What is the fundamental trade-off that society faces if it chooses to save more? How might the government increase national saving?

What is the fundamental trade-off that society faces if it chooses to save more? How might the government increase national saving?

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July 23, 2021
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What is the fundamental trade-off that society faces if it chooses to save more? How might the government increase national saving?

Answer and ExplanationSolution by a verified expert

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National saving is influenced by private as well as public saving.

Explanation
Individual's income is the sum of the total of consumption expenditure (C) and saving (S). This implies, a society can reduce its consumption expenditure at present and save a greater amount of income if it wants higher future income and consumption. Therefore, there is a fundamental trade-off between consumption and saving, a decline in consumption today will increase saving today as well as a rise in wealth in the future.

The government might increase national saving in either of the following two ways:

Revising existing tax laws: Altering the tax codes, such as, reducing the personal income tax and corporate tax will give more incentive to the people to raise their savings. So, a rise in private savings directly influences national saving.
Reducing budget deficit: The government can reduce its budget deficit by raising taxes on the wealthy individuals thereby raising the public savings. Since national saving is the sum of private and public saving so a rise in public saving directly influences the national saving.
Verified Answer
There is a fundamental trade-off between consumption and saving. If a society chooses to save more today, then it has to reduce its consumption spending today and can raise their spending in the future. Thus, the trade-off is really a trade-off between consumption today or consumption in the future.

The government might increase national saving by revising the existing tax laws or by reducing its budget deficit.

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