Question

What is meant by the balance of savings and investment? Do you think the government should try to balance the budget in the short-run or the long-run? Discuss what is meant by sustainability of fiscal policy.

Answer 1

Saving-expenditure balance or I-S balance in economics is a combination of national savings and national expenditure that is equal to the current account. The connection is obtained from the identity of the national income. First, saving is equivalent to savings, and injections lead to leakages. As such, the overall circular flow volume remains unchanged. Second, if saving is not equal to expenditure, then the circular flow volume changes, particularly aggregate output. If saving surpasses spending, gross production decreases. If expenditure is greater than savings, gross output increases.

Like other U.S. states' constitutions, the U.S. Constitution does not allow the U.S. Congress to pass a balanced budget, one in which the estimated revenue to the government from taxes, fees, penalties, and other revenues is equal to or greater than the amount expected to be spent. This has resulted in spending on the deficit and building a national debt. A government with a very large budget deficit will move aggregate demand to the right in the short run, and cause severe inflation. Governments may also borrow for idiotic or impractical purposes.

Fiscal sustainability, or sustainability of public finances, is a government's ability to maintain its current expenditure, tax and other policies in the long term without endangering fiscal solvency or defaulting on any of its obligations or planned expenditure. There is no consensus among economists on an acceptable operational concept of fiscal sustainability, but rather different studies use their own definitions, often similar. However, the European Commission describes sustainability of public finances as: the capacity of a government to manage its current budget, tax and other policies in the long term, without jeopardizing the solvency of the government or failing to do so