Money & Finance › Money flows around the world › Flow of funds: the Fed's Z.1 map of who owes what to whom
Sectoral balances: one sector's deficit is another's surplus
· Concept
Fact, law or dataA rule, statute, definition or measured number.
An accounting identity: the private, government and foreign sectors' surpluses and deficits must add up to zero.
See it on the Money & Finance map →How it works
Spending by one sector is income to another. So the private sector's surplus (saving minus investment) equals the government deficit plus the current-account surplus. Example: if the government runs a deficit of 6% of GDP and the current account shows a 4% deficit, the private sector must be saving a net 2%. If the private sector borrows heavily instead, something else must give. Economist Wynne Godley used the framework at Cambridge and later the Levy Institute to warn of rising US private debt before 2008.
Why it matters
It explains why a government deficit tends to show up as private saving or a trade gap, and why every country cannot cut deficits and run trade surpluses at once.
Think of it like
Like partners' capital accounts in a closed partnership: one partner's net withdrawals must equal the others' net contributions, by definition.
Facts, rules and data
It follows from national income accounting in the BEA's NIPA tables and the Fed's Z.1; Godley's Levy Institute papers (1999–2007) applied it to the US.
Debates and risks
The identity is not disputed; causation is. Do budget deficits cause trade deficits, or do private saving choices drive both?
Connections (2)
▸Sectoral balances: one sector's deficit is another's surplus links budget deficits with Trade deficits and the current accountFact, law or data
The connection
Because sector balances must sum to zero, a government deficit not matched by private saving must be met by borrowing from abroad, which means a current-account deficit. The 1980s 'twin deficits' under Reagan showed this pattern. But private saving can shift, so budget and trade deficits do not move one-for-one.
When and why
In US national accounts, notably the 1980s and 2000s; formalized by Wynne Godley at Cambridge from the 1970s.
How we know
The identity holds by definition in BEA's national accounts; empirical studies find a weaker, variable link between the two deficits.
Debates and risks
Causation is disputed: some say budget deficits drive trade deficits; others say foreign saving and investment choices drive both.
▸Modern Monetary Theory (MMT) leans heavily on Sectoral balances: one sector's deficit is another's surplusFact, law or data
The connection
MMT economists such as Stephanie Kelton and L. Randall Wray use Godley's identity to argue that government deficits are the private sector's surplus: cutting deficits, with trade unchanged, forces households and firms to save less or borrow more. Mainstream economists accept the identity but reject MMT's conclusions about how large deficits can safely be.
When and why
At the Levy Economics Institute and the University of Missouri–Kansas City from the 1990s; popularized by Kelton's The Deficit Myth (2020).
How we know
MMT texts explicitly build on Godley's framework, and Godley worked alongside MMT economists at the Levy Institute.
Debates and risks
Everyone accepts the identity; whether it justifies bigger deficits depends on inflation and interest-rate effects, which are disputed.