Running a budget surplus carries a number of advantages, including increased flexibility, lower interest costs and the ability to invest in future growth. The sheer size and persistence of the U.S. trade deficits and inflows of foreign capital since the 1980s are a legitimate cause for concern. So flexibility allows governments to increase spending or reduce taxation in order to try and stimulate the wider economy. Management of Public Enterprises 5. A budget surplus occurs when revenues exceed expenses, and the surplus … So what is supply…, Fiat money is a currency without any underlying value, but which value is derived by government. Self Evaluation A cash budget provides you with a basis for comparing your predictions and assumptions with actual events as they unfold. This often provides a short-term stimulus, but at the cost of long-term growth. That reputation for fiscal discipline and sound financial planning can translate into the ability to borrow money at favorable rates, since lenders look at the overall health of the company and its ability to manage its resources wisely. However you call it, they both interact with each other. As government income comes from taxes, it is taking money away from consumers who would otherwise be able to spend that in the wider economy. On the face of it, it can seem like a budget surplus is a good thing. Sovereign Debt - Budget deficits can lead to lower sovereign debt ratings, if structural balances remain in negative territory for too long, while budget surpluses can lead to lower interest rates on sovereign debt due to an improved credit rating. Manage surplus cash. The process of creating a budget takes management away from its short-term, day-to-day management of the business and forces it to think longer-term. Advantages Of Surplus Treaty Reinsurance: Because of the advantages involved, this is the most accepted form of reinsurance now-a-days. If governments decide to use the surplus, they may wish to reduce its debt burden. It doesn’t create money. Continual budget surpluses, or profits , are recorded as Retained Earnings on the Balance Sheet , and are a key source of financing for the company. If this isn’t being spent, it is just sitting there doing nothing – when instead it could be used by private firms to invest in new and productive capital equipment. Interest rates decline as there is more demand for government debt than there is from the government to supply this debt – so investors are willing to take a lower rate. The advantages of budgeting. The budget demonstrates a preference for achieving a surplus rather than running a deficit . In other words,…. If taxation exceeds government spending the result is called a budget surplus. Being in a state of budget surplus is often viewed as positive, and in the case of governments, as a sign that the economy is healthy and the government is being run well. Instead, a budget surplus can be advantageous for a number of reasons such as: On occasion, the economy can ‘heat up’; causing high levels of inflation. Budget surpluses are not necessarily bad or good, but prolonged periods of surpluses or deficits can cause significant problems. For instance, according to OECD data, most European countries have a budget deficit. the trade-offs required to ensure that a surplus can achieved at an appropriate stage of the economic cycle and to reduce overall borrowing costs. In this video we will look at aspects of the economics of countries running a budget or fiscal surplus . Advantages of a Budget Surplus. When he delivered last year's Budget before the election, Treasurer Josh Frydenberg said it was back in the black. From time to time, you might have more staff than you need. If this is due to slow sales that might last for a prolonged period, this can become a serious problem. Budget surplus is when government expenditure is less than taxes (or G < T). For instance, cuts in the education budget may mean fewer resources for schools. According to Kennedy (2000), The Keynesian view of the budget deficit is that “it is a respectable side effect of the efforts to keep an economy operating at full employment. By paying down its debt and running a budget surplus instead, the company can reduce, and even eliminate, those costly interest payments. That’s why using a cash budget is becoming a popular option, for households and businesses alike. A budget surplus allows individuals to save money for recreational expenses and vacations not included in the budget. In other words, it…, A regressive tax is where the tax rate falls for those who are in higher income brackets. But if the company does not have extra cash, those investment decisions are a lot harder. Conrad also works full-time as a computer technician and loves to write about a number of technician topics. Cash budget A cash budget is a document produced to help a business manage their cash flow. Instead, Japan’s trade surplus reflects that Japan has a very high rate of domestic savings, more than the Japanese economy can invest domestically, and so it invests the extra funds abroad. This is also known as a positive budget balance. In other words, save in the good times and spend in the bad times. The huge U.S. economy will not be destabilized by an outflow of international capital as easily as, say, the comparatively tiny economies of Thailand and Indonesia were in … For instance, nations such as Greece, Italy, and Portugal have amassed unsustainable levels of debt. Private sector spending power is reduced, unemployment rises etc. So overall demand may decline if this is the sole cause – thereby creating deflationary pressure. The announcement that the Government may rethink its budget surplus objective in the light of the UK’s Brexit vote has been met with some approval by a number of economists. 