If a government is running surplus in its budget, we can expect that public debt will be :

Question

Accepted Answer

The correct option is 4: Falling if the government uses the surplus to repay its past debts.

A budget surplus occurs when a government's total revenue (primarily from taxes) exceeds its total expenditure in a given fiscal year. When a government achieves a surplus, it has more money coming in than going out. Public debt represents the accumulation of past budget deficits. Therefore, if the government chooses to allocate this excess revenue (the surplus) toward retiring or paying back the principal on outstanding government bonds or loans (its past debts), the total public debt will decrease. This action reduces the government's total liabilities and is the most direct and logical consequence of using a budget surplus to address existing debt obligations.

The incorrect option is 1: Rising.
Public debt rises when the government runs a budget deficit, meaning spending exceeds revenue. A surplus, by definition, is the opposite of a deficit and provides the financial means to reduce debt, not increase it.

The incorrect option is 2: Constant.
If the government runs a surplus, the public debt will only remain constant if the government chooses to hold the surplus money as cash reserves or deposits without utilizing it to reduce debt or increase spending/cut taxes. While possible, this is a passive choice and not the most direct or expected consequence of managing the debt with surplus funds.

The incorrect option is 3: Falling if there are tax cuts.
This option presents a scenario where the surplus is eliminated (or reduced) through tax cuts, not used to repay debt. If taxes are cut, the surplus shrinks, and the government loses the excess funds needed to actively pay down debt, meaning debt reduction would become less likely or cease entirely.