Definition

Budget Surplus

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What is a budget surplus?

When revenue exceeds expenses, a budget surplus is generated. A surplus budget usually applies to the government's financial situation. So, it means the government's finances are in good shape. A budget surplus occurs when tax revenue exceeds government expenditures. With a budget surplus, the government will use the surplus revenue to pay down public sector debt.

 

Summary
  • A budget surplus is produced when revenue exceeds expenditures.
  • The word "budget surplus" refers to the financial health of a country.
  • When the government's budget is in surplus, it can be used to pay down debt, lower interest rates, and stimulate the economy.

Frequently Asked Questions (FAQs)

What could result in a budget surplus?

Simply put, a budget surplus arises when revenue growth exceeds expenditure growth or when expenses or spending, or both, are reduced; however, a surplus may also result from a rise in taxes.

Furthermore, a surplus indicates that the government has additional funds to spend on current services like social security, Medicare or to launch new ones.

  • Substantial tax revenues, such as those produced by increasing wages, high employment, and benefit taxes.
  • When the economy is undergoing a phase of rapid expansion.
  • Tax revenues, both direct and indirect, are growing.

Since policymakers are tempted to cut taxes and spend more revenue, budget surpluses are uncommon in industrialised economies.

When the budget is in surplus, it can pay off debt, lower interest rates, and boost the economy. It may also assist in making a purchase or putting money aside for the future. For example, a city government with a budget surplus might put the money into construction projects like revitalising a run-down park or revitalising the downtown area.

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What are the effects of having a budget surplus?

Growth Impact

If the government receives more funds than it spends, it can use them to pay off current debt or fund potential government spending. It would lead the country's economic growth.

Government Debt Declines

In bad times, the government could use surpluses to boost growth and reduce debt. Simply put, save when times are good and invest when times are bad.

Lower Interest Rates

Budget surpluses indicate that debt levels can lower. As a result, lending to the government becomes less risky. Governments with lower debt levels are less likely to default.

Poor Quality Public Services

If the budget surplus is due to a reduction in government expenditures, fewer funds are available for government-provided services. If the government wants to spend less, it must decide where to cut spending, which may include defence, welfare, education, and healthcare, among other things.

As a consequence, public services could be jeopardised. Cuts to the education budget, for example, may result in less funding for schools, and students' education may suffer.

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When does it appropriate time to run a budget surplus?

When the economy is in the growth phase of the economic cycle, a budget surplus is sufficient. Demand is reduced during a recession, and a budget deficit is projected. To achieve a budget surplus during a recession, higher taxes and lower spending would be necessary – but these policies will exacerbate the recession.

As a result, it is preferable to wait before the economy improves and automatic fiscal stabilisers strengthen, as higher growth contributes to higher income tax revenues.

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What are the benefits of having a budget surplus?

  • A budget surplus helps the government to repay the accumulated national debt.
  • This might cause bond yields to decline, making potential government borrowing less costly.
  • A budget surplus allows a government to respond to a potential crisis, such as a fiscal stimulus during a depression or in response to a shock from the outside world.
  • The government could use a budget surplus to reduce taxes to boost the economy's supply
  • Surplus revenues may be used to boost public-sector infrastructure investment.

What are the disadvantages of having a budget surplus?

  • A budget surplus occurs when the government takes more money out of the economy than it puts in. Simply put, it depletes the economy's financial resources. We see less consumer spending and business expenditure due to collecting more tax than is necessary from companies and customers.
  • Fiscal austerity to achieve a budget surplus will harm the quality of public services while also potentially increasing inequality.