A
balanced budget is when there is neither a budget deficit or a budget surplus – when
revenueIn business, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, such as the United Kingdom, revenue is referred to as turnover....
s equal expenditure ("the accounts
balance") – particularly by a government. More generally, it refers to when there is no deficit, but possibly a surplus. A
cyclically balanced budget is a budget that is not necessarily balanced year-to-year, but is balanced over the economic cycle, running a surplus in boom years and running a deficit in lean years, with these offsetting over time.
Balanced budgets, and the associated topic of budget deficits, are a contentious point within academic economics and within politics, notably American politics. The mainstream economic view is that having a balanced budget in every year is not desirable, with budget deficits in lean times being desirable. Within American politics the situation is much more debated, with all US states other than
VermontVermont is a state in the New England region of the northeastern United States of America. The state ranks 43rd in land area, , and 45th in total area. Its population according to the 2010 census, 630,337, is the second smallest in the country, larger only than Wyoming. It is the only New England...
having a
balanced budget amendmentA balanced-budget amendment is a constitutional rule requiring that the state cannot spend more than its income. It requires a balance between the projected receipts and expenditures of the government....
of some form, while conversely the US federal government has generally run a deficit since the late 1960s, and the topic of balanced budgets being a consistent topic of debate. In rare cases large budget
surpluses may also be banned, as in the
Oregon kickerThe Oregon tax rebate, commonly referred to as the kicker, is a rebate given to both individual and corporate taxpayers in the U.S. state of Oregon when a revenue surplus exists. The Oregon Constitution mandates that the rebate be issued when the calculated revenue for a given biennium exceeds the...
.
Economic views
Mainstream economicsMainstream economics is a loose term used to refer to widely-accepted economics as taught in prominent universities and in contrast to heterodox economics...
mainly advocates a cyclically balanced budget, arguing from the perspective
Keynesian economicsKeynesian economics is a school of macroeconomic thought based on the ideas of 20th-century English economist John Maynard Keynes.Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the...
that budget deficits provide fiscal stimulus in lean times, while budget surpluses provide restraint in boom times.
Alternative currents in the mainstream and branches of
heterodox economics"Heterodox economics" refers to approaches or to schools of economic thought that are considered outside of "mainstream economics". Mainstream economists sometimes assert that it has little or no influence on the vast majority of academic economists in the English speaking world. "Mainstream...
argue differently, with some arguing that budget deficits are always harmful, and others arguing that budget deficits are both beneficial and in fact
necessary.
Schools which often argue against the effectiveness of budget deficits as cyclical tools include the freshwater school of mainstream economics and
neoclassical economicsNeoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...
more generally, and the Austrian school of economics. Budget deficits are argued to be necessary by some within
Post-Keynesian economicsPost Keynesian economics is a school of economic thought with its origins in The General Theory of John Maynard Keynes, although its subsequent development was influenced to a large degree by Michał Kalecki, Joan Robinson, Nicholas Kaldor and Paul Davidson...
, notably the Chartalist school.
- Larger deficits, sufficient to recycle savings out of a growing gross domestic product (GDP) in excess of what can be recycled by profit-seeking private investment, are not an economic sin but an economic necessity.
United States
In the United States, the
fiscal conservatismFiscal conservatism is a political term used to describe a fiscal policy that advocates avoiding deficit spending. Fiscal conservatives often consider reduction of overall government spending and national debt as well as ensuring balanced budget of paramount importance...
movement believes that balanced budgets are an important goal. Every state other than
VermontVermont is a state in the New England region of the northeastern United States of America. The state ranks 43rd in land area, , and 45th in total area. Its population according to the 2010 census, 630,337, is the second smallest in the country, larger only than Wyoming. It is the only New England...
has a
balanced budget amendmentA balanced-budget amendment is a constitutional rule requiring that the state cannot spend more than its income. It requires a balance between the projected receipts and expenditures of the government....
, providing some form of ban on deficits, while the
Oregon kickerThe Oregon tax rebate, commonly referred to as the kicker, is a rebate given to both individual and corporate taxpayers in the U.S. state of Oregon when a revenue surplus exists. The Oregon Constitution mandates that the rebate be issued when the calculated revenue for a given biennium exceeds the...
bans
surpluses of greater than 2% of revenue. The Colorado Taxpayer Bill of Rights (the TABOR amendment) also bans surpluses, and requires the state to refund taxpayers in event of a budget surplus.
Balanced budget multiplier
Because of the multiplier effect, it is possible to change aggregate demand (Y) keeping a balanced budget. The government increases its expenditures (G), balancing it by an increase in taxes (T). Since only part of the money taken away from households would have actually been used in the economy, the change in consumption expenditure will be smaller than the change in taxes. Therefore the money which would have been saved by households is instead injected into the economy, itself becoming part of the multiplier process. In general, a change in the balanced budget will change aggregate demand by an amount equal to the change in spending.