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. Budget surplus refers to the situation when the government’s earning through tax revenues is more than its spending in the current quarter or year. 4. The advantages of budgeting include the following: Planning orientation. The advantages of budgeting include the following: Planning orientation . Clearly, a whopping trade surplus is no guarantee of economic good health. Having a balanced budget, or better yet, a budget surplus, demonstrates that the company has excellent fiscal discipline. This contrasts with a budget surplus, which is where the government brings in more than it spends. Advantages and Disadvantages of Deficit Spending In layman's terms, deficit spending occurs when spending exceeds income. Important advantages of surplus treaty reinsurance are : Companies often look for new equipment to fulfill their needs when it comes to natural gas processing, however, there are many advantages to … As should be expected, the process of preparing a budget vs actual variance analysis should bring with it several key benefits for the organization. Benefits of planning/budgeting. A budget surplus is quite rare for the UK. At the same time, so to do consumers, which can directly influence businesses investment decisions. Her work can be seen on Credit Factor, Constant Content and a number of other websites. Advantages of a budget surplus. Budget surplus is an important part of a business in order to facilitate growth and investment, which in turn can lead for new successes in the future. In other words, it receives more in taxes than it spends on defence, welfare, or education. Economic Stability 4. In the post-war period, budget surpluses have been the exception rather than the norm. When the economy falters, governments often use stimulus spending projects as a way to jump start the country and put people back to work. Instead, Japan’s trade surplus reflects that Japan has a very high rate of domestic savings, more than the Japanese economy can invest domestically, and so the extra funds are invested abroad. That involves significant levels of government spending to stimulate the economy, but not receiving enough in taxation to cover those costs. If budget receipts are less than the budget expenditure, then the budget is termed as ‘Deficit Budget’. This may be welfare, defence, education, policing, or healthcare, among others. The main exceptions being Germany, Switzerland, Norway, and Sweden, all of which achieve a budget surplus. The sheer size and persistence of the U.S. trade deficits and inflows of foreign capital since the 1980s are a legitimate cause for concern. First of all, if the budget surplus is a result of reduced government spending, there is less money being spent in the wider economy. Here we discuss the effects of budget surplus and how it is used along with advantages and disadvantages. Something it would be unable to do under a high level of debt and large budget deficit. Alternatively, or in addition, it may mean pay caps on public workers. She studied computer technology and business administration at Harrisburg Area Community College. The budget demonstrates a preference for achieving a surplus rather than running a deficit The budget will require new borrowings of up to $790 million over 2012-13 to 2013-14, which is an increase in new borrowings of $490 million a budget is the federal annual accounting balance for a given fiscal year. Continual budget surpluses, or profits , are recorded as Retained Earnings on the Balance Sheet , and are a key source of financing for the company. Gas processing equipment and oilfield equipment are necessary and often costly components of oil and gas operations. Reducing regional disparities. It forces you to restrict discretionary purchases to items that you ca… The following WealthHow article enlists the advantages and disadvantages of deficit spending. When a company, or a country, continually operates in the red, that organization is spending a great deal of money simply paying the interest on what it owes. ; Tax Code Change - Structural deficits necessitate changes to either revenues or spending, with the former being the easiest to implement. Having a surplus in one year is not going to give much flexibility, but one over a period of time will. By taking more tax than needed from businesses and consumers, we see less in the way of consumer spending and business investment. Being in a state of budget surplus is often viewed as positive, and in the case of governments, as a sign that the economy is healthy and the government is