Budget Surplus

What Is a Budget Surplus?

A budget surplus is the situation in which a government collects more money in tax revenue and other income than it spends over a given period, usually a fiscal year. It is the reverse of a budget deficit, which occurs when spending exceeds revenue. The difference between the two is typically reported as the government's budget balance.

How It Is Calculated

The basic calculation is simple:

Budget balance = Government revenue − Government spending

If the result is positive, the government has a surplus. If it is negative, the government has a deficit. Analysts also often look at the primary balance, which leaves out interest payments on government debt. A government can run a primary surplus while still posting an overall deficit if its interest costs are large.

Why Surpluses Happen

Surpluses are influenced by the state of the economy. When growth is strong, incomes and profits rise and tax receipts climb, while spending on programs such as unemployment benefits tends to fall. These automatic changes are sometimes called automatic stabilizers. Governments can also run surpluses deliberately through fiscal policy decisions, such as cutting spending or raising taxes. Surpluses are more common in some periods than others. The United States recorded federal surpluses in the late 1990s, for example.

Why It Matters to Investors

A surplus means the government does not need to borrow to cover its spending in that period. If the surplus is used to repay debt, the amount of outstanding government debt and the interest it generates can fall. Some investors read persistent surpluses as a sign of fiscal health, while others note that they can reduce the supply of government bonds in financial markets. A surplus is not automatically good or bad. Its effect depends on the economic conditions in which it occurs and on how the money is used.