Question

If a country is running a government budget surplus, why is (T – G) on the left side of the saving-investment identity?

Short answer

(T – G) on the left side of the saving-investment identity because rather than borrowing, the government is saving.

Step-by-step solution

Step 1. Identity

The national savings and investment identity will be as follows in light of current economic conditions:

Capital supply equals capital demand.

$S+\left(M-X\right)+\left(T-G\right)=I$

Investment = Savings + (Trade Deficit) + (Government Budget Surplus)

Step 2. Explanation

Rather than borrowing, the government is saving. On the left side of the identity lies the supply of savings, whether private or public.