May 2023

What exactly is a budget surplus?

For the first time in 15 years, the government announced a budget surplus. But what exactly is that?

Governments are similar to families and businesses in that they earn and spend money. A surplus is simply where a government earns more money during the year than it spends. A deficit is where a government spends more than it earns.

Over time you would want to see an equal number of surpluses to deficits, but why do surpluses occur n some years and deficits in others?  This is to do with Fiscal Policy.  Governments can manipulate the economy by increasing or reducing their spending. 

If a government increases their spending this should stimulate the economy and if they reduce it then it will slow the economy. We are currently in a cycle where the government wants to slow the economy to help reign in inflation, so it is important that they reduce their spending.

This also corresponds with what economists call Monetary Policy where the Reserve Bank has the ability to manipulate the economy with interest rates.  To slow the economy, they increase the interest rate and to stimulate it they reduce them.

If the Reserve Bank increased interest rates and the government increased spending at the same time, then we may have the two of them working in conflict, which could see inflation and interest rates both increasing at the same time. This can have a trickle-down effect, and effect taxpayers like yourself.

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