What Is a Budget Surplus? The Impact and Pros & Cons

What Is a Budget Surplus?

A budget surplus occurs when income exceeds expenditures. It is often used to describe the financial state of corporations or governments, unlike individuals who have savings instead of budget surpluses. A surplus indicates effective financial management, while a budget deficit occurs when spending exceeds income.

Key Takeaways

• A budget surplus is when income exceeds expenditures.
• Governments and companies with surpluses can reinvest or use the extra money to pay off debts.
• A deficit 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. currently has a budget deficit of over $421 billion as of January 2023.

How a Budget Surplus Impacts the Economy

A budget surplus describes the financial situation of companies or governments. Surpluses occur when income exceeds spending or due to shifts in the economic climate or government spending. Increases in taxes can also result in a surplus. Individuals can also have surpluses, commonly known as savings.

A surplus provides extra funds for various purposes, such as making purchases, paying off debts, or saving for future generations. Here are some examples:

• Companies can use their budget surplus for research and development (R&D) of new product lines.
• Municipal governments may revitalize parks or downtown areas using their surplus.
• State surpluses can reduce taxes, start new programs, or fund existing programs like healthcare.
• Federal governments can allocate their surplus to public debt repayment, reducing interest rates and helping the economy.

A budget surplus often indicates a healthy economy. However, it is not necessary for a government to maintain a surplus. The U.S. has experienced long periods of economic growth with a budget deficit. This occurs when spending exceeds income and results in borrowing money and paying interest. On the other hand, a balanced budget exists when expenditures equal income.

Risks of a Budget Surplus

While having funds in the coffers can be a sign of prudent spending, running a surplus is not always beneficial and can come with its own problems. The main risks of a surplus are the decline in investment revenue and higher taxation. When companies or governments run a surplus, they are not spending or investing as much. This can lead to decreased investment returns and insufficient money circulating in the economy. To compensate for this, governments may raise taxes, and companies may raise prices.

Keynesian economics theory suggests running a surplus during times of prosperity and a deficit during a downcycle or depression. This allows entities to save money when they are financially stable and spend during economic downturns to stimulate the economy.

$421 billion

The size of the U.S. national deficit 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. It depends on the entity’s economic situation and priorities. Here are some common pros and cons of running a budget surplus.

Advantages

Running a budget surplus means there is extra money at the end of the fiscal year. This money can be used to pay off debts, reinvest in projects, or returned to the public through price or tax cuts.

A large surplus reduces the need for borrowing through corporate or government bonds, lowering interest rates and allowing easier access to funds.

Disadvantages

Running a surplus is not always beneficial. The wider economy may not benefit from the multiplier effect of government spending, and public services may receive less funding.

A budget surplus can also affect a company’s economic standing, inflation levels, and gross domestic product (GDP). Lower spending reduces the money circulating in the economy and can lead to deflation.

• Facilitates saving money
• Increases credit ratings and reduces borrowing costs
• Lowers interest rates and encourages economic activity
• Can lead to price hikes or excessive taxation
• Less economic stimulus from spending
• Reduces the amount of money circulating in the economy, potentially causing deflation

U.S. Budget Surpluses

The U.S. Treasury releases government budget information monthly, including surplus or deficit data. During President Bill Clinton’s term, the government reduced spending and increased revenues, resulting in a surplus. The last year with a budget surplus was 2001. Since then, the federal government has mostly run at a deficit, with varying sizes depending on economic circumstances, such as the Great Recession and the COVID-19 pandemic.

Is a Budget Surplus a Good Thing?

A budget surplus is generally considered a good thing because it signifies extra funds that can be reinvested or used to pay off debts. However, the impact depends on how wisely the money is spent. If high taxes or reduced public services lead to a surplus, it can result in a net loss for the economy.

What Is a Budget Surplus vs. a Budget Deficit?

A budget surplus occurs when spending is less than revenue, while a deficit occurs when spending exceeds revenue, requiring borrowing to finance 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 reduced spending and increased revenues, resulting in a small surplus. The last year with a budget surplus was 2001.

The Bottom Line

Budget surpluses occur when income exceeds expenditures for entities such as companies and governments. Surpluses can be beneficial for paying off debt or funding investments. However, there are risks, such as increased taxation, reduced spending on public services, and potential deflation. Whether running a surplus or a deficit is advantageous depends on various economic factors.