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Economics of a Budget (Fiscal) Surplus

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Last updated 20 Oct 2019

In this video we will look at aspects of the economics of countries running a budget or fiscal surplus.

A government runs a budget surplus when total tax revenues exceeds government spending in any given year. This is also known as a fiscal surplus. A budget surplus can either be expressed in nominal terms or as a percentage of a nation’s national income (GDP). The budget surplus might be adjusted to take account the effects of the economic cycle.

Economics of a Budget (Fiscal) Surplus

Budget surpluses are rare for the UK. The last one happened nearly twenty years ago.

What might cause a budget surplus?

  • Strong tax revenues e.g. from high employment, rising incomes or taxes of profits / rents from natural resource exports.
  • Typically a government’s fiscal position improves when the economy is experiencing a period of strong economic growth.
  • Direct and indirect tax revenues grow (including the effects of fiscal drag) whilst welfare spending drops (as unemployment declines).
  • But a fiscal surplus might also be the result of a long period of fiscal austerity involving higher tax rates and deep cuts in state spending.

Advantages of a budget surplus

  • A surplus allows a government to repay some of their existing national debt
  • This might lead to a fall in bond yields which makes future government borrowing less expensive
  • A budget surplus gives a government scope for meeting a future crisis e.g. a fiscal stimulus during a downturn or in response to an external shock
  • Government might use a budget surplus to cut taxes to stimulate the supply-side of the economy
  • Surplus revenues might be used to fund an increase in public sector infrastructure spending

Potential drawbacks of a budget surplus

  • If taxes > government spending, this is a net leakage from the circular flow of income which can have a deflationary effect on real GDP
  • Fiscal austerity to achieve a budget surplus can have damaging effects on the quality of public services and might increase inequality
  • There is nothing inherently wrong in running a budget deficit – especially during a downturn or to increase infrastructure investment
  • There is an argument for countries such as Germany to make bigger use of a fiscal stimulus to help other nations inside the Euro Zone

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