A government surplus hurts. Surpluses are often touted as a government’s
finest economic achievement, an ironclad demonstration of superior economic management.
But what is so good about a surplus? A government surplus occurs when the government
collects more money than it spends. The other side of that equation is that the private sector
(everyone but the government) has less money, because the government has taken more back out
than it put in. By definition a government surplus is a deficit for the rest of us.
If a government spends five billion dollars, then in the same financial year collects taxes
and other revenue of seven billion dollars they will have run a surplus of 2 billion dollars.
Say the private sector started that period with ten billion dollars: it will have gained five
billion from the government spending to make fifteen billion, but then given seven billion
in taxes and other charges to the government and been left with eight billion dollars.
The private sector is two billion dollars poorer because of the government’s surplus.
Let’s go back to the start and try that again with one difference: this time the government
spends eight billion dollars rather than five. Then they collect the same amount as before:
seven billion. The government has now run a deficit of one billion dollars.
The private sector, starting with the same ten billion as last time,
gains eight billion from the government spending, taking it to eighteen billion.
Then the government collects its seven billion in revenue leaving the private sector
with eleven billion dollars: one billion better off than it started. This government deficit has
contributed one billion dollars more into the hands of businesses and households.
A government deficit is the same thing as a surplus for the private sector. (Which
entities in the private sector end up with that extra money is, of course, a whole other issue).
There are other ways for the total amount of money in private hands to change up or down,
but a government surplus will always mean that there is less money in private pockets than
there would have been with a government deficit. There are sometimes reasons for a government to
run a surplus; such as slowing down economic activity for reasons of financial stability,
but the belief that it is a good idea to run one whenever you can is a fairytale.
In fact periods of repeated government surplus are generally followed by recessions and even
depressions. Less government spending leads to reduced economic activity
and the total economy slowing down. In the USA every period of continued surpluses
has been followed by negative economic growth, including all six depressions in US history.
In Australia since the dollar was adopted we have had three periods of consistent surpluses:
the first lead up to the 1991 recession,
the second was followed by the Global Financial Crisis, also known as the Great Recession,
and the third ushered in the per capita recessions in 2018 and 2019.
The important thing to remember is that a national, currency issuing government’s budget
isn’t like a business or household budget. They don’t need to save up for things, or
have a rainy day fund in case of unexpected costs. A currency issuer can always pay its debts and buy
anything for sale in its own currency and can never go bankrupt. A government in surplus
isn’t building a nest egg, it’s reducing the amount everyone else has to play with.
A government surplus isn’t necessarily a good thing,
and it isn’t necessarily a bad thing. Anyone saying that we should always want a surplus
either doesn’t understand, or is trying to trick you. What you can be sure of is that
a government surplus means less money in the hands of people and businesses than if it ran a deficit.