This article will help you to learn about the difference between full-employment budget surplus and budget surplus.
Difference between Full-Employment Budget Surplus and Budget Surplus
Budget Surplus (BS) is the excess of the Government’s revenue (taxes) over its total expenditure, which consists of purchase of goods and services and transfer payments.
BS is a function of level of income, for a given, government expenditure, transfer payments and income tax.
Effect of Fiscal policy, that is, ∆G and ∆TA on the Budget Surplus:
(i) If Government purchases increase:
BS will be reduce. This is because, due to increase in Government purchases by ∆G, income will increase. This increase in income ∆Y = αG . ∆G Since, a fraction of this increase in income is collected in the form of taxes, therefore, tax revenue will increase by tαG . ∆G.
(ii) When tax rate increases
This will lead to increase in the BS
Thus, increase in taxes with government expenditure constant will not lead to decrease in BS
(iii) When ∆G = ∆TA (Balanced budget multiplier)
BS will be unchanged.
Limitation of Budget Surplus:
If budget surplus is used to measure the effects of Fiscal Policy, then the BS can change if there is a change in the Autonomous private spending.
Full-Employment Budget Surplus:
Cyclically adjusted surplus (or deficit)/
standardized budget surplus/
It is the BS at full-employment level of income. The full-employment budget surplus (BS*) shows the budget-surplus (BS) at the full-employment level of income (Y*)
According to Dornbusch and Fischer:
1. Full-employment level means an unemployment rate of about 5 to 5.5%. This rate will differ depending on the assumptions made about the economy at full employment.
2. High-employment surplus is not a perfect measure of fiscal policy because fiscal policy involves a number of variables like the tax rate, transfers and Government purchases.