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The economy has four parts;
Trade (Exports & Imports)
The annual balances of these four factors equals zero. This means that if trade stays constant, then surpluses in one sector will be balanced by deficits in another sector.
If the private sector is in surplus, then that surplus must come from another part of the economy, which will then be in deficit.
When the government runs a surplus it is taxing more than it is spending.
In this scenario, households or businesses will be in deficit and economic activity is suppressed.
However, when the government is running a deficit it is spending more than it is taxing. This means the households and businesses are in surplus and can spend and stimulate the economy.
The government is different from businesses and households in a number of ways.
The government controls the money supply because it creates the currency, which means the government can create money whenever it needs to.
The government can, and usually does run continuous deficits in its own currency, which are created by its own central bank.
The restrictions to money creation are avoiding inflation and the availability of real resources.
So although money creation cannot make a country wealthy, government deficits may not be the problem that many believe them to be. However, inflation, exchange rates and limited real resources can be.
A country's real wealth lies within its real resources.
Taxation policy should ensure that the optimal quantity of money is floating within the economy so as to prevent rising inflation or currency devaluation.
Government deficits are the tool used to create essential infrastructure and ensures the smooth running of an economy.
Scotland is resource-rich country.
We can build on our national wealth by making productive and sustainable use out of Scotland's natural and geo-strategic assets, but this requires investment.
Scotland could create a monetary and fiscal environment conducive to investment with an independent currency and strong monetary institutions.
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