What Is A Budget Surplus?

Even though it's been a long time since the United States has actually experienced a budget surplus (the last time the government ran a surplus was in 2001), understanding what a budget surplus is can be important when discussing and understanding budgeting at every level. Plus, since surpluses at the government level can have significant impacts on the country's overall economy, it's important to understand how a surplus can affect your life. First, despite what it might seem like on the surface, there are both positive and negative factors to consider about a budget surplus as opposed to a budget deficit. At its simplest, a budget surplus is when a company or government has more income than expenditures. For an individual, this tends to be referred to as savings.

Surpluses allow people, companies, and even governments to pay off existing debts and/or reinvest in people, research, and new opportunities. However, how exactly a government or company got to a place of surplus is key. For instance, if a government has accomplished a surplus through extremely high taxes and/or by cutting public services and benefits, then the surplus is not all that beneficial to the people or the economy of that country. With that in mind, remember that there are both pros and cons to running a budget surplus, and it's not necessarily required for a company or a government to experience economic growth (although it can certainly help, depending on the factors that led to it).

Pros of a budget surplus

A budget surplus typically means the budget is being handled effectively. On top of this, a surplus could also be a sign of a healthy economy. Again, this depends on the specific factors that have led to the budget surplus in question. With that said, on the whole, budget surpluses can help reduce the need for borrowing (through either corporate or government bonds) and can thereby help to reduce interest rates. Reduced interest rates can allow people to borrow money for less, which can impact the overall economic activity within a country significantly. Since people are able to shop for small and large things alike more easily (from clothing to houses), they're more likely to fuel economic stimulus.

Further, if a company or government is operating at a surplus, then they're also saving money. This money can be used for myriad things, like reducing the level of existing debt that a country might have and/or expanding or creating new programs and services. Since the debt level would, in theory, be significantly lower than a country or company experiencing a deficit, they're more easily able to borrow in the event they did want to increase spending. Plus, since the government is essentially taking money out of the general economy by saving it, a budget surplus can be helpful in curbing inflation.

Cons of a budget surplus

Despite its seemingly positive nature, a budget surplus can also cause unintended consequences. Namely, budget surpluses can lead to price increases. Using the government as an example, a surplus could affect inflation levels, as well as a country's gross domestic product, or GDP.

Of course, as anyone who's experienced the post-pandemic economy can tell you, inflation can absolutely be an issue while running a deficit like the U.S. is today. The reason a surplus can lead to GDP impacts has to do with spending. Since having a surplus tends to mean a country is spending less, this also means there's generally less money circulating in the economy — this can cause the economy to stall. Also, such conditions can cause deflation (the decline of prices for goods and services) to occur. While deflation may sound good on its surface, over time, it can be especially problematic for borrowers as the value of money increases.

What's more, a drop in spending can also lead to a drop in investments; this can lead to a drop in overall revenues due to the need for more investment returns. Combining this lack of investment revenue with the effects of deflation can lead to tough economic decisions for companies and/or governments. Many would choose to increase the prices of things, like goods, and even taxes, to essentially try and combat not only deflation but also their lack of revenues.