What Is a Budget Surplus? What's the Impact, and Pros & Cons?

What Is a Budget Surplus?

The term budget surplus refers to a situation that occurs when income exceeds expenditures. The term is often used to describe a corporation or government's financial state, unlike individuals who have savings instead of budget surpluses. A surplus indicates that a government's finances are being effectively managed. The opposite of a budget surplus is a budget deficit, which commonly occurs when spending exceeds income.

Key Takeaways

  • A budget surplus is when income or revenue exceeds expenditures.
  • Governments and companies with surpluses have additional money that can be reinvested or used to pay off debts.
  • The opposite of a surplus is a deficit, which occurs when spending exceeds revenues.
  • The last time the U.S. ran a budget surplus was in 2001 under President Bill Clinton.
  • The U.S. budget had a deficit of more than $421 billion as of January 2023.
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Budget Surplus

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 company can apply its budget surplus to the research and development (R&D) of a new product line.
  • A municipal government may use its budget surplus to make improvements like revitalizing a decaying park or downtown area.
  • State surpluses can be used to reduce taxes, start new programs, or fund existing programs such as healthcare.
  • A country's federal government may allocate its surplus toward public debt, which can reduce interest rates and help the economy.

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. 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 Surplus

Having 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.

$421 billion

The size of the national deficit in the United States as of January 2023.

Advantages and Disadvantages of a Budget Surplus

There 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.

Advantages

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.

Disadvantages

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.

Pros
  • Facilitates the saving of money

  • Increases credit ratings and reduces borrowing costs

  • Lowers interest rates and encourages economic activity

Cons
  • Can lead to price hikes or excessive taxation

  • Less economic stimulus from 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.

As 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.

This 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.

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?

The U.S. budget is running a deficit of over $421 billion as of January 2023.

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.

The Bottom Line

Budget surpluses occur whenever an entity has more income than it spends. This includes companies and governments. Individuals can also have surpluses, although they're normally called savings. Having a surplus can be beneficial because those funds can be used to pay off debt or fund new investments. But there are risks to running a surplus, which include increased taxation or pricing and a loss of revenue. So whether an entity runs a surplus or a deficit can often be a double-edged sword.

Article Sources
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  1. The White House. "Historical Tables," Table 1.1.

  2. Fiscal Data. "What is the national deficit?"

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

  4. Bureau of the Fiscal Service. "Monthly Treasury Statement."

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

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