If taxes exceed the government expenditures, what will be the impact of the government budget on equilibrium income?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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If taxes exceed government spending, there will be a government surplus.  If there is a government surplus, the equilibrium income of the country as a whole will be reduced.  This is because the government is taking away money through taxation and is not returning it through government spending.  When the government takes more money than it gives, equilibrium income is reduced.

We can see this by looking at the injections-leakages model of aggregate income.  In this model, we measure aggregate income by looking at what injections there are (where money is put into the system) and what leakages there are (when money comes out of the system).  One injection is government spending.  When the government spends money, it is injected into the economy and becomes part of income.  One leakage, however, is taxes.  When the government taxes people, money “leaks” out of the system and income declines.  When the leakage is larger than the injection, the overall impact is to decrease the equilibrium income.