Budget Surplus Definition Effects How To Interpret

Budget Surplus Definition

The government has several ways of earning, but its primary source of revenue is taxes. If the taxes earned are more than what the government has spent in a fiscal yearFiscal YearFiscal Year (FY) is referred to as a period lasting for twelve months and is used for budgeting, account keeping and all the other financial reporting for industries. Some of the most commonly used Fiscal Years by businesses all over the world are: 1st January to 31st December, 1st April to 31st March, 1st July to 30th June and 1st October to 30th Septemberread more, it is a budget surplus. In addition, it can be used to pay off debts that the government has taken from the public or other nations.

How It is Used?

These are mainly used to pay off the government’s debts from the public or other nations. Government surplus is often used to strengthen a country’s military and can be used to create public parks or build government hospitals.The government often keeps some money aside to fight during a budget deficitBudget DeficitBudget Deficit is the shortage of revenue against the expenses. The budgetary deficit could be the sum of deficit from revenue and capital account. read more. It gets difficult to manage the budget deficit by borrowing from other nations or the public every time.

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Key Takeaways

A budget surplus refers to a virtuous situation where the government’s earnings are more than its spending in a particular quarter or year. The government’s surplus is used to build a country’s military, fight the budget deficit, pay off debts taken by the world bank, etc.A budget surplus is a situation where money flow in the market decreases due to increased government earnings, which causes a deflationary effect.However, a budget surplus causes a decrease in demand for bonds, which again causes a decline in household income because of fewer interests.

Effects of Budget Surplus

The demand for bondsBondsBonds refer to the debt instruments issued by governments or corporations to acquire investors’ funds for a certain period.read more decreases as the government stops borrowing. So the yield of the bond marketYield Of The Bond MarketThe bond yield formula evaluates the returns from investment in a given bond. It is calculated as the percentage of the annual coupon payment to the bond price. The annual coupon payment is depicted by multiplying the bond’s face value with the coupon rate.read more falls and it helps corporations issue more bonds at lower interest levels. On the other hand, it is a loss for the households who buy bonds as they will be getting less interest in purchasing bonds.The growth of the economy decreases as the government starts taking more in taxes, and also, the spending of the government is low to make up the budget deficit.Consumption power decreases as the money supply becomes less.

Difference Between Budget Surplus and Budget Deficit

The budget surplus is when the government earning is more than the spending, whereas, in the budget deficit, government spending is more than its income. It may happen when the government collects fewer taxes or starts spending more. In both scenarios, money is flown in the economy, and purchasing power increases.It helps in making the economy strong, and growth can be noticed.If the budget surplus happens during the booming period, monetary policyMonetary PolicyMonetary policy refers to the steps taken by a country’s central bank to control the money supply for economic stability. For example, policymakers manipulate money circulation for increasing employment, GDP, price stability by using tools such as interest rates, reserves, bonds, etc.read more can tackle it. So if the government starts taking more taxes and the economy slows down, that can be tackled by expansionary monetary policyExpansionary Monetary PolicyThe central bank uses expansionary monetary policy to increase the supply of money while lowering the interest rate and increasing demand. This is done to boost a country’s economy.read more.Suppose the economy is in the depression phase. In that case, it becomes difficult to recover if the government starts to plan a budget surplus as the economy itself is in depression. On top of that, the government decreases expenditure and increases taxes. At times surplus is good as the money saved can be used to pay off government debts and create an abundance for future deficits.

Advantages

It is a very important plan when the economy is running in a boom. It will help set aside funds for future deficits that the economy may face.Money saved from budget surplus can be used to fund the military. Military expenditure is very important for the country, but it doesn’t add to its well-being. Money spent on guns and ships can fund education and healthcare. Thus, it is good if the military expenditure can be done from surplus money.When the government needs money to fund its expenditure, they either borrow the money from the public or takes it from other wealthy nations. Borrowing money costs interest that needs to be paid. To prevent a country from paying huge sums as interest, it always plans to repay loans when it has money to do so. So it is an important step that helps the government pay off its debts.

Disadvantage

During the recession, such a policy will have an increased deteriorating effect. Recession times are when there is less money in the hands of people. If the government decides to increase taxes and limit its expenditure to recover the economy, it will harm it.It decreases the demand for bonds. As the government stops borrowing, the interest rate on a bond falls, and the yield falls. So it is a loss for households as they will be getting less interest.

Conclusion

The budget surplus is a very important plan taken by the government to get rid of debts from the public and other nations. Moreover, if the surplus can be channelized well, it can increase military power and safeguard the country from a sudden recession.