existing debt, or, more likely – future government spending.

Either way, it is money taken away

from the private sector and the wider economy.

If the government reduces its debt, it also reduces the money supply, which can create
deflationary pressures and have a detrimental impact on consumer behavior. As government
income comes from taxes, it is taking money away from consumers who would otherwise be
able to spend that in the wider economy. At the same time, taxes affect a business – which
means lower levels of consumption and lower levels of investment. Both of which are two
factors of economic growth.

Another disadvantage is that it can lower levels of investment. A budget surplus means that the
government is taking more from the economy that it is putting in. In other words, it is starving
the economy of money. By taking more tax than needed from businesses and consumers, we
see less in the way of consumer spending and business investment. Businesses have less money
than they would otherwise. At the same time, so to do consumers, this can directly influence
businesses investment decisions. Even though it may not impact investment directly, it can
reduce potential investment. So, what investment would have been if taxation was reduced?

There is also the possibility of deflationary effect in that when government operates a budget
surplus, it is removing money from circulation in the wider economy. With less money
circulating, it can create a deflationary effect.

Less money in the economy means that the money that is in circulation has to represent the
number of goods and services produced. As there is less money available, it means that there is
less to represent the goods in the economy.

On the other hand however, a surplus can help lower interest rates. When governments post a
surplus, it means debt levels can be reduced. In turn, it makes lending to government less risky.
If government has lower levels of debt, it is less likely to default. As government bonds or gilts
become rarer on the market, they command a higher price, but a lower yield.