how a budget surplus impacts the economy
as noted above the term budget surplus is often used to define the financial situation of a company or government these entities often run in surpluses when income or revenue exceeds spending or when there are shifts in the economic climate or the way governments spend taxpayers money an increase in taxes can also result in a budget surplus individuals can also run surpluses but their surpluses are commonly called savings a surplus implies the government has extra funds which can be used for many different purposes including making purchases paying off debts or saving for future generations the following are some of the ways surpluses may be used a budget surplus can often be an indicator of a healthy economy but it is not necessary for a government to maintain a surplus the u s has rarely run a budget surplus and experienced long periods of economic growth while running a budget deficit which is the opposite of a surplus 31 a budget deficit occurs when expenditures exceed income money is borrowed and interest is paid when a deficit occurs a balanced budget on the other hand exists when expenditures equal income risks of a budget surplushaving funds in the coffers can be a sign of prudent spending but it doesn t mean that running a surplus is always beneficial as such it can sometimes come with its own problems the main risks of running a budget surplus are the decline in investment revenue and higher taxation when companies or governments run a surplus they re not spending or investing as much when investment drops returns aren t generated similarly when there s a drop in revenue there isn t enough money going through the economy in order to compensate and prevent deflation governments may have to raise taxes and companies may need to raise prices keynesian economics theory suggests that entities should run a surplus during times of prosperity and a deficit during a downcycle or depression this allows the company or government to save money when it is well off and to spend money on economic stimulus when the economy is less well off the size of the national deficit in the united states as of january 2023 2advantages and disadvantages of a budget surplusthere is no simple answer as to whether a budget surplus is good or bad running a surplus has its advantages the same way running a deficit does the best action depends on the entity s specific economic situation and priorities having said that we ve highlighted some of the most common pros and cons of running a budget surplus running a budget surplus means there is additional money to spend at the end of the accounting period which is generally a fiscal year this extra cash can be used to pay off debts or be reinvested in other projects it can even be returned to the public in the form of price or tax cuts a large surplus also reduces the need for borrowing through corporate or government bond issues this will reduce interest rates in that country allowing people and businesses to borrow money at a lower cost running a surplus is not always an unmixed blessing although it may seem wise for a government to save money those savings mean that the wider economy will not benefit from the multiplier effect of government spending in addition those savings could mean less spending on public services a budget surplus can also affect a company s economic standing or a country s inflation levels and gross domestic product gdp in the case of governments spending is one of the four components of gdp meaning that a government that struggles to reduce its spending will ultimately reduce its gdp since lower spending reduces the amount of money circulating in an economy deflation can occur facilitates the saving of moneyincreases credit ratings and reduces borrowing costslowers interest rates and encourages economic activitycan lead to price hikes or excessive taxationless economic stimulus from spendingreduces the amount of money circulating in an economy potentially causing deflationu s budget surplusesthe u s treasury releases government budget information on a monthly basis budget surplus or deficit data appears in the statements which summarize whether the government is spending or collecting more money than expected in addition the data records future collections or changes to the budget 4as noted above the u s government eliminated a large budget deficit while bill clinton was president this resulted in a budget surplus in the 2000 fiscal year revenue came in at 2 025 trillion while the total spending bill for the year ended up at 1 788 trillion this resulted in a budget surplus of about 236 billion 1this surplus ended just after the september 11 attacks in 2001 the federal government has been running at a deficit since then although the size of the deficit rose and fell in accordance with economic circumstances for instance the deficit grew to 1 41 trillion in 2009 in the aftermath of the great recession before slowly declining as the economy recovered this was the highest deficit of the 21st century at least until the covid 19 pandemic when the deficit again ballooned to more than 3 trillion 5