What Is a Budget Surplus? Impact and Pros & Cons

What Is a Budget Surplus?

A budget surplus occurs when a business or government’s revenue exceeds its expenses during its fiscal year. Strong growth, high tax or sales revenue, and a drop in spending can all lead to a budget surplus. The surplus can be used to pay for research, new projects, or existing debt. A surplus can be risky, though, as businesses are less likely to invest when the economy is strong. The opposite of a surplus is a budget deficit, which occurs when expenses exceed revenue.

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 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. A surplus indicates that its finances are being managed effectively. 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.

Risks of a Budget Surplus

Having funds in the coffers can be a sign of prudent spending but that doesn’t mean that running a surplus is always beneficial. 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.

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.

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.

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.