of $80,000. If it pays $20,000 in taxes and spends $50,000 on goods and services, its private savings would be $10,000. This remaining income might be deposited into a retirement account, used to purchase stocks, or kept in a high-yield savings account. These actions not only prepare the household for future needs but also contribute funds to financial markets that firms can borrow for productive investment.

Private saving is influenced by factors like interest rates, consumer confidence, and access to financial products. Policies such as tax incentives for retirement contributions (e.g., IRAs in the U.S.) can also encourage higher private saving rates.

Public Saving: Government Budgets and Fiscal Policy

Suppose a government collects $3 trillion in taxes and spends $2.8 trillion on public services and welfare programs. It runs a budget surplus of $200 billion, a positive contribution to public savings. On the other hand, if it spends $3.2 trillion, the resulting $200 billion deficit represents negative public savings.

Public saving is heavily influenced by fiscal policy decisions. During recessions, governments may increase spending to stimulate demand, often resulting in budget deficits. During economic booms, efforts to pay down debt or fund reserves can create surpluses.

The sum of private and public saving constitutes national saving, which must equal investment in a closed economy. In open economies, differences between saving and investment reflect net capital flows, influencing trade balances and currency valuation.

The total available savings in an economy is the sum of private savings by households and public savings by the government.

Private savings are the income households have left after paying taxes and covering their consumption expenses. This is expressed as: S equals Y minus T minus C — where S is private saving, Y is total income, T is taxes, and C is consumption.

Public savings, on the other hand, is the difference between what the government collects in taxes and what it spends. This is shown as T – G, (Read as T minus G) where T is tax revenue and G is government spending.

Together, private and public savings form the total savings in an economy. These total savings must match the total investment.

This follows from the closed-economy national income identity, Y=C+I+G.

National saving is what’s left after consumption and government spending, S=Y−C−G.

Substituting for Y gives S=(C+I+G)−C−G=I.

Thus, in a closed economy, total savings equals total investment.