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Future Living Standards
- National Saving
- Productivity
National Saving
National Saving = Private Saving + Government Saving
If all other parts of national saving remain unchanged, national savings will fall as the federal deficit increases.
Reasons:
- reductions in taxes → increase private consumption
- increases in government spending for federal entitlement programs → increase private consumption
- increases in government purchases → increase government consumption
Note: This switch from saving to consumption occurs regardless of whether the increased deficit is the result of increased current federal spending or tax reductions. The decrease in national saving results from the deficits' tendency to raise the fraction of income that is consumed.
Private Saving
The degree to which private saving changes in response to changes depends upon both the current policy changes as well as peoples' perceptions about future policy actions.