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What Is a Surplus Budget

8 Mins 31 Jan 2024 0 COMMENT
What is Surplus Budget

When a government’s revenue is more than its expenditure, it’s called a Surplus Budget. A Surplus Budget occurs when the government prepares its annual plan in a manner that its expenses don’t exceed its revenue. In such a scenario, it is able to keep its spending on wages, infrastructure creation, defence, healthcare, pension, interest payments, subsidies within the revenue it is going to earn through taxes, duties, monetization of assets, interest and so on.

Budget Surplus Example

The formula for a budget surplus is S = T – G – TR, where
S = Government savings =
T = Tax revenue = Rs. 20,000 crore
G = Government spending on goods and services = Rs. 15,000
TR = Transfer payments = Rs. 2000 crore
Thus, by the above formula and the figures in the example,
S = Rs. 20,000 crore – Rs. 15,000 – Rs. 2,000 crore = Rs. 3,000 crore


Countries like Ireland, Germany, Switzerland, and South Korea usually post budget surpluses. Kuwait posted a budget surplus in 2022-23, thanks to high oil prices in the year. Saudi Arabia posted a budget surplus in 2022, again due to high oil prices. In the last couple of years, Brazil has also posted monthly budget surpluses, owing to booming exports of commodities, mainly agricultural.

How a Budget Surplus Impacts the Economy

A budget surplus is a good thing and reflects sound fiscal management by the government. A budget surplus means the government has resources to spend on infrastructure creation and its welfare plans without having the need to borrow or borrow less. Since the government’s borrowing needs are not there or less, it allows the private sector to raise funds at low interest rates. This keeps cost of their operations low and enhances their profitability. It also enables greater investments in R&D, education, healthcare, infrastructure creation and a robust business ecosystem.

Risks of a Surplus Budget

The risk of a surplus budget is that government can get too narrowly focused on ensuring a surplus. This may lead to them compromising on investments in R&D, education, healthcare and infrastructure. It can also lead to higher taxes as revenue generated from economic activities may not be enough for investments in job-creating activities. As a result, government may find it easier to hike taxes and milk the existing base of taxpayers.

Advantage of Surplus Budget

A surplus budget ensures fiscal discipline on the part of the government. It helps them to focus on projects and schemes that are most important for the growth of the economy. When a government does not borrow, it leaves space for private sector to borrow at low interest rates. It also prevents unhealthy competition between political parties to resort to populist schemes and borrow excessively to fund their pet projects. This leads to a fair and equitable society that lives in peace, while laying emphasis on innovation, competence and fairness.

Disadvantages of Surplus Budget

A government that is obsessed with a surplus budget may focus too much on fiscal discipline. At times, this can lead to lack of investments in R&D, innovation and infrastructure. This can have long-term damage on the country’s economy as technological advancements need research and innovation to flourish. It can also keep such countries behind those who are investing heavily in R&D, even if that means taking on large debt.

It can also lead to harassment of common citizens if the tax officials are given strict targets to chase collections. It can then have an adverse impact where citizens look for loopholes to hide their earnings to show lower incomes and hence pay less tax.

Over time, due to lack of investments in existing and new infrastructure, it can lead to inadequate job creation and poor roads, ports and other infrastructure, that in turn hurts the country’s trade and economy. Lack of jobs also results in lower tax collections, showing that a surplus budget can also put into motion a vicious cycle that’s difficult to come out of.

Is a Budget Surplus a Good Thing?

A budget surplus is an outcome of good fiscal management and hence, it’s mostly a good thing. It reflects an efficient economy where tax compliance is high and politicians are not indulging in populist schemes. This ensures that there are few distortions in the economy and everybody is doing their duty. It means politicians are not resorting to gimmicks and understand their responsibility. It also leads to a fair and just society.

How do you calculate a budget surplus

A budget surplus is calculated by subtracting all the expenditure of the government including interest payments and outward remittances from its revenue that includes taxes, dividends from companies, fee from services, interest from loans and inward remittances.

Conclusion

A budget surplus is a good thing but economic management needs flexibility as the environment evolves. What is good at one point of time may not be as good in another time zone. It is thus important that a government keeps good advisors and responds to evolving situations. It may not be a bad idea to run a little deficit if it is directed at infrastructure building, job creation and other useful and productive economic activities. To what extent and how far that deficit should go is what will differentiate between good and bad economic management.