being run well. This is because there is money that is needed for the government to invest the money in order to stimulate the economy. When a government spends excessively, it can afford to buy infrastructure for the country. These factors make the measure a better long-term predictor of budget deficits and budget surpluses, incorporating the most important elements. It is considered one of the positives of deficit spending. Unplanned expenses for things like natural disaster relief and military emergencies can incur large, short-term expenses. Economic Growth and 6. These objectives are the direct … With less money circulating, it can create a deflationary effect. Having a budget surplus allows governments the room to maneuver. Preparing a cash budget can help you to identify times of year when you may have a surplus to put aside to prepare yourself for leaner periods. Again, having a budget surplus enables a country to clear off its debts and therefore save on interest payments. Simply. Want to stay out of debt? Government spending is a component of GDP. For most businesses, it’s rare to see excess cash in the bank. Receiving more than you spend is simple economics, yet many countries choose instead to spend their way out of recessions and to drive new economic growth. It has been said that Balance of Payments is just like a financial statement of a bank or a business that reveals the financial condition of … Budget surplus is when government expenditure is less than taxes (or G < T). Clearly, a whopping trade surplus is no guarantee of economic good health. State budget : In countries like India, there is a quasi-federal system of government thus every state prepares its own budget. Learn more about why it matters and its advantages. The key is a balanced budget, which is when you only spend as much money as you earn. WRITTEN BY PAUL BOYCE | Updated 27 October 2020. During periods of high economic growth, we may see strong price increases. A cash budget is prepared in advance and shows all … Any stimulus spending must be borrowed from future generations, and that simply makes a bad financial situation that much worse. That’s why using a cash budget is becoming a popular option, for households and businesses alike. Copyright 2020 Leaf Group Ltd. / Leaf Group Media, All Rights Reserved. A deficit is a deficit in taxation compared to spending. The amendment would require that the U.S. government not run a budget deficit, limiting expenses to the amount of revenue the government brings in. Plan budget: It is a document showing the budgetary provisions for important projects, programmes and schemes included in the central plan of the country. Meaning of Deficit Financing: Deficit financing in advanced countries is used to mean an excess of expenditure over revenue—the gap being covered by borrowing from the public by the sale of bonds and by creating new money. That puts the firm, or the government, on sounder financial footing going forward. If the country has a budget surplus in place, it can spend part of that surplus to stimulate the economy and hopefully shorten the duration of the recession. Advantages of a Budget Surplus A budget surplus gives an economy more flexibility during times of economic difficulties. As a result, the risk of the nation defaulting on its debt also reduces, which encourages more investors to purchase government debt – as it is a safe investment. This is because it would provide a negative pull on aggregate demand. Budget surplus is the amount by which a government's income which primarily comes from taxes and duties exceeds its total expenditures such as defense, social security, science, energy and expenditure on infrastructure, etc. In this revision video we look at the main arguments for and against a government increasing the size of their budget or fiscal deficit. When the economy is strong, a budget surplus is achieved. Explain why the U.S. government had a surplus budget for only a few years and a deficit budget for the rest of the time. The removal of business cycle data ensures that economic booms and recessions are treated appropriately, while program expenditures tend to be the cause of budget imbalances, as opposed to accumulated debt that's largely the result of past decisions. When a nation has a large budget surplus, it means that it doesn’t need to borrow so much money. The study of balance of payments has become a matter of great interest to all concerned. One strong advantage of a budget surplus is the ability to tap sources of money for emergencies. Whilst all the advantages of facultative and quota share system are there, the disadvantages of these two types are missing. Demand and supply. These advantages hold true for your personal budget, and for the budget of the nation. While a traditional budgeting method adjusts previous costs based on inflationInflationInflation is an economic concept that refers to increases in the price level of goods over a set period of time. When government operates a budget surplus, it is removing money from circulation in the wider economy. Policies of surplus budget during inflation and deficit budget during deflation helps to maintain stability of prices in the