Budget Surplus

What Is a Budget Surplus?

A budget surplus occurs when income exceeds expenditures. The term often refers to a government's financial state, as individuals have "savings" rather than a "budget surplus." A surplus is an indication that a government's finances are being effectively managed.

Key Takeaways

  • A budget surplus is when income exceeds expenditures.
  • When a government runs a surplus, they have additional money that can be reinvested or used to pay off debts.
  • A deficit is the opposite of a surplus. When spending exceeds revenues, the government must borrow money in order to fund spending.
  • The last time the U.S. ran a budget surplus was in 2001.
  • In 2021, the U.S. budget had a deficit of more than $2.8 trillion.
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Budget Surplus

Understanding Budget Surplus

A budget surplus might be used to make a purchase, pay off debt or save for the future. A city government with a budget surplus may use the money to make improvements, such as revitalizing a decaying park or downtown area.

When expenditures exceed income, the outcome is a budget deficit. When deficits occur, money is borrowed and interest is paid, similar to an individual spending more than they earn and paying interest on a credit card balance. A balanced budget exists when expenditures equal income.

During the final years of Bill Clinton's presidency, the U.S. government eliminated a large budget deficit, resulting in a surplus. A surplus is a positive value and is the sum by which revenues are greater than spending during a set period, usually a fiscal year. For example, in 2000, receipts for the year totaled $2.025 trillion, while expenditures were $1.788 trillion. This resulted in a budget surplus of about $236 billion.

Economic and spending changes generate a surplus. A budget surplus is one indicator of a healthy economy. However, it is not necessary for a government to maintain a surplus. The U.S. has rarely run a budget surplus and has experienced long periods of economic growth while running a budget deficit.

A surplus implies the government has extra funds. These funds can be allocated toward public debt, which reduces interest rates and helps the economy. A budget surplus can be used to reduce taxes, start new programs or fund existing programs such as Social Security or Medicare. A budget surplus can occur when growth in revenue exceeds growth in expenditures or following a reduction in costs, spending, or both. An increase in taxes can also result in a surplus.

Impact of a Budget Surplus

Although having unspent funds can be a sign of prudent spending, running a surplus is not always beneficial, and can sometimes come with its own problems. Most countries could gain a budget surplus by increasing their tax revenues, but the economic consequences of higher taxes could diminish the value of running at a surplus.

Keynesian economics suggests that governments should run a surplus during times of prosperity, and a deficit in times of depression. This allows the government to save money when it is well off, and to spend money on fiscal stimulus when the economy is less well off.

$3 trillion

The size of the U.S. deficit in 2020, the first year of the coronavirus pandemic.

Advantages and Disadvantages of a Budget Surplus

Running a budget surplus means that government bodies will have additional money to spend at the end of an accounting period. This extra cash can be used to pay off government debts or reinvested in other government projects. It can even be returned to the public in the form of a tax cut.

A large surplus also reduces the need for borrowing through bond issues. This will reduce interest rates in that country, allowing people and businesses to borrow money at a lower cost.

However, 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 country's inflation levels and GDP. Government spending is one of the four components of GDP, meaning that a government that struggles to reduce spending will ultimately reduce that country's GDP. Moreover, since lower spending reduces the amount of money circulating in an economy, this can result in deflation.

Ultimately, there is no simple answer to whether a budget surplus is a good or a bad thing. Both surpluses and deficits have their own advantages, and the best action depends on a government's specific economic situation and priorities.

Pros & Cons of Budget Surplus

Pros
  • Allows government to save money.

  • Paying government debts can increase the government's credit rating and reduce the cost of borrowing.

  • Can lower interest rates, ultimately encouraging economic activity.

Cons
  • Since government funds come from tax revenues, running a high surplus can mean excessive taxation.

  • Running a surplus means less economic stimulus from government spending.

  • Lower spending reduces the amount of money circulating in an economy, potentially causing deflation.

U.S. Budget Surpluses

The 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.

During the final years of Bill Clinton's presidency, the U.S. government eliminated a large budget deficit, resulting in a surplus. A surplus is a positive value and is the sum by which revenues are greater than spending during a set period, usually a fiscal year. For example, in 2000, receipts for the year totaled $2.025 trillion, while expenditures were $1.788 trillion. This resulted in a budget surplus of about $236 billion.

This surplus ended just after the September 11 attacks in 2001. Every year since then, the federal government ran at a deficit, although the size of the deficit rose and fell according to economic circumstances.

In 2009, the deficit grew to 1.41 trillion in the aftermath of the Great Recession, before slowly declining as the economy recovered. This was the highest deficit of the twenty-first century–at least until the coronavirus pandemic when the deficit again ballooned to more than 3 trillion.

Is a Budget Surplus a Good Thing?

A budget surplus is generally considered a good thing, because it means that the government has money left over that can be reinvested or spent to pay off debts. However, it depends on how wisely the government is spending money: if the government has a surplus because of high taxes or reduced public services, that can result in a net loss for the economy as a whole.

What Is a Budget Surplus vs. a Budget Deficit?

A budget surplus is when a body (such as the U.S. government) spends less money during an accounting period than it takes in through revenue. A deficit is when spending is higher than revenue, requiring the government to borrow money in order to finance its activities.

What Is the Current U.S. Budget Deficit?

In 2021, the federal budget deficit totaled nearly $2.8 trillion. This is equal to about 15% of the U.S. GDP for that year but lower than the deficit for 2020.

Has the U.S. Ever Had a Budget Surplus?

Yes. During the Clinton presidency, the federal government was able to reduce spending and increase revenues, turning a large deficit into a small surplus. The last year where the government ran a budget surplus was in 2001.

Article Sources
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  1. White House, Office of Management and Budget. "Historical Tables," Table 1.1.

  2. Federal Reserve Bank of St. Louis. "Real Gross Domestic Product."

  3. BoyceWire. "Budget Surplus Definition: Effects, Advantages, Disadvantages."

  4. U.S. Department of the Treasury, Bureau of the Fiscal Service. "Monthly Treasury Statement."

  5. Statista. "Surplus or Deficit of the U.S. Budget in Fiscal Years 2000 to 2026."

  6. Congressional Budget Office. "Monthly Budget Review: Summary for Fiscal Year 2021."

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