According to JPKE 2009 BDKI report, Brunei Darussalam had been running budget surpluses since 2006 or maybe more. In 2006, the budget surplus was reported at B$3.9 billion; In 2007 it was B$4.1 billion and in 2008 it was B$5.6 billion.
So is it good?.....well on microeconomics level, it is good. But on macroeconomic level, well it is a different ball game.
In essence, majority of people get very confused about the concept of national saving. They assume that saving is spending less than you earn and then apply that to budget surpluses and conclude that the surpluses add to national saving. But this view is erroneous. A monetarily sovereign government does not save. What sense does it make to say that the government is saving in the currency that it issues? Households save to increase their capacity to spend in the future. How can this apply to the issuer of the currency who can spend at any time it chooses?
A simple example helps reinforce these points. Suppose the economy is populated by two people, one being government and the other deemed to be the private (non-government) sector. We abstract from the distinction between the external and private domestic sectors here – which mostly only involved distributional considerations anyway.
If the government runs a balanced budget (spends 100 dollars and taxes 100 dollars) then private accumulation of fiat currency (savings) is zero in that period and the private budget is also balanced.
Say the government spends 120 and taxes remain at 100, then private saving is 20 dollars which can accumulate as financial assets. In the first instance, they would be sitting as a 20 dollar bank deposit have been created by the government to cover its additional expenses. The government deficit of 20 is exactly the private savings of 20.
If the government continued in this vein, accumulated private savings would equal the cumulative budget deficits. The government may decide to issue an interest-bearing bond to encourage saving but operationally it does not have to do this to finance its deficit. If the savers transfer their deposits into bonds their overall saving is not altered and it has no implications for the government’s capacity to spend. It has the advantage for savers that they now also enjoy an income flow from their saving.
However, should government decide to run a surplus (say spend 80 and tax 100) then the private sector would owe the government a net tax payment of 20 dollars and would need to sell something back to the government to get the needed funds. The result is the government generally buys back some bonds it had previously sold. The net funding needs of the non-government sector automatically elicit this correct response from government via interest rate signals. Either way accumulated private saving is reduced dollar-for-dollar when there is a government surplus.
So it is clear that the government surplus has two negative effects for the private sector:
- The stock of financial assets (money or bonds) held by the private sector, which represents its wealth, falls.
- Private disposable income also falls in line with the net taxation impost.
Therefore, the argument that budget surpluses represents “public saving”, which can be used to fund future public expenditure is superficial. Public surpluses do not create a cache of money that can be spent later. Governments spend by crediting a reserve account in the banking system. The credits do not “come from anywhere”, as, for example, gold coins would have had to come from somewhere. It is accounted for but that is a different issue. Likewise, payments to government reduce reserve balances. Those payments do not “go anywhere” but are merely accounted for.
There is an elaborate institutional structure in place to obsfucate the true nature of these transactions. But in an accounting sense, when there is a budget surplus, then base money and/or private wealth is destroyed. The opposite is the case for budget deficits.
Now, coming back to the 2009 BDKI report, Brunei Darussalam GDP's during that reporting period was 4.4% in 2006, 0.2% in 2007, -1.9% in 2008 and -1.8% in 2009.
Is it a coincidence? I'll leave it to you to judge.