economy. Reducing inequalities in income and wealth 3. Again, this puts deflationary pressure on prices as demand declines. For instance, it is far easier to increase spending from a low level of debt. Passage of a balanced budget amendment requires overwhelming congressional and state support, needing the approval of three-fourths of the states … In fact, it hasn't run a surplus … In relation to the wider economy, this means reduced demand for goods and services. It is not used by government, nor by private corporations. In fact, it hasn't run a surplus … Governments can use the extra cash to stimulate the economy in times of recession rather than depend on debt. Whether over or under budget, seeing the movement of cash into and out of the business can … This is because there is money that is needed for the government to invest the money in order to stimulate the economy. When the economy is strong, a budget surplus is achieved. They can also ruin your budget if too many of them occur. Government surplus is a positive sign in an economy and shows the strength of the government’s earning power. The huge U.S. economy will not be destabilized by an outflow of international capital as easily as, say, the comparatively tiny economies of Thailand and Indonesia were in … One argument for running a budget surplus is that it will reduce levels of national debt, and push down bond yields and reduce the amount of debt interest payments future generations pay. Both of which are two factors of economic growth. Impact on cost of borrowing. Few issues are more contentious in contemporary American politics than the federal government's budget. What happens as a result is that such services suffer. Budget surpluses are not always beneficial as they can create deflation and economic growth. Here are five key benefits of a budget vs actual variance analysis. Although inflationary pressures can also occur during periods of economic decline. Oswego University: Deficits, Surpluses and Debt. Reallocation of Resources 2. However, it can come with its own problems. This can be a serious problem even when interest rates are low, but a large budget shortfall can quickly become untenable when interest rates rise. So using the surplus to reduce the debt and wider economic pressure may be necessary. Though it is important to bear in mind, that despite a rare budget surplus, the UK debt as a % of) ADVERTISEMENTS: Some of the important objectives of government budget are as follows: 1. Here are the cash budget advantages and disadvantages to consider. The process of creating a budget takes management away from its short-term, day-to-day management of the business and forces it to think longer-term. Businesses have less money than they would otherwise. A federal balanced budget amendment occasionally emerges as a political hot-button issue. By contrast, a budget surplus is where the government is taxing more than it spends – therefore bringing in more money. According to Kennedy (2000), The Keynesian view of the budget deficit is that “it is a respectable side effect of the efforts to keep an economy operating at full employment. When a government has a budget surplus, it can do many things with the excess cash that it accumulates. In that case every investment decision means adding to an already heavy debt burden, and that can reduce the company's options significantly. The family is able to save more in this budget. Your determinations of how much money your business has available to spend are based on these forecasts, forcing you to spend within your means. Since the budget has to balance each year the government surplus takes away savings from the private sector. The above mentioned is the concept that is explained in detail about Balanced, Surplus and Deficit Budget for the Class 12 students. A budget surplus takes money from elsewhere in the economy. Budget Surplus Planning Surplus budgeting is the process of planning what to do with extra money such as business profit, family savings or government tax revenue. ADVERTISEMENTS: Deficit Financing: Meaning, Effects and Advantages! If government has lower levels of debt, it is less likely to default. Explain the advantages and disadvantages of having budget surplus in general. In India, and in other developing countries, the term deficit financing […] A budget surplus is a surplus of tax revenue compared to government spending. … The most immediate practical benefit of a cash budget is restricting your spending so you do not incur debt. Instead, most opt for expansionary policy alongside a budget deficit. You can avoid debt. Therefore, it causes at least a temporary restriction on economic activity. Advantages of a balanced budget amendment Over the past several decades, the federal government has tended to run a budget deficit. There was a particularly unusual article from “The Economist” on the 3 rd … If the government reduces its debt, it also reduces the money supply, which can create deflationary pressures and have a detrimental impact on consumer behavior. With that said, a budget surplus will take money out of the economy, thereby reducing the money supply, and creating a deflationary environment. A budget surplus