A Balanced Budget: What Is It?
In financial planning or the budgeting process, a balanced budget is one in which all anticipated income and expenses are equal. The most common use of this phrase is about public sector (government) budgeting. After all of the spending and income for the whole year have been incurred and documented, a budget can also be deemed balanced in retrospect.
Comprehending a Balanced Budget
The term “balanced budget” is frequently used for official government budgets. For instance, governments could declare in a news release that they have a balanced budget for the next fiscal year, or candidates might pledge throughout their campaign to do so if elected.
There is a budget deficit when costs exceed revenues and a budget surplus when revenues surpass expenses. Although technically, none of these budgets are balanced, deficits usually raise more red flags.
One frequently associates the phrase “budget surplus” with a balanced budget. When revenues exceed costs, there is a budget surplus—the difference between the two. In a corporate context, an organization may pay surpluses as dividends to shareholders, give them to staff as bonuses, or reinvest them in the firm for uses like R&D costs.
When tax collections in a given calendar year surpass government expenditures, a budget surplus exists in a government setting. Since 1970, the US government has only produced a budget surplus four times. That took place in the years 1998–2001.
On the other hand, a budget deficit arises when spending exceeds receipts. Debt inevitably rises due to budget deficits since money must be borrowed to cover costs. The national debt of the United States, for instance, amounted to more than $27 trillion as of November 2020 and was the consequence of cumulative budget deficits over several decades.
The Benefits and Drawbacks of a Balanced Budget
According to proponents of a balanced budget, excessive budget deficits burden future generations with unmanageable debt. A government should aim to maintain some balance between tax receipts and expenditures, just as any home or business must gradually balance its spending against available income to avoid bankruptcy.
Most economists concur that a significant systemic risk to an economy might arise from an overwhelming public sector debt load. To pay off this debt, taxes will eventually need to be increased, or the money supply must be artificially expanded, depreciating the currency. When taxes are finally hiked, this may lead to debilitating tax bills, unreasonably high interest rates that restrict credit availability to consumers and businesses, or extreme inflation that might destabilize the whole economy.
However, consistently maintaining budget surpluses is not a politically popular thing to do. Governments are typically not expected to function like for-profit companies, even if it may be advantageous for them to set aside surpluses for “rainy day funds” if tax income declines.
Since money building up in public accounts offers an appealing target for extraordinary interest expenditure, the availability of excess government funds typically results in calls for either reduced taxes or, more frequently, more spending. Maintaining a broadly balanced budget may assist governments in avoiding the dangers associated with a deficit or a surplus.
Nonetheless, some economists believe that fiscal policy might benefit from budget surpluses and deficits to the extent that, initially, it may be worthwhile to take a chance on the potentially catastrophic consequences of high debt. Keynesian economists maintain that deficit spending is one of the most essential tools in the government’s toolbox for combating recessions.
They contend that a downturn in the economy causes demand to diminish, which causes the GDP to decline. Keynesians claim that deficit spending may be utilized to boost private sector spending by putting money into important economic areas or to make up for weak private demand.
They contend, if possibly less vehemently, that governments should run budget deficits in prosperous economic times to curb too optimistic private sector demand. Keynesians believe a balanced budget abdicates the government’s responsibility to manipulate the economy through fiscal policy.
Conclusion
- When the entire income exceeds total costs, a balanced budget is achieved.
- A budget is deemed balanced after all the spending and income for the whole year have been incurred and documented.
- According to proponents of a balanced budget, budget deficits burden future generations with debt.
