A balanced budget represents financial planning where the total expected revenues either meet or exceed the total planned spending. This concept is particularly significant in public sector (government) budgeting but is applicable in various areas. A budget is considered balanced if this equilibrium is maintained both in forecast planning and in hindsight, after a full year’s revenues and expenses are accounted for.
Key Takeaways
- A balanced budget occurs when revenues match or exceed total expenses.
- Budgets can be recognized as balanced after a complete fiscal year when revenues and expenses are recorded and compared.
- Advocates argue that avoiding budget deficits is crucial as deficits can lead to long-term debts harming future generations.
Grasping the Balanced Budget Concept
The term “balanced budget” is frequently associated with official government budgets. Governments often announce a balanced budget for an upcoming fiscal year, or politicians may pledge to achieve a balanced budget during their tenure. A balanced budget means expenses do not exceed revenues. Conversely, when expenditures surpass revenues, a budget deficit occurs, causing more concern.
A budget surplus occurs when revenues outpace expenses, allowing institutions to reinvest in growth, issue bonuses, or distribute dividends. In the government context, a surplus happens when tax revenues exceed expenses within a given year. For example, the U.S. government rarely has seen a surplus, having achieved it just four times since 1970, most recently between 1998 and 2001.
In contrast, a budget deficit results when spending exceeds revenues, leading to increased debt. The U.S. national debt, surpassing $27 trillion as of November 2020, illustrates the long-term impact of accumulated deficits.
Pros and Cons of a Balanced Budget
Advantages
Proponents of a balanced budget argue that avoiding massive deficits is akin to ensuring stability in personal or business finances, as perpetual deficits can lead to unsustainable debt burdens. Economists warn that high public debt can drain economic resources, necessitating future tax hikes or increased money supply, which may trigger inflation or stifle economic growth.
Disadvantages
Conversely, consistently running surpluses may not garner political favor. Surpluses can lead to calls for tax reductions or increased spending due to accumulated funds being an attractive target for various interests. Another argument posits that deliberate budget deficits and surpluses play critical roles in fiscal policy – vital tools for economic management.
Economists supporting Keynesian principles argue in favor of deficit spending during economic downturns to boost demand and counteract GDP declines. During prosperous periods, they advocate for surpluses to temper excessive optimism. From a Keynesian viewpoint, a steadfastly balanced budget neglects effective fiscal policy utilization for economic steering.
In closing, achieving a balanced budget involves meticulous planning and responsible financial management, showing its vital role in both public and broader financial contexts.
Related Terms: Budget, Fiscal Year, Research and Development Expenses, Fiscal Policy, Recession, Gross Domestic Product.
References
- Peter G. Peterson Foundation. “WHAT IS THE NATIONAL DEBT TODAY”?
