The term “balanced budget” refers to a situation in financial planning or government budgeting where total revenues are equal to or exceed total expenses. Government budgets are considered balanced after a complete year’s expenses and revenues have been calculated and reconciled. Similarly, a company’s operating budget for the upcoming year may be labeled as balanced if forecasts and estimates indicate it will achieve this state in practice.
Balanced budget is most commonly associated in the context of government budgets. For example, a government may issue statements claiming their budget will be balanced in the upcoming fiscal year, and politicians may promise to balance the federal budget if elected.
A balanced budget can refer to a scenario where revenues and expenses are equal or where revenues exceed expenses. However, it cannot be considered balanced if expenses exceed revenues. The term “budget surplus” is related and refers to a situation where revenues surpass expenses, with the difference between the two representing the surplus amount.
In business, surpluses can be reinvested in the company, perhaps used for research and development, distributed as dividends to shareholders, or given as bonuses to employees. In government, a budget surplus occurs when tax revenues exceed government spending, which is rare in the U.S. For example, from 1970 to 2017, the U.S. only had budget surpluses during the Clinton administration from 1998 to 2001.
Budget deficits occur when expenses exceed revenues, leading to increased government debt. As of 2017, the U.S. national debt exceeded $20 trillion, the cumulative result of numerous budget deficits accrued over more than five decades.
Proponents of balanced budgets argue that the deficits accumulated over past decades are unfairly burdening future generations of Americans with an insurmountable debt. They contend that eventually, taxes will need to be raised or the money supply inflated to service this debt, not just to repay it. This could severely devalue the currency and ultimately devastate the savings and investments of countless American workers and retirees.
However, some economists believe budget deficits can be beneficial, especially during economic recessions. In such times, demand decreases, causing a decline in gross domestic product (GDP). As unemployment rises during these recessionary periods, tax revenues naturally fall. This means the government cannot balance its budget without significantly reducing spending to match the diminished tax base. Such spending cuts could further reduce demand and put additional pressure on GDP.
Deficit spending can help support and stimulate demand in the economy during these periods by injecting much-needed capital, preventing a negative economic spiral as seen in countries like Greece, which faced severe economic contraction due to austerity measures imposed by creditors.
