A Surplus, Deficit, Or Balanced Budget? Is There An Ideal Type Of Budget?

On Feb 20, Singapore’s 2017 Budget will be delivered by Finance Minister Heng Swee Keat. As Singaporeans eagerly anticipate the latest announcements, we thought it would be worthwhile explaining some considerations behind how budgets are created, and how they play an important role in nation building.

Budget 101 – Surplus, Deficit And Balanced Budget

There are three main types of budgets that governments generally have. They are a surplus budget, a deficit budget, and a balanced budget.

Depending on the country’s economic conditions, governments would strategically deploy different types of budget for different situations.

# 1 Expanding Economy – Budget Surplus

During periods of growth, employment is typically higher with both companies and individuals earning more. This would normally translate into higher tax revenues for such economies.

If revenues exceed expenditures, governments can save surplus revenues as possible ammunition for future periods, when the economy may not perform as well.

# 2 Contracting Economy – Budget Deficit

During periods of contraction or recession, tax revenues could fall as earnings from both companies and individuals are expected to decline.

During such periods, the government may spend more to support companies and individuals and to stimulate the economy. If spending exceeds revenues, in turn, this may lead to budget deficits.

A Balanced Budget Each Year: An Ideal Scenario?

A balanced budget refers to a budget where revenue is similar to the expenditure. Some may think that a balanced budget each year is the ideal scenario to strive for.

However, unlike the planning of our own finances, managing the country’s budget isn’t as straightforward as simply spending what you earn each year.

The limitations of having a balanced budget each year is that it assumes an economy will always grow in a predictable manner.

Most countries, however, would experience economic cycles where they enjoy years of good growth followed by a period of recession. One of the purposes of fiscal policy is to smoothen such business cycle fluctuations, and saved surpluses allow the government to stimulate the economy when it is weaker.

In addition, consider that the demand for key public services such as education, healthcare and defence continues regardless of economic fluctuations. Reducing expenditure in these areas in the name of a balanced budget isn’t practical.

Read Also: 5 Initiatives From Budget 2015 & 2016 That Are Still Impacting Our Lives Today

Different Countries, Different Approaches

Another area to note is that as a small and open economy, our budget approach in Singapore would be different from other larger economies.

A “balanced budget” is similar to a “balanced diet”. A good mix of carbohydrate, protein and fats is required for the body to grow well. However, in different parts of the world, maintaining a “balanced diet” could take on a different meaning.

For places with extreme weather conditions such as Greenland, a diet richer in fats would help individuals better withstand the cold climate. This would be a different “balanced diet” from what we are used to in Singapore.

Among competitive athletes, the term “balanced diet” also takes on a different meaning. Swimming legend Michael Phelps famously consumed about 12,500 calories each day while training for the Olympics. NFL superstar Tom Brady has an extremely strict plant-based “balanced diet”, which most of us would never be able to maintain.

In Singapore, the government aims to achieve a balanced budget over each term of government. That means even as the annual budget may be at a surplus or deficit for a particular year, the government aims to keep it balanced over the four to five years between elections.

As a safeguard, the President’s approval is required should the current government intend to draw on past reserves – which refers to surpluses accumulated in previous terms of government. The most recent example came during the 2009 global financial crisis, when the government dipped into past reserves to fund Budget measures to help the nation overcome the crisis. The amount used was subsequently returned in 2011, when the economy recovered sufficiently.

Spending For Today, Yet Investing For Tomorrow

A responsible government needs to manage its annual budget such that it wisely saves and invest more during good years, and prudently supports the economy during challenging years, all while continuing to address ongoing national priorities.

What it spends on is also important. Needs and wants from different groups are always aplenty, but a country’s budget remains finite.

One tricky consideration is to ensure that any spending made can be sustainable in the long-term. For example, it’s easy to hand out cash vouchers to people for just one or two years. But sustaining an annual payout over the long term can be a lot costlier.

A good example of a successful initiative in Singapore would be the GST Cash Voucher, which is a permanent transfer scheme meant to help lower and middle-income Singaporean households deal with the cost of living.

At the same time, the government needs to balance between spending money on today’s needs against the equally important need of investing for tomorrow.

Roads, schools, train systems, and hospitals need to be built for our children’s generation and beyond. These are areas that require investments today. When these investments are ready, people such as healthcare workers and teachers need to be employed.

These needs require a bigger budget, balanced or not, which in turn means the overall revenue for the country needs to be higher. And the only way for that revenue to increase without taxing people more would be to grow the overall economy. And that goes back to having to invest in people and infrastructure at an early stage.

A surplus, deficit, or balanced budget for 2017? Discuss with us your thoughts on what will be happening in 2017.

The article was produced in collaboration with the Ministry Of Finance. All views expressed in the article are the independent opinion of DollarsAndSense.sg