Dear lector (at 2017/03/13 at 6:44 am)
The full quote from the blog you mention is:
Using the sectoral balance framework, we can say that a current account
surplus (X – M > 0) allows the government to run a budget surplus (G –
T < 0) and still allow the private domestic sector to net save (S -
I) > 0. In fact, the budget surplus is ensuring that the total net
spending injection to the economy matches the spending gap derived from
the desire to save. If the government tried to run deficits in this
case, then spending overall would be too large relative to the real
capacity of the economy and inflation would result.
The other way of expressing the sectoral balance accounting relationship is as you quote (from my colleague Randall Wray):
(S – I) = (G – T) + (X – M)
Now put some numbers in:
1. Private domestic balance (S – I) = 2 per cent of GDP – saving overall.
2. External balance (X – M) = 4 per cent of GDP – surplus
So we have:
+ 2 = (G – T) + 4
Which means that (G – T) must be – 2 ( surplus).
You are getting confused because the balance for government in the
way Wray expresses it is written (G – T) which means a surplus is a
negative number.
Note also that (X – M) above is really (X – M + FNI) or the current
account balance. In the simplified version, (X – M) we are assuming net
income transfers to be zero.
The way to understand it is that the current account surplus is an
injection of net spending, while the private domestic surplus is a net
withdrawal. As long as the government surplus is equal to the
difference, then the overall impact on national income is stable.
If the government surplus was greater than the difference between the
external injection and the private domestic withdrawal of spending then
the economy would reduce overall output and income and head to
recession.
best wishes
bill