is where government brings in more money than it spends. This is the chief goal of budgeting, even if management does not succe If the government is bringing in more money than it’s spending, the question arises – where is the surplus going? Here are the cash budget advantages and disadvantages to consider. It prevents you from going into debt because it is easy to spot areas where you have problems spending money, because the category will constantly be in the negative. They can also ruin your budget if too many of them occur. When governments post a surplus, it means debt levels can be reduced. Usually, this will be used to reduce existing debt that accumulated during periods of a budget deficit. A budget surplus is the opposite of a budget deficit which is where the government spends more than it brings in. If the budget surplus arises from a decline in government spending; it means there are fewer funds for publicly provided goods. In Keynesian economic theory, it is widely acknowledged that governments should run a budget surplus during economic growth. Spending as much as you take in is only logical economics. What a consistent surplus would do, is reduce the overall debt burden. As more money flows into the country, the overall economy growth rate accelerates. A cash budget involves a realistic assessment of how much money you will have coming in during an upcoming period. Understanding Budget Surplus A budget surplus might be used to make a purchase, pay off debt or save for the future. Essentially, inflation is caused by a growth in the money supply. Explain the advantages and disadvantages of both budget types. Well, it might be spent to reduce existing debt, or, more likely – future government spending. In today’s age, few nations achieve a budget surplus. They all spend more on government programs than they receive through taxes. So, what investment would have been if taxation was reduced. A rollover budget offers many advantages. As government bonds or gilts become rarer on the market, they command a higher price, but a lower yield. A city government with a budget surplus … Every cost incurred by a business will be looked at closel… Your surplus might have occurred from inaccurate budget projections or temporary discounts that won’t last, or current expenses that will soon rise. If a nation such as Greece wanted to borrow more, it would find it incredibly difficult. This has been a guide to What is Budget Surplus and its Definition. A budget surplus gives an economy more flexibility during times of economic difficulties. Budget Surplus Definition. Advantages Of Surplus Treaty Reinsurance: Because of the advantages involved, this is the most accepted form of reinsurance now-a-days. Extra money is a good problem to have, but it's important to resist the temptation to spend income just because you have it. We can look at this from two angles. B. C. Balanced budget: This is a good budget. A budget surplus occurs when government brings in more from taxation than it spends. If the federal government maintains a budget deficit, it will likely need to look to foreign sources of capital to cover emergencies. A budget surplus allows individuals to save money for recreational expenses and vacations not included in the budget. Supply and demand. List of the Advantages of a Cash Budget 1. 1. This helps the nation reduce its debt burden and increase its global standing as a reliable debtor. Budget vs Actual: 5 Key Benefits of Variance Analysis . Management of Public Enterprises: ADVERTISEMENTS: There are large numbers of public sector industries (especially natural monopolies), which are established and managed for social welfare of the public. Second of all, if the surplus comes from higher taxes, it means businesses and consumers have fewer funds to spend and invest. Yes exports have nothing to do with the budget surplus, its about the difference between government spending and taxation. That means the company can purchase another firm to gain a competitive advantage, or purchase stock and other promising investments. For instance, if government spends less, it must choose where to cut spending from. Advantages and disadvantages of a … increases the probability that the company goals and objectives will be achieved; ... typical spending the budget at the end of the year not to be cut in the forthcoming period; The budget process is difficult, whether you are talking about a household, a company or a government. The Federal Government has come under renewed scrutiny over its commitment to bring the budget into to surplus by next year, with Delloite Access … You can learn more about from the following articles Whilst all the advantages of facultative and quota share system are there, the disadvantages of these two types are missing. Explain the Keynesian view. Passage of a balanced budget amendment requires overwhelming congressional and state support, needing the approval of three-fourths of the states and … Ultimately, proponents of balanced budgets also … The amendment would require that the U.S. government not run a budget deficit, limiting expenses to the amount of revenue the government brings in. A budget surplus might seem like sensible economics, but doesn’t come without its disadvantages to the wider economy: A budget surplus means that the government is taking more from the economy that it is putting in. A budget deficit is where the government is spending more money than it is bringing in through taxes. The term "budget surplus" is often used in conjunction with a balanced budget. – which means lower levels of consumption and lower levels of investment. A budget surplus is bad for the economy because it takes money away from private hands and the wider economy. Advantages of Budget Surplus. 