A budget surplus may create a temporary artificial prosperity. The short term effect is usually inflationary as the government sees surplus meaning the economy is more productive, thus can shoulder a higher tax burden when in actuality taxes should be lowered. The tax burden, allegedly imposed to cool the economy, tends to raise prices, thus increasing tax revenue, contributing to the continuance of the surplus until such time as prices cause consumers to spend less. While a surplus represents an over taxation of the society, it does provide the government with some short term ability to finance projects of social and political influence through grants and loans. While Keynesian
Followers consider this spending to be good, the Smith follower sees this tendency to
Spend, rather than reduce debt, as overall negative. However, the usual effect is that the
Surplus is used to invoke new programs, which inevitably grow, the populace becomes dependent upon
The program, the program expands to include more 'eligible' parties and requires increased
Financial support. This leads to the government dipping into the same pool to fund what was
Started, or take out loans as necessary to fund operations. The long term effect of a surplus tends to be a deficit and recession as government takes on more debt to fund what began under a surplus The surplus generally is not used in the proper manner to reduce debt and taxes.
Please join StudyMode to read the full document