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.
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 September, 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.
Table of contents
- A budget surplus refers to a virtuous situation where the government’s earnings are more than its spending in a particular quarter or year.
- 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.
- A budget surplus is a situation where money flow in the market decreases due to increased government earnings, which causes a deflationary effect.
- 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. . It gets difficult to manage the budget deficit by borrowing from other nations or the public every time.
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:
- The demand for bondsBondsBonds refer to the debt instruments issued by governments or corporations to acquire investors’ funds for a certain period. 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 issue more bonds at lower interest levels. On the other hand, it is a loss for the households that buy bonds as they receive less interest in purchasing bonds.
- The growth of the economy decreases as the government starts asking for more taxes, and also, lowering the spending to make up the budget deficit.
- Consumption power decreases as the money supply becomes less.
Let us consider the following budget surplus examples to understand the concept better:
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.
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.
- 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.
- 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:
- A budget surplus is when the government’s earnings are more than the spending. On the other hand, in a budget deficit, government spending is more than its income. It may happen when the government collects fewer taxes or starts spending more. In both scenarios, money flows in the economy, and the purchasing power increases.
- It helps in making the economy strong, indicating a noticeable growth.
- If the budget surplus happens during the booming period, monetary policyMonetary PolicyMonetary policy refers to the steps taken by a country’s central bank to control the money supply for economic stability. For example, policymakers manipulate money circulation for increasing employment, GDP, price stability by using tools such as interest rates, reserves, bonds, etc. can tackle it. So, if the government starts taking more taxes and the economy slows down, expansionary monetary policyExpansionary Monetary PolicyThe central bank uses expansionary monetary policy to increase the supply of money while lowering the interest rate and increasing demand. This is done to boost a country's economy. enables it to tackle the situation.
- Suppose the economy is in the depression phase. In that case, it becomes difficult to recover if the government plans a budget surplus. This is because the plan won’t work as the economy itself is in a depression. On top of that, the government decreases expenditures and increases taxes. At times, the surplus is good as the saved money helps pay off government debts. In addition, it can also create an abundance against future deficits.
Frequently Asked Questions (FAQs)
Surpluses aren’t particularly good or bad. However, prolonged periods of surpluses or deficits are unhealthy for a country.
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.
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.
This has been a guide to what is Budget Surplus. Here we explain its examples, vs budget deficit, along with effects, causes, advantages, and disadvantages. You can learn more about from the following articles –