Budget surplus is a term commonly thrown around during discussions about economics.
But what does it mean exactly? Below we have answered that question as well as what might cause it, the advantages of it, and the potential disadvantages that can arise.
In the simplest terms, it is when the income exceeds the expenditure.
The term is typically used about government spending; the average person uses the term ‘savings’ instead when referring to their personal budget surplus.
When the government has a budget surplus, it usually means that the finances have been effectively managed. This term can also be used in a corporate context, but it is not common.
The opposite of this is a ‘budget deficit.’ This typically means the government must borrow money and pay an interest rate.
When the income and expenditure figure is equal, it is called a ‘balanced budget.’
What Might Cause A Budget Surplus
Economic growth in a country naturally causes a budget surplus. If the general economy is going well and unemployment rates are decreasing, it only makes sense for the government to have more money.
While this may sound good on paper, having a budget surplus is especially rare in these modern times for a reason.
A budget surplus could also be from increased taxes or cuts in state spending.
Just because there is ‘leftover’ money at the end of the fiscal year doesn’t mean it wasn’t gained at the detriment of something else.
On the other hand, a budget deficit doesn’t mean the country can’t experience growth. If a deficit happens, it could mean that a lot of money has been spent on public services.
If a budget deficit goes on too long, however, it can cause more significant debts that need to be paid off.
Having more money than you need is always a benefit. There are many benefits to a government having a budget surplus.
Here are some of them and what the government could do with the excess money.
- The government can pay off any debts they may have. When a government pays off debt, it means that any future interest rates for loans they may need to make will be lower. This is because it shows investors that the government is good at its word of paying them back.
- A city government with a surplus can invest money towards public renovations, such as parks and residential areas.
- They will usually choose to reduce taxes with a budget surplus. This can help economic growth as people can spend more money on businesses.
- They can fund new programs or provide extra funding for existing programs without taking out loans.
- If they can save money during good fiscal years, it can help to support the poor fiscal years. This allows for more flexibility from the government if there is a budget surplus for multiple years.
- By keeping money back, it can help contain inflation. If there is no influx of money put into the economy in one go, the coin’s value can stay the same.
- A company with a budget surplus can expand and hire more employees.
As with anything, there are always disadvantages. While the advantages of a budget surplus typically revolve around what the government could do with the money, the disadvantages are different.
The disadvantages of a budget surplus are focused mainly on how the money was gained in the first place. Also, how the government can call it ‘surplus’ money.
Most of the earnings to the government are through taxes, so the general public who pays them has an expectation of how that money should be spent.
When paying taxes, you expect that money to be making your country better, or at the very least, not making it worse.
- If the surplus is gained from raising taxes, the extra money has been removed from the general public. Instead, they could use that money to improve the broader economy by buying from local businesses or public transportation. Also, if the extra taxes aren’t reflected in the development of the public sector, it can cause a low opinion of the government in charge.
- If businesses have higher tax rates, then they will hire fewer people or make cutbacks to compensate. This can cause unemployment rates to rise.
- If it is gained from state spending cuts, it can lead to poor infrastructure and public services being underfunded.
- If there is a surplus of money, the government doesn’t spend it. People will see this as wasted money that could’ve gone to education, welfare, or defense.
As you can see, a budget surplus (while sounding positive) is neither good nor bad. In the same vein, a budget deficit isn’t necessarily a bad term and can have some benefits in the short term.
The ultimate goal of a government is always to have a balanced budget. But that isn’t realistic.
Very few countries regularly have a budget surplus, some of those being Germany, Norway, and Sweden. This, however, has caused conflict in Europe.
People believe that countries that consistently have a budget surplus should help out other countries with a lot of debt, such as Greece.
While it may seem like a budget surplus can happen at random. Most of the time, it is planned by the government to get rid of debt.
Ideally, they don’t want to have one during a recession as it can harm the economy via raised taxes rather than support it through future lower interest rates.
If you enjoyed this article, you might enjoy our post on ‘How To Stick To A Budget?‘.