Budget surplus is a term commonly thrown around during discussion 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 in reference to 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 deficient’. This typically means that the government will need to 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 going down, 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 an increase in taxes or cuts in state spending.
Just because there is ‘left over’ 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 larger debts that will 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 possibly do with the excess money.
- The government is able to 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 to their word of paying them back.
- A city government with a surplus can put the money towards public renovations, such as parks and residential areas.
- What they will usually choose to do with a budget surplus is reduce taxes. This can help economic growth as people will be able to spend more money on businesses.
- They can fund new programmes or provide extra funding for existing programmes, without taking out any 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, it means that the value of the coin can stay the same.
- If a company has a budget surplus it means they can expand their company 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 is able to call it ‘surplus’ money.
Most of the earnings to the government is through taxes so the general public who pay them have an expectation on 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, then that means the extra money has been taken away from the general public. They could instead be using that money to improve the wider economy, such as buying from local businesses or using public transport. Also if the extra taxes aren’t reflected in the development of the public sector then it can cause a low opinion of the government in charge.
- If businesses have higher tax rates, then they will hire less people or make cut backs to compensate. This can cause unemployment rates to rise.
- If it is gained from cuts in state spending then it can lead to poor infrastructure and public services being underfunded.
- If there is a surplus of money it means that the government didn’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 to always have a balanced budget. But that just isn’t realistic.
In fact 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 who consistently have a budget surplus, should help out other countries who are in 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 in order 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?‘.