What Are the Benefits of a Budget Surplus?
The budget process is difficult, whether you are talking about a household, a company or a government. Running a budget surplus carries a number of advantages, including increased flexibility, lower interest costs and the ability to invest in future growth. These advantages hold true for your personal budget, and for the budget of the nation.
When the economy falters, governments often use stimulus spending projects as a way to jump start the country and put people back to work. Countries that run budget surpluses in good times have a lot more flexibility when it comes to stimulative spending in a recession. 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. But when the country goes into the recession already in debt, it has fewer options to stimulate the economy. Any stimulus spending must be borrowed from future generations, and that simply makes a bad financial situation that much worse.
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. 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. By paying down its debt and running a budget surplus instead, the company can reduce, and even eliminate, those costly interest payments. That puts the firm, or the government, on sounder financial footing going forward.
Having a balanced budget, or better yet, a budget surplus, demonstrates that the company has excellent fiscal discipline. 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. 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.
A company that is flush with cash has the opportunity to jump on a promising investment opportunity when it comes along. That means the company can purchase another firm to gain a competitive advantage, or purchase stock and other promising investments. But if the company does not have extra cash, those investment decisions are a lot harder. In that case every investment decision means adding to an already heavy debt burden, and that can reduce the company's options significantly.