What Is a Balanced Budget?
A balanced budget is a situation in financial planning or the budgeting process where total revenues are equal to or greater than total expenses. A budget can be considered balanced in hindsight after a full year's worth of revenues and expenses have been incurred and recorded. A company's operating budget for an upcoming year can also be called balanced based on predictions or estimates.
- A balanced budget occurs when revenues are equal to or greater than total expenses.
- A budget can be considered balanced after a full year of revenues and expenses have been incurred and recorded.
- Proponents of a balanced budget argue that budget deficits burden future generations with debt.
How To Build A Budget
Understanding a Balanced Budget
The phrase "balanced budget" is commonly used in reference to official government budgets. For example, governments may issue a press release stating that they have a balanced budget for the upcoming fiscal year, or politicians may campaign on a promise to balance the budget once in office.
The phrase "balanced budget" can refer to either a situation where revenues equal expenses or where revenues exceed expenses, but not where expenses exceed revenues.
The term "budget surplus" is often used in conjunction with a balanced budget. A budget surplus occurs when revenues exceed expenses, and the surplus amount represents the difference between the two. In a business setting, a company can reinvest surpluses back into itself, such as for research and development expenses, pay them out to employees in the form of bonuses, or distribute them to shareholders as dividends.
In a government setting, a budget surplus occurs when tax revenues in a calendar year exceed government expenditures. The United States government has only achieved a budget surplus—or a balanced budget—four times since 1970. It happened during consecutive years from 1998 until 2001.
A budget deficit, by contrast, is the result of expenses eclipsing revenues. Budget deficits almost invariably result in rising debt. For example, the U.S. national debt, which is in excess of $22 trillion as of March 2019, is the result of accumulated budget deficits over many decades.
Advantages and Disadvantages of a Balanced Budget
Proponents of a balanced budget argue that budget deficits saddle future generations with untenable debt. Eventually, taxes must be raised or the money supply artificially increased—thus devaluing the currency—to service this debt.
Other economists feel budget deficits serve a valuable purpose. Deficit spending represents a key tactic in the government's arsenal to fight recessions. During economic contraction, demand falls, which leads to gross domestic product (GDP) declines. Moreover, since unemployment rises during a recession, the government's income tax revenue falls.
In order to balance the budget, governments must cut spending to match lower tax receipts. This reduces demand and erodes GDP further, potentially throwing the economy into a dangerous downward spiral. Deficit spending, proponents argue, stimulates a lagging economy by infusing it with much-needed capital.