Definition: When income exceeds the expenditures in the same duration, it is called a budget surplus. Businesses and governments use this term, but individuals are more likely to use the term “savings.” A budget surplus shows the business is doing well and funds are managed effectively.
A budget surplus is a good thing for businesses and the government. This is an excess amount of money, and the government can invest these funds in economic growth.
Organizations can use surplus funds for growth, business acquisitions, and new ventures.
The government can use the surplus budget to reduce the public debt, reduce interest, and help grow the economy. It can invest these funds in infrastructure development, social security, medical care, etc.
Note that when the expenditures exceed the income, it is called a budget deficit and is the least desired condition. When expenditures and income are equal, it is called a balanced budget and is an acceptable condition.
Apart from the budget surplus, a business can have the following types of surplus:
- Inventory Surplus: The business has more inventory than it sells in an inventory surplus. For example, you have 100 items in inventory but sold only 80. In this case, 20 items are known as inventory surplus. It is more inventory than required.
- Consumer Surplus: Here, the product cost is less than the cost the customer is willing to pay. For example, the customer is willing to pay 20 USD for the product, but the product price is 15 USD. The consumer surplus is the difference between these prices, i.e., 5 USD.
- Producer Surplus: The business sells the product at a higher price than they are willing to sell. For example, the product cost is 10 USD, and they are willing to sell it at 12 USD, but they decide to sell it at 15 USD. The producer surplus of 3 USD is the difference between the minimum price and the price they sell the product for.
Cause of Budget Surplus
A budget surplus can occur due to the following reasons:
- Efficient expense management
- Reduced expenditures
- Increased taxes by the government
Example of Budget Surplus
For example, consider that your government’s annual budgeted expenses were 100,000 USD and the estimated revenue was the same. It was a balanced budget, but the government collected more taxes due to positive economic growth, and the revenue was 120,000 USD.
In this case, the government has an extra 20,000 USD on hand.
Pros of Budget Surplus
- Organizations or governments will have extra funds on hand
- Funds can be used to help grow the business
- It reduces government debt
- Lower interest rates and increased economic growth
Cons of Budget Surplus
- Increased taxes
- Misuse of funds could occur
- Lower spending
Most governments release budget information yearly, but the US government provides this information monthly. Here, the public can see the government expenses and income and whether they are as planned.
Summary
A budget surplus is a savings or extra money on hand, which is usually good. Governments, businesses, or individuals can use this surplus budget to grow, pay off debt, or launch new ventures.