A graph showing net lending (+) and net borrowing (-) by sector in the UK economy.
- I grouped Central gov’t and local gov’t into total government
- Private sector = Financial corporation, non-financial corporations and households.
As you would expect, there is roughly an inverse relationship between government borrowing and private sector borrowing. As the private sector borrows less and becomes a net lender, the government becomes a net borrower.
You could also think of it as happening the other way, as the government borrow more, the private sector spend less and become net lenders.
But, in the recession, I think what is happening is that we are seeing a rise in the household savings ratio, and firms are increasing their cash reserves. Banks have also gone from net borrowers to net lenders. In this climate of depressed private sector spending and investment, it is to be hoped the government will step in and spend by borrowing from a private sector that want to save and pay off debts.
In 2012 Q2, there must have been a temporary surve in borrowing by financial corporations.
Net lending from the rest of the world helps fund the UK current account deficit. The increase in net lending towards the end of 2012 from the rest of the world, corresponds with a worsening of the current account in this period.
- Keynesian economics – the principle of government borrowing
- when does Keynesianism work?
- UK national debt