What Are the Pros and Cons of a Balanced Budget?

The history of U.S. debt goes back to the American Revolution and almost all of the deficits in the early days were the result of war. The federal government managed to pay off its entire debt back in 1835, which was the first time that the country was ever debt-free. And since then, wars, economic conditions, and stock market crashes have all had a hand in helping the government accumulate the nation's debt.

Few issues are more contentious in contemporary American politics than the federal government's budget. Those who argue in favor of a balanced budget claim the growing federal debt will have harmful effects in the future. Others counter that a government budget isn't like a household budget and shouldn't be viewed as such. These individuals say that deficits should be readily used to ward off economic or foreign threats and that a nation's debt isn't an urgent problem.

Ultimately, proponents of balanced budgets also support restricting the power and scope of the government, while their opponents want the government to have the power to affect wide, reaching change if needed.

Key Takeaways

  • The American government has run up deficits since the American Revolution mainly because of wars, economic conditions, and stock market crashes.
  • The idea of a balanced budget is a contentious issue.
  • Proponents say balancing the budget protects future generations as well as social programs like Social Security.
  • Many mainstream economists don't believe the U.S. government must balance its budget because any drastic action could derail the economy.
  • Some conservatives suggest passing a law or Constitutional amendment that would ensure the nation runs under a balanced budget.

Economists Are Divided on Deficits and Debt

Running the country with a balanced budget means the government would have to operate without a deficit. Sounds good right?

Economists are divided on the question of just how important it is for the U.S. to tackle its budget deficit and total outstanding debt. The mainstream view is that the debt isn't a big cause for concern right now, so tackling the deficit isn't urgent.

Others argue that the government's debt eventually will become a problem and it would be easier to tackle it now. Still, other economists argue that government budget deficits don't matter—up to a point. This group generally falls in the minority.

The national debt is the difference between the government's revenue and spending each year. As of April 21, 2022, the U.S. national debt was $30.4 trillion.

Arguments for Balancing the Budget

One of the main points behind the argument for a balanced budget is to protect newer generations from the effects of accumulated debt. Consider the national debt at the end of the fourth quarter of 1980 when it was $930.2 billion compared to $29.6 trillion at the end of the fourth quarter of 2021. Continuously running a deficit like this, they say, would make things even more unsustainable in the future.

The ever-rising debt may also force investors to question whether the U.S. government will ever be able to repay its debts. This, they say, results in surging interest rates that will quash private-sector investment as well as the economy. If interest rates rise too quickly, the government would find it very difficult to afford interest payments on the national debt, leading to default or still higher inflation.

Proponents of balancing the budget also claim that running large deficits when an economy is at full employment can shift economic activity from the private sector to the public sector. This can, therefore, tamp down growth in the long run.

No Need to Worry About Deficits for Now

Just how easy would it be to implement ways to balance the budget? Not very, according to some economists. That's because the taxes you pay each year to the Internal Revenue Service (IRS) are counted as revenue, which is used to knock down the deficit. But there's no guarantee that this revenue stream will be realized or how much it'll be. After all, not everyone pays their taxes let alone files a tax return.

The more mainstream view among economists is that the nation's debt may ultimately become a problem, but it's not one we need to face by balancing the budget right now. They cite conditions like historically low interest rates, which indicate that investors don't see the debt as much of a problem either. U.S. government bonds are still considered the safest investments in the world, and decades of predictions of bond-market doom have yet to be realized.

Economists also caution that taking drastic measures to balance the budget could have a negative impact on the economy. Doing so would require steep spending cuts and tax increases, which would amount to a double body blow to the nation's economy. And it could have the opposite effect—actually increasing the deficit by lowering tax revenue and causing the government to spend more on social programs.

Deficits Don't Matter—To a Point

One view of government deficits and debt that has risen to prominence in recent years is that of Modern Monetary Theory (MMT). Proponents of MMT, usually liberal economists and politicians, argue that deficits and debts generally don't matter because the government, unlike a household, can simply print more money.

But there's one catch: This theory only holds when inflation is weak or at least contained. Government borrowing becomes a problem only when it raises aggregate demand to inflationary levels, MMT proponents say.

Because a government is able to print money and raise taxes, its budget should not be compared to a household budget.

Arguments Against a Balanced Budget Law

Many conservatives suggest passing a law or even a Constitutional amendment requiring the government to balance its budget. Running a deficit, therefore, would be deemed unconstitutional. Enacting a law like this would also ensure that a balanced budget is presented to Congress and that any excess spending is capped.

Most mainstream economists argue this is a risky way to tackle the debt—one that could hamstring the government in times of economic crisis or other emergencies when additional spending is required. Ratifying such a law, they say, could lead to increased unemployment as well as deeper and longer recessions.

Experts say a constitutional amendment may also lead to a breakdown in certain federal social programs, including Social Security and retirement programs for military personnel and veterans to name just a few. Since federal spending must offset revenue collected in the same year, some of these programs would not be able to rely on anything collected in previous years even if they had a surplus balance.

When Was the Federal Budget Balanced?

The federal government has run deficits since the American Revolution. Andrew Jackson paid off the national debt in 1835. This was the only time the national budget had a $0 balance. The country has been running under many deficits since then. But the last time the U.S. had a surplus balance was in 2001.

Which Presidents Balanced the Federal Budget?

A balanced budget occurs when spending equals revenue. Keep in mind, though, that the term balanced budget may also be used to describe scenarios where a surplus balance exists. Andrew Jackson managed to pay down the national debt in 1835, which resulted in a $0 balance. But the last time that the country ran under a surplus budget was in 2001 under Bill Clinton.

Is a Balanced Federal Budget a Good Thing?

That depends on who you ask. Some economists say a balanced budget is necessary because it helps protect future generations and helps keep interest rates low. It also keeps the economy growing. Opponents, though, say reducing the deficit would raise taxes. And they suggest that the deficit isn't necessarily a problem because Investors still don't consider U.S debt to be such a problem and see federal bonds to be among the safest investments on the market.

The Bottom Line

Balancing the nation's budget isn't an easy feat and it's nothing like trying to keep your books balanced at home. The U.S. has run under deficits ever since it gained independence. The government has to spend in order to keep running and federal government debt has always been one of the most attractive and safest investments, which is why opponents aren't eager to do so. But those who support balancing the budget say it's a rolling ball of moss that future generations may not be able to unravel. So is it a good idea to cut the deficit and balance the budget? It all depends on who you ask.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. History. "The U.S. national debt reaches $0 for the first time."

  2. Debt.org. "Timeline of U.S. Federal Debt Since Independence Day 1776."

  3. Fiscal Data Treasury.gov. "Debt to the Penny."

  4. FRED Economic Data St. Louis Fed. "Federal Debt: Total Public Debt."

  5. DataLab. "Federal Deficit Trends Over Time."

Take the Next Step to Invest
×
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
Service
Name
Description