Budget Surplus

Article bySourav Sinha
Reviewed byDheeraj Vaidya, CFA, FRM

What Is A Budget Surplus?

Budget surplus occurs when the government’s earning through tax revenues is more than its spending in the current quarter or year. It signifies that an economy is moving in the right direction with its government having a considerable earning power. Most surpluses are recorded during the period when the government can charge higher taxes, while reducing expenses.

Budget Surplus

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The government has several ways of earning, but its primary source of revenue is taxes. If the taxes earned are more than what the government has spent in a fiscal yearFiscal YearFiscal Year (FY) is referred to as a period lasting for twelve months and is used for budgeting, account keeping and all the other financial reporting for industries. Some of the most commonly used Fiscal Years by businesses all over the world are: 1st January to 31st December, 1st April to 31st March, 1st July to 30th June and 1st October to 30th Septemberread more, it is a budget surplus. This extra amount can be used to pay off debts that the government might have taken from the public or other nations.

Key Takeaways

  1. A budget surplus refers to a virtuous situation where the government’s earnings are more than its spending in a particular quarter or year. 
  2. The government’s surplus is used to build a country’s military, fight the budget deficit, pay off debts taken by the world bank, etc.
  3. A budget surplus is a situation where money flow in the market decreases due to increased government earnings, which causes a deflationary effect.
  4. However, a budget surplus causes a decrease in demand for bonds, which again causes a decline in household income because of fewer interests. 

Budget Surplus Explained

The budget surplus definition specifies it as an income that the government is left with after covering all its expenses. This amount helps it to get rid of the debts from the public and other nations. Moreover, if the surplus can be channelized well, it can increase military power and safeguard the country from a sudden recession.

The government often keeps some money aside 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. read more. It gets difficult to manage the budget deficit by borrowing from other nations or the public every time.

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Causes & Effects

The cause of the budget surplus could be anything that leaves the government with a significant amount after covering all expenses from the revenue that it generates from taxes, fees, charges, investments, etc. However, its effects are many.

Let us have a look at some of them:

Examples

Let us consider the following budget surplus examples to understand the concept better:

Example 1

Suppose nation A suffers from a budget deficit of $20 billion. However, the current earning after paying all regular expenses is $30 billion. This amount is the budget surplus for the government of nation A, from which it pays off its debt along with the applicable interest, accounting for a total payment of $26 billion. The remaining $4 billion enters the government’s reserves.

Example 2

Ireland recorded the highest EU budget surplus in 2022. This 2% of the gross national income accounted for 5.2 billion euros, which reflected a completely opposite scenario compared to 2021 when the nation recorded a deficit of 7 billion euros. The growth in the tax figures played a major role in helping the Irish reach this point.

Advantages

  • It is a very important plan when the economy is running in a boom. It helps set aside funds for future deficits that the economy may face.
  • Money from the budget surplus helps fund the military. Military expenditure is very important for the country, but it doesn’t add to its well-being. Money spent on guns and ships can fund education and healthcare. Thus, it is good if the government covers the military expenditure using surplus money.
  • When the government needs money to fund its expenditure, they borrow money from the public or other wealthy nations. Borrowing money costs interest. To prevent a country from paying huge sums as interest, it repays loans when it has money to do so. So it is an important step that helps the government pay off its debts.

Disadvantages

  • During the recession, this policy exhibits an increased deteriorating effect. A recession is when there is less money in the hands of people. If the government decides to increase taxes and limit expenditure for economic recovery, it imposes a negative effect on it.
  • It decreases the demand for bonds. As the government stops borrowing, the interest rate on a bond falls, diminishing the yield value simultaneously. So, it is a loss for households as they receive less interest.

Budget Surplus Vs Budget Deficit

Budget surplus and deficit are two opposite terms that an economy comes across every now and then. While the former indicates the additional money the government has after covering its expenses, the latter signifies the extra amount the government must have to cover its expenses completely.

Some of the differences between the terms are as follows:

Frequently Asked Questions (FAQs)

Is it good to have a high budget surplus in financial planning?

Surpluses aren’t particularly good or bad. However, prolonged periods of surpluses or deficits are unhealthy for a country.

How to cure a deficit budget?

Promoting economic growth is one of the best strategies to lower the budget deficit as a percentage of GDP. The government will generate more tax revenue without raising taxes if the economy expands. People pay more VAT, businesses pay more corporation tax (a tax on profits), and employees pay more income tax when the economy grows.

Are budget surplus funds an asset?

Although one can invest cash from equity to turn them into assets, the surplus funds from the budget are not assets. Therefore, the statement of retained earnings is another place to record retained earnings.

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