Economics of a Budget (Fiscal) Surplus

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.

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