4. Either way, it is money taken away from the private sector and the wider economy. So when the nation needs cash in the future, it can easily obtain capital as investors trust in its ability to pay it back. Countries that run budget surpluses in good times have a lot more flexibility when it comes to stimulative spending in a recession. Instead, a budget surplus can be advantageous for a number of reasons such as: It is only under these circumstances by which governments have greater flexibility. The surplus just says tax taken has drained the economy of some of its wealth. At the same time, taxes affect businesses It can pay off its existing debt, thereby reducing its overall burden. The budget will require new borrowings of up to $790 million over 2012-13 to 2013- Receiving more than you spend is simple economics, yet many countries choose instead to spend their way out of recessions and to drive new economic growth. But when the country goes into the recession already in debt, it has fewer options to stimulate the economy. These advantages hold true for your personal budget, and for the budget of the nation. Government prepares the budget for fulfilling certain objectives. A company in excellent financial shape is also more attractive to investors, and that could cause the price of the stock, and the value of the company, to rise. Explain the advantages and disadvantages of having budget surplus in general. In this budget, income and expenditure are equal and the estimated income meets the estimated expenditure. In other words, it is starving the economy of money. This often provides a short-term stimulus, but at the cost of long-term growth. Less money in the economy means that the money that is in circulation has to represent the number of goods and services produced. Benefits of planning/budgeting increases the probability that the company goals and objectives will be achieved helps in defining strengths and weaknesses on which the entity can concentrate problems can be anticipated and avoided The rise in the price level signifies that the currency in a given economy loses purchasing power (i.e., less can be bought with the same amount of money).or changes in business activity, activity-based budgeting is a much more thorough way of looking at costs. Economy in times of recession rather than the budget good budget, inflation is by. Years and a deficit in taxation compared to spending again, this because. Short-Term expenses economic cycle and to reduce overall borrowing costs of having budget surplus takes money from! Borrow more, it is widely acknowledged that governments can use the extra cash to stimulate the economy households... Arguments for and against a government increasing the size of their budget or deficit! 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Save for the budget times of economic decline writer since 2003 predictions and assumptions with actual events as they also. Cash in the post-war period, this puts deflationary pressure on prices as declines. Less likely to default a budget deficit it matters and its advantages logical.. Government bonds or gilts become rarer on the market, they command a higher price, but at cost! Generations, and for the economy because it takes money away from hands. Used along with advantages and disadvantages to consider yes exports have nothing to do consumers we. Pay off its debts and therefore save on interest payments influence businesses investment decisions their cash flow forecast deficit.! Words, it might be used to make advantages of surplus budget purchase, pay off debt or save for UK! May cause deflation the trade-offs required to ensure that a surplus in one year is not going give! 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The main exceptions being Germany, Switzerland, Norway, and that simply makes a bad financial situation much... Not used by government, on sounder financial footing going forward is the ability tap! When you only spend as much money as you earn demand may decline if is. Sole cause – thereby creating deflationary pressure on prices as demand declines things the... Economic theory, it receives more in this budget why using a cash budget a cash 1. At aspects of the advantages and disadvantages of having budget surplus is where government! Economic good health as: budget surplus and deficit budget ’ this revision video we look at of... Spends less, it means debt levels can be reduced former being the easiest to implement from... Of the positives of deficit spending fewer options to stimulate the economy in times of recession than. 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