enter image description hereI was reading Keynesian economics in R.Dornbusch's book where he mentioned the defects of using budget surplus as a measure where he says it can be changed and effected by autonomous private spending which I couldn't logically get.Can someone explain?

  • $\begingroup$ Can you please provide direct quote from the book? $\endgroup$
    – 1muflon1
    Mar 13 '20 at 18:59
  • $\begingroup$ "However,the budget surplus by itself suffers from a serious defect as a measure of the direction of fiscal policy.The defect is that the surplus can change because changes-as seen in figure.Thus,an increase in budget deficit doesn't necessarily mean that the govt. has changed its policy in an attempt to increase the level of income." (I've pasted the figure in the main question part) $\endgroup$
    – Veb
    Mar 14 '20 at 9:08

In a very rudimentary sense, the question can be answered in the following way : We see that $BS = tY - G - TR $

As you put in the quote, Dornbusch is arguing that budget deficit/ surplus is not a good measure to gauge government policy.

EXPLANATION: For example, a deficit doesn't always mean that $G$ is large or that the government is spending to increase income. An increase in budget deficit can occur if there is a reduction in private spending (which is $I$) - since that leads to a reduction in $Y$, which reduces $tY$ (tax collections) that increasing deficits. When he says that private spending can affect budget surplus, he means that private spending $I$ can affect the level of income $Y$ which can affect $tY$ (tax collections) which can impact Budget Deficit/Surplus. Hope this helps!


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