When the actual amount of cash a business receives is greater than the amount that it had planned to receive in the budgeting process, the business is said to have a cash surplus. An unplanned surplus is a very favorable situation for a business or any other entity, particularly if the budget was accurately and thoughtfully prepared.
There may be a number of reasons for the surplus. Perhaps the external business environment was better than expected, causing sales to increase. Perhaps a business product or service was exceptionally pleasing to customers because of its price, features, or design, and thus the firm sold more products. Collections could have been better or faster from customers that owed the business money. A surplus could also result from conscious belt-tightening by a business to limit outlays and purchases for equipment and supplies during a budget period. A business might also delay paying their bills in a timely manner to have more cash on hand. Regardless of the reason, a surplus for a business generally results from expenses and cash outlays being less than expected, sales and cash receipts being more than expected, or both, during any budget period.
Surpluses are important for governments and business organizations. States, for example, may accumulate a general fund surplus due to cuts in spending or tax increases. A surplus might be saved in the state's accounts for a so-called "rainy day" fund, in anticipation of a future budget deficit or shortfall.
The surpluses in the United States budget experienced during the late 1990s were the result of a strong U.S. economy, low interest rates, and cuts in defense spending. These budget surpluses followed a prior period of large budget deficits during the 1980s. Budget surpluses may also be the result of political forces and administrations with alternative fiscal scenarios.
In 2000, President Bill Clinton announced a $1 trillion increase in the projected federal budget. The President offered to use some of the windfall to cut taxes for married couples and to offer a prescription drug benefit under Medicare. According to Clinton, how the U.S. uses surpluses in a time of prosperity will determine the future of the country. If budget estimates are correct, the White House projects a non-Social Security surplus of $1.9 trillion over the next 10 years due to an unprecedented economic boom that produced massive amounts of new taxable income.
Like a business, the U.S. government—when faced with the exceptional prospect of a surplus—must make plans to either save or spend the surplus. Although President Clinton said he wanted to spend part of the surplus to pay for prescription drugs for the elderly, others had differing views on how to allocate a surplus. For example, several Republicans said the plans were weighted too heavily on spending. The President also proposed setting aside some of the larger surplus in a 10-year, $500 billion reserve for America's future that could be used for debt reduction, tax cuts, government retirement plans, or whatever else lawmakers decide.
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Bohn, Henning, and Robert P. Inman. Balanced Budget Rules and Public Deficits: Evidence from the U.S. States. April 1996.
Fearon, Craig. "The Budgeting Nightmare." CMA Management. May 2000.
Reason, Tim. "Building Better Budgets." CFO. December 2000.