Updated Feb 04, 2022

What are Balanced budget, Surplus budget, and Deficit budget?

What are balanced budget, Surplus budget, and Deficit budget?

 

 

A government budget is an annual financial statement that details the planned government expenditures and receipts or revenues for the coming fiscal year. Budgets are divided into three categories based on the viability of these estimates: balanced budget, surplus budget, and deficit budget. The following are brief descriptions of the three types of budgets:

 

 

Balanced Budget

 

A government budget is said to be balanced if the predicted government expenditures in a given fiscal year are equal to the expected government receipts. This budget is based on the notion of "living within means," which is advocated by many classical economists. They felt that the government's spending should not outstrip its revenue.

 

 A balanced budget, while ideal for achieving a balanced economy and maintaining fiscal discipline, does not guarantee financial stability in times of economic slump or deflation. Theoretically, balancing predicted expenditures and anticipated revenues is simple, but it is difficult to execute in practice.

 

 

A Balanced Budget's Components

 

Revenues

 

The sale of goods and/or services generates revenue for corporations and non-governmental organizations. The majority of government revenue comes from income taxes and business taxes. Personal Income Tax vs. Corporate Income Tax Corporate tax, social insurance taxes, and consumer taxes are all government-imposed corporate expenses (cash outflows). 

 

Expenses

 

Expenses include the amount spent on everyday operations and factors of production, such as rent Expenses, for corporations and non-governmental organizations. The overall cost of using rental property for each reporting period is referred to as rent expense. It is usually one of the most significant expenses, along with wages. Expenses for governments include infrastructure, defense, healthcare, pensions, subsidies, and other things that contribute to the overall economy's health.

 

 

Examples of a balanced budget

 

Due to the instability of the components that contribute to a surplus or deficit, it is difficult to come across balanced budgets where revenues and expenses are equal. For example, Canada reported $332.2 billion in revenue and $346.2 billion in expenses in 2017, resulting in a $14 billion budget deficit.

 

Countries such as Germany, Switzerland, and South Korea, on the other hand, reported a budget surplus, which might be termed a balanced budget.

It's also worth noting that such a budget can be created on an annual, biannual, or cyclical basis.

 

• A balanced yearly budget balances the budget for the fiscal year it covers.

 

• A balanced biannual budget allows for budget fluctuations throughout two years. A biennially balanced budget will have a surplus in one and a deficit in the other of the same amount.

 

• Budgets that are cyclically balanced take into account economic situations. While the economy is in a slump, they are usually in deficit, and when the economy is booming, they are usually in excess.

 

 

Importance of balanced budget

 

A balanced budget helps governments avoid overspending by allowing them to focus expenditures on the regions and services that are most in need. Additionally, creating a budget surplus might offer to fund for unexpected expenses, such as if the government wants to rise spending during a recession without borrowing.

Budget balance also allows governments to avoid interest rate charges on big loans from lenders (other countries and/or organizations such as the International Monetary Fund (IMF) and the World Bank) and to keep up policy control during periods of crisis.

 

 

 

Surplus Budget

If predicted government revenues surpass estimated government expenditures in a given fiscal year, the budget is said to be a surplus budget. This signifies that the government's revenue from taxes is larger than the amount it spends on public assistance. A nation's financial wealth is specified by a surplus budget. During periods of inflation, such a budget can be created to reduce aggregate demand.

 

 

How to enter a budget surplus into your accounting system

Your business will profit from a constant budget surplus. On your balance sheet, record the profits (also known as retained earnings). On the balance sheet, record the retained earnings from a budget surplus as equity.

 

Although you can turn cash from equity into assets by investing, budget surplus monies are not assets. The retained earnings might also be recorded on the statement of retained earnings.

Calculate the budget surplus at the end of the year after all expenses have been paid and all revenue has been recorded.

 

 

Types of Surplus budget

When it comes to surplus, surpluses aren't the only ones that business owners encounter. There are many more sorts of surplus:

 

• Inventory surplus
• Consumer surplus
• Producer surplus

 

 

Inventory surplus

A business with a surplus of inventory has more merchandise than it sells or can sell. A product sitting on a store's shelf, unpurchased, is a common example of inventory surplus.

 

Due to poor consumer demand, your company may have unsold inventory in a warehouse that is not traveling to retailers.

 

If you have an excess inventory, it may be time to reconsider your product prices or marketing techniques. You should also consider updating your purchasing system to better manage and monitor your inventories.

 

Consumer surplus

When there is a consumer surplus, the price of a product or service is lower than what a customer is willing to pay. In other words, when a buyer buys a product or service for less than they were willing to pay for it, they profit.

 

Producer surplus

The producer surplus is the polar opposite of consumer surplus. You offer a product or service for more than the lowest price you're willing to sell it for when you have a producer surplus. In other words, because you sell the goods for more than your minimum price, the seller earns from a producer surplus.

 

 

What to do with a surplus

What do you do if you have a surplus in your business? You might use the extra money towards:

 

• Put the money to good use.
• Reward staff with bonuses
• Reinvest the surplus in the company (e.g., purchasing new equipment)
• Employ people

 

And there's a lot more. Examine and prioritize your company's requirements before making a decision. For example, if your organization needs new equipment, it's better to buy it rather than pay bonuses.

 

 

Deficit Budget

 

If the predicted government expenditure exceeds the expected government revenue in a given fiscal year, the budget is considered to be a deficit budget. This budget is best for growing economies like India. Deficit budgets, which are especially useful during recessions, help generate additional demand and enhance the rate of economic growth. In this case, the government spends excessively to increase the employment rate. As a result, demand for products and services rises, assisting in the recovery of the economy. The government pays for this either by borrowing money from the public (by issuing government bonds) or taking money from its accumulated reserve surplus.

 

 

Types of Budget Deficits

 

There are three types of the budget deficit.

• Fiscal deficit
• Revenue deficit
• Primary deficit

 

Fiscal Deficit

The fiscal deficit is defined as the difference between total expenditures and total receipts in a given year, excluding borrowings. In other words, this is the amount that the government will need to borrow to cover all of its spendings.

The larger the fiscal imbalance, the more money will be borrowed. In the absence of cash, the fiscal deficit helps to understand the shortage that the government suffers while paying for expenses.

 

The following is the formula for estimating the fiscal deficit:

Fiscal deficit = Total expenditures – Total receipts excluding borrowings

 

Revenue Deficit

The difference between total revenue expenditure and total revenue revenues is known as revenue expenditure. In other terms, revenue deficit refers to the difference between revenue receipts and revenue expenditures.

 

Economists interpret a revenue deficit as a sign that the government's revenue is insufficient to cover the necessary expenditures for critical government services.

 

The formula for calculating the revenue deficit is as follows:

Revenue deficit = Total revenue expenditure – Total revenue receipts

 

Primary Deficit

The primary deficit is calculated by subtracting the current year's fiscal deficit from the interest payments due on past borrowings. To put it another way, the fundamental deficit is the need to borrow money without paying interest.

As a result, the primary deficit depicts the expenses that government borrowings will cover while omitting the payment of income interest.

A zero deficit indicates that credit or borrowing is required to pay off the outstanding interest payments.

 

The primary deficit is calculated using the following formula:

Primary deficit = Fiscal deficit – Interest payments

 

Conclusion

A balanced budget, Surplus Budget, and Deficit Budget have their purposes and calculations. These budgets are used in wide areas to solve complex problems.