Budget Surplus Definition
Budget surplus refers to the situation when the government’s earning through tax revenues is more than its spending in the current quarter or year. Government surplus is a positive sign in an economy and shows the strength of the government’s earning power. Most surpluses happen during the boom period when the government can charge higher taxes and it can cut down on its expense.
The government has several ways of earning and the most important way is the taxes. The government’s primary source of revenue taxes. If the taxes earned are more than what the government has spent in a fiscal year, then it is termed as a budget surplus. It can be used to pay off debts that the government has taken from the public, or from other nations.
How It is Used?
- These are mainly used to pay off the debts that the government has taken from the public or from other nations. Government surplus is often used to strengthen the military of a country and can be used to create public parks or building government hospitals.
- The money is often kept aside by the government to fight during a budget deficitBudget DeficitBudget Deficit is the shortage of revenue against the expenses. The budgetary deficit could be the sum of deficit from revenue and capital account. . Every time it gets difficult to manage the budget deficit by borrowing from other nations or the public.
Effects of Budget Surplus
- The demand for bondsBondsA bond is financial instrument that denotes the debt owed by the issuer to the bondholder. Issuer is liable to pay the coupon (an interest) on the same. These are also negotiable and the interest can be paid monthly, quarterly, half-yearly or even annually whichever is agreed mutually. decreases as the government stops borrowing. So the yield of the bond marketYield Of The Bond MarketThe bond yield formula evaluates the returns from investment in a given bond. It is calculated as the percentage of the annual coupon payment to the bond price. The annual coupon payment is depicted by multiplying the bond's face value with the coupon rate. falls and it helps corporations to issue more bonds at lower interest levels. On the other hand, it is a loss for the households who buys bonds as they will be getting less interest in the purchase of bonds.
- The growth of the economy decreases as the government starts taking more in taxes and also the spending of the government is low to make the budget deficit.
- Consuming power decreases as the money supply becomes less.
Difference Between Budget Surplus and Budget Deficit
- The budget surplus is the scenario when government earning is more than the spending whereas, in the budget deficit, government spending is more than its Income. It may happen when the government starts to collect fewer taxes or starts spending more. In both, the scenario money is flown in the economy and purchasing power increases. It helps in making the economy strong and growth can be noticed.
- If the budget surplus happens during the booming period, then it can be tackled by monetary policy. So if the government starts taking more taxes and the economy slows down, then that can be tackled by expansionary monetary policy.
- If the economy is in the depression phase, then it becomes difficult to recover if the government starts to plan a budget surplus, because the economy itself is in depression and on top of that government is decreasing expenditure and increasing taxes. At times surplus is good as the money saved can be used to pay off government debts and to create a surplus for future deficits.
- It is a very important plan when the economy is running in a boom. It will help to set aside funds for future deficits that the economy may face.
- Money saved from budget surplus can be used to fund the military. Military expenditure is very important for the country but it doesn’t add to the well-being of the economy. Money spent on Guns and ships can be used to fund education and healthcare. So if the military expenditure can be done from surplus money, then it is good for the economy.
- When the government needs money to fund its expenditure, they either borrow the money from the public or take it from other wealthy nations. Borrowing money costs interest that needs to be paid. To prevent a country from paying huge sums as interest, a country always plans to repay loans as and when they have money to do so. So it is an important step that helps the government to pay off its debts.
- Such a policy, if taken during the recession, will have an even deteriorating effect. Recession times are those when there is less money in the hands of people and if then the government decides to increase taxes and limit its expenditure to recover the economy, then it will have an adverse effect on the economy in total.
- It decreases the demand for bonds. As the government stops borrowing, so the interest rate on a bond falls and the yield falls. So it is a loss for households as they will be getting less interest.
The budget surplus is a very important plan taken by the government to get rid of debts from the public and other nations. If the surplus can be channelized well then it can be used in favour of increasing military power and to safeguard the country form the sudden recession.
This has been a guide to What is Budget Surplus and its Definition. Here we discuss the effects of budget surplus and how it is used along with advantages and disadvantages. You can learn more about from the following articles –