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

The government when running a budget surplus, it implies it is spending less and hence, the budget is in surplus. Hence, T-G implies that surplus.

Step-by-step solution

Step1. Introduction

The savings-investment identity is-

(S-I) = (X-M) + (G-T)

S- Savings

I- Investments

X- Exports

M- Imports

X-M= Trade Balance

G- Government Expenditure

T- Taxation

Step2. Explanation

When G-T is on the right hand side, it implies the earnings through taxation is less than the government spending, implying a government budget deficit.

When we take G-T to left, it becomes T-G as according to simple mathematical operations. Now, T-G implies T is greater than G, hence government when runs a budget surplus, T-G is on the left hand side of the identity equation.