What Is a Balanced Budget?

What Is a Balanced Budget?

Let me explain what a balanced budget really means. It's a financial plan where your total expected revenues are equal to your total planned spending. You'll hear this term most often in discussions about public sector or government budgeting. And remember, a budget can also be seen as balanced after the fact, once a full year's revenues and expenses have been tallied up.

Key Takeaways

Here's what you need to know at a glance. A balanced budget happens when revenues are equal to or greater than total expenses. You can consider a budget balanced after recording a full year of revenues and expenses. Those who support balanced budgets point out that deficits just pile debt onto future generations.

Understanding a Balanced Budget

You often hear 'balanced budget' in the context of official government budgets. For instance, governments might announce a balanced budget for the next fiscal year, or politicians promise to achieve one if elected. I want to connect this to the idea of a budget surplus, which is when revenues exceed expenses—the surplus is simply that difference. In a business, you could reinvest that surplus into things like research and development, give bonuses to employees, or pay dividends to shareholders.

It's important to note that when revenues beat expenses, you have a surplus; when expenses outpace revenues, it's a deficit. Neither is strictly balanced, but deficits usually raise more alarms. In government terms, a surplus means tax revenues in a year exceed expenditures. The U.S. government has only managed this four times since 1970, specifically from 1998 to 2001.

On the flip side, a budget deficit comes from expenses exceeding revenues, which inevitably leads to more debt since you have to borrow to cover the gap. Take the U.S. national debt—it's over $35 trillion as of October 2024, built up from decades of these deficits.

Advantages and Disadvantages of a Balanced Budget

Supporters of balanced budgets argue that big deficits load future generations with unsustainable debt. Just like a household or business has to balance spending against income to avoid bankruptcy, governments should aim for some equilibrium between taxes and expenditures. Most economists agree that too much public debt can create serious risks for the economy. Eventually, you'd need to raise taxes or inflate the money supply to pay it off, devaluing the currency.

This could lead to massive tax hikes, sky