Lack of Purchasing Power 3

Back to Purchasing Power 2
Another approach to the question of purchasing power is to use Godley's sectoral balance analysis#.

This says that the net government expenditure must balance exactly the net savings of the non-government sector, being the private sector together with the foreign sector:

(G-T) = (S-I) + BoT

meaning that government expenditure (G) minus taxation (T) is equal to private sector savings (S) minus private sector investment (I) plus the balance of trade (BoT) , which is essentially imports minus exports. This equation is an accounting identity - every credit must be matched by a debit - and hence is true by definition.

From the example of ConceptCorp:

Δ Cost of employees	Δ Tax (34%)	Δ Sales	Δ Saving (10%)
£24,628	£8,373	£14,629	£1,625

there is a glaring discrepancy between the company's costs (£24,628) and its income from sales (£14,629).

In this example, there were no imports / exports, and no investment: the money saved (ΔS) was effectively stuffed into a mattress. In addition, the accounting identity above cannot be satisfied by the ConceptCorp example: something is missing.

Taxation
The principal reason for taxation is to reduce private purchasing power so that the state can provision itself. Government typically tries to 'balance the budget'# by spending no more than is taxed. Setting ΔG equal to ΔT has the government purchasing a portion of ConceptCorp's output, leaving only the savings ΔS as the missing purchasing power.

Savings
Savings are tricky. In the ConceptCorp example, the savings were thought of as money not spent - that is: money stuffed into a mattress. Normally, however, savings are thought of as being used by banks to fund investment.

However, there is no necessary connection between savings and any subsequent investment: banks make loans based on their assessment of profitability, not on the funds saved with them#.

If, as a result of ConceptCorp's new product, confidence in the economy picks up to the extent that banks are happy to invest an amount

ΔI = ΔT + ΔS

in future production, then the accounting identity can be satisfied without any need for government spending.

The reckoning
If the government runs a 'balanced budget' and the economy is growing, then investment in future production can be sufficient for markets to clear. This growth would of course have to be for ever.

If the economy is really growing, then it is conceivable that the government will not need to spend at all, and that investment will be enough to ensure that all products can be purchased.

But for how long ... ?