What is Public Saving? 

Public saving deals with the amount which has been in excess after meeting all the obligatory expenses and investment of the government. Taxes are collected by the government to meet its day-to-day expenditures. The obligatory expenses include all those expenses which are mandatory for the government. It cannot be avoided as it is inevitable. 

Few examples of expenses are salary to government employees, pensions, etc. Some other expenses are not mandatory but the country makes. These are an investment in building schools, colleges, hospitals, road, and other infrastructure. To spend, money is collected by the government in the form of taxes. The taxes may be a direct tax, indirect tax, duties on export and import. 

Overview of Types of Saving

Savings is considered income left after spending. There are mainly three types of savings in the context of a country: 

1. Private savings 
2. Public savings 
3. National savings 

The many types of taxes collected throughout a fiscal year provide revenue to governments. The amount they spend on social systems and providing basic amenities to their people is referred to as their expenditure. Public savings is the leftover amount earned in taxes after accounting for all government expenditure in a fiscal year. Public savings is also sometimes called government savings. 

Private savings (PS) is the sum of saving by private (financial and non-financial) corporations and household sectors. The total quantity of public and private savings is referred to as national savings (S). In other words, the total remaining income in the economy after paying for consumption and government purchases is called national savings. 

Budget

Budget can be defined as the sources and collection of revenues and allocation of the amount in different portfolios decided by the government. Each government plans its budget so that there should not be any excessive surplus of revenue neither a shortage of funds. Such kind of budget is called Balanced Budget.

Calculation of Public, Private, and National Savings 

For an open economy, the formula of GDP is: 

Y = C + I + G + left( {X - M} right)Y=C+I+G+(X−M) 

For a closed economy, the formula of GDP is: 

Y = C + I + G (Since in closed economy net exports = 0) 

Rearranging the above equation: 

I=Y-C-GI=Y−C−G 

Since in a closed economy: S=I, then: 

S=Y-C-GS=Y−C−G 

Where S is national savings: 

Alternatively, 

• National savings = (Y−C−T)+(T−G) 
• T is tax revenue, collected from the public’s income and added to the government’s income. 
• Private savings = Gross Domestic Product - Tax revenue - consumption 
• Public savings= Tax revenue − government spendings 
• The budget surplus is an excess of tax revenue over government spending. 
• The budget deficit is a shortfall of tax revenue from government spending. 

Budget deficit 

When the government's overall spending exceeds the tax income generated, a budget deficit arises. The accumulation of each year's deficit is the national debt. A budget surplus is created when tax collection surpasses expenditures. This budget surplus represents public savings that can be used for investments and the acquisition of financial assets, excluding the national debt. 

The federal budget for fiscal year 2020 shows the United States government's expenditure and revenue from October 1, 2019, to September 30, 2020. Estimates of the Office of Management and Budget are as follows: 

Revenue will be $3.706 trillion. 

Spending of $4.79 trillion will create a $1.083 trillion budget deficit. 

Major Sources of Income of Government 

The significant sources of Government comprise Direct and Indirect taxes, Interest received on loans, and others. The Receipts through exports, Foreign Direct Investment, and Foreign Institutional Investor’s play a vital role in commercial activities. Each country plans for balanced trade i.e., the receipts received through exports and receipts paid for imports are equal. But generally, it does not happen. Either country will have surplus trade or trade deficit. In surplus trade, there are more receipts received by Government than it pays to another country for imports. Trade deficit refers to less export revenue over imports. It includes the export of goods and services as well. A country having surplus trade adds saving to the revenue of the government. The sources of government can be boosted by investment in infrastructure. In the short term, it does not seem beneficial but in the long - run it will have immense benefits. National saving could be more if the nation has less Government spending over its income. 

Commerce and Trade: Money has an immense multiplier effect. The government's role is to boost commercial activities. And it promotes the movement of money from one hand to the other. It can be better understood by an example, suppose Rs.10 /- gets rotated in 10 hands in a day then that Rs 10 had the value of Rs 100. This is called the multiplier effect. The government also has regulatory bodies that check inflation. A borrower would consume products that are cheap and inexpensive. It will cut his expenditure to great extent. Government usage taxation measures to control the demand and supply of Products and services in the country. 

Major Expenditures of Government 

It includes payments of salaries, payment of interest on the debt. These two expenses are obligatory and cannot be ignored. 

When the Government expenditure is more than its revenue then the budget is called deficit budget. However, if the revenue is more than the expenditures then the budget is said to be Surplus Budget. 

The surplus amount that did not get used in a particular financial year is said to be Savings. This saving would be more when there is revenue receipts collection is more and the expenditures are less. 

An investment of the Government in infrastructure is not an expenditure. It is expected from the government to have an investment in infrastructures such as roads, hospitals, schools, and colleges. The Government must provide specific services concerning health and education. So investment over these projects is welcome. The amount allocated for the different portfolios is based on the policymakers. They consider different aspects and decide further for allocation of amount. 

The capital investment led to an increase in GDP and has immense benefits in the long term. 

Generally, in developed economies Government spending is more on infrastructure. The underdeveloped economies and developing economies Government spending is more on obligatory expenditures i.e., in payments of salaries, subsidy on specific goods, interest on debt payments. The reason behind this Government spending is that the poor economy's Government has low revenue receipts and could not afford to make a huge investment in infrastructure. But the developed economies have sound and robust GDP and it enables these countries to make a huge investment in infrastructure projects as it has a good return in long term. Today international organization like IMF and World Bank gives loan on low rate of interest. So the underdeveloped economies borrow loans from International organizations. They also borrow from the public in their own country called public borrowing. 

National Saving includes the savings of Individual or private saving and public saving. Private saving refers to the savings of Individual and private business entities as well. 

Context and Applications 

The Topic would be helpful for students pursuing a different course, such as: 

• Master in Public Policy 
• MBA (Finance) 
• Master in Commerce  
• Bachelors in commerce 
• Bachelors in Business Administration 
• Apart from students, it would be highly beneficial for professionals engaged in Public Finance, Planning Government Budgets, and Economic Policies. It would be helpful for students working as an intern in the World Bank, IMF, and other financial institutions of Government. It will help you in the calculation of a nation's GDP and others understand national saving. 
   

Practice Problem 

Problem: What is a Trade deficit? How Surplus trades boost Public savings? 

Solution: Trade deficit refers to a shortage of revenue receipts through export over imports of goods and services. When a government has fewer receipts from export and pays for its imports of goods and services more than export receipts for goods and services both. 

When receivables from the export of goods and services are moreover its imports then the trading is said to be trade surplus. It boosts foreign exchange receipts which augment countries' national savings. 

Hence, Trade surplus boosts government savings.