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Definition of a Budget Surplus:
A budget surplus
is the amount that an individual’s, company’s, or government’s income exceeds its spending.
Governments have a budget surplus when tax revenues exceed government spending. For example, if the government is paid $3.5 trillion in taxes and other revenue, and spends $3.0 trillion in the same year, it has a budget surplus of $0.5 trillion. Sometimes a budget surplus is referred to as a “balanced budget” even though the budget is not balanced. Families normally refer to a budget surplus as “savings”, and businesses use the term “net cash flow” rather than budget surplus. A budget deficit is the opposite of a surplus.
The added revenue can be spent, invested, or used to pay down a debt. Families may spend the money on an item it needs or a luxury. They may also invest the money in a savings account, stocks, or perhaps real estate. Another option is to pay down a debt such as a mortgage, car loan or credit card. Businesses may pay their employees bonuses, their shareholders dividends, or invest in an income generating asset such as new equipment or factory.
Governments may spend a surplus on a program. They also can invest a surplus – perhaps in infrastructure improvements, education, or other areas that further the country’s economic growth. Any surplus that is not spent is used to pay down the national debt. Governments have another option – reducing taxes. Families or businesses normally do not consider reducing their income when blessed with a surplus (although an individual may consider cutting back on working in favor of leisure).
Since 1970, the United States has had a budget surplus in only four years, 1998 through 2001. The graph below clearly illustrates how uncommon a surplus is and the exponential growth in public expenditures and the rising deficits.
Source: U.S. Government Publishing Office
Dig Deeper With These Free Lessons:
The Federal Budget and Managing The National Debt
Fiscal Policy – Managing an Economy by Taxing and Spending
Monetary Policy – The Power of an Interest Rate
Fractional Reserve Banking and The Creation of Money