In this article:
- What Is a Budget Surplus?
- Causes of a Budget Surplus
- Effects of a Budget Surplus
A budget surplus is when a government, business or individual brings in more money than is spent in a given period. It's the opposite of a budget deficit, which is when an entity spends more than it collects.
Often, when people talk about budget surpluses and deficits, they're referring to the national deficit or surplus. In the U.S., budget surpluses are fairly rare; there have been five budget surpluses in the past 50 years, and the most recent surplus was in 2001. Here's how budget surpluses happen and their potential impacts on the national economy.
What Is a Budget Surplus?
A national budget surplus is when the government collects more in taxes than it spends in a given year. In other words, if the government's earnings are greater than its outlays (or spending) in a given year, there's a surplus.
On the other hand, if it spends more than it earns, there's a budget deficit. For example, in 2023, the U.S. federal government spent $6.13 trillion and brought in $4.44 trillion in revenue. This resulted in a budget deficit of $1.70 trillion for the year 2023.
When government spending is equal to revenue, the budget is referred to as balanced; in other words, there's neither a deficit or a surplus.
Causes of a Budget Surplus
The fundamental cause of a government budget surplus is when government spending is less than its revenue.
While a budget surplus could be linked to the strength of the economy, a period of economic expansion doesn't necessarily lead to a surplus. National fiscal policy—tax rates and government spending—each play a role.
Here's a breakdown of the factors that can lead to a budget surplus:
- Strong economic growth: When the economy is healthy, individual incomes increase, and the government earns more in tax collections. Also, the government may spend less on social welfare programs such as unemployment benefits. Both of these factors can contribute to a surplus.
- Higher tax revenue: Higher tax revenue can come from the conditions of economic growth described above, but fiscal policy that increases taxes may also decrease deficits.
- Decreased government spending: Decreased government spending can lead to a surplus. For example, in 2001, the year of the most recent surplus, government spending was at its lowest point as a percentage of the economy since 1966.
Effects of a Budget Surplus
A budget surplus is typically considered a good thing because it can be an indication of a strong economy. Also, a surplus can be invested toward lowering the national debt or recirculated by increasing social spending or tax reform.
On the other hand, a surplus could be the result of fiscal policies with potential negative impacts, such as decreased spending on economic welfare programs.
The Bottom Line
Government deficits and surpluses are macroeconomic factors that influence and are influenced by the national economy and fiscal policy. For example, high budget deficits and a resulting high national debt can place a strain on the national budget and contribute to increased interest rates.
Staying up to date on the latest financial news is a good way to stay informed on macroeconomic trends. Beyond minding national trends, be sure to focus your attention on your personal household economy. For example, consider signing up for free credit monitoring through Experian and tracking your spending. You might be able to create your own budget surplus.
