Loading the player...

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.

BREAKING DOWN '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. It is important to understand that 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.

How Budget Deficits and Surpluses Impact a Balanced Budget

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 it 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 $21 trillion as of May 2018, is the result of accumulated budget deficits over many decades.

Arguments for and Against 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 declines. Moreover, since unemployment rises during a recession, the government's income tax revenue falls. In order to balance the budget, it 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.

RELATED TERMS
  1. Budget Deficit

    A budget deficit occurs when expenditures exceed revenue. The ...
  2. Budget Surplus

    A budget surplus is a situation in which income exceeds expenditures. ...
  3. Budget Planning Calendar

    A budget planning calendar is a schedule of activities that must ...
  4. Budget Manual

    A budget manual is a set of instructions used by large organizations ...
  5. Budget Committee

    A budget committee is a group of people that creates and maintains ...
  6. Administrative Budget

    A administrative budget focuses on the costs of running an operation ...
Related Articles
  1. Personal Finance

    Here's How to Create a Successful Budget

    Break your expenses into needs, wants, and savings goals for a budget plan you can stick to.
  2. Personal Finance

    10 Reasons People Don’t Create a Budget

    Don't avoid putting together a budget, an essential part of a personal financial plan, for these reasons.
  3. Insights

    Trump Budget and CBO Budget Differ Widely

    The size of the difference between the administration’s assumption about economic growth and that of the CBO is unprecedented.
  4. Personal Finance

    Why It’s Essential to Create a Budget for Yourself

    Budgeting may sound elementary, but it is the cornerstone of sound fiscal management.
  5. Personal Finance

    5 Steps Toward Creating an Effective Budget

    Creating a budget can seem daunting, but it doesn't have to be. Use these five steps to create an effective budget you can live with.
  6. Personal Finance

    How to Create a Budget You Can Actually Stick With

    Following these five steps can help you create a budget that you can stick with.
  7. Personal Finance

    How to Create a Budget You Can Stick With

    Following a budget can be difficult. But it’s usually the difference between living a stressful retirement versus the retirement of your dreams.
RELATED FAQS
  1. How do budgeting and financial forecasting differ?

    Budgeting helps management members set expectations for where they want their company to go and financial forecasting measures ... Read Answer >>
  2. How long has the U.S. run fiscal deficits?

    Read about the history of deficit spending in the United States, dating back to 1789, and learn how Alexander Hamilton addressed ... Read Answer >>
  3. How does fiscal policy impact the budget deficit?

    Fiscal policy refers to any uses of the government budget to affect the economy including government spending and levied ... Read Answer >>
  4. Understanding the Effects of Fiscal Deficits on an Economy

    Understand what fiscal deficits are and understand the real impact of budget deficits on the economy. Learn why government ... Read Answer >>
  5. What is the difference between a current account deficit and a trade deficit?

    Learn the meanings of the macroeconomic terms "current account deficit" and "trade deficit," and understand the differences ... Read Answer >>
Trading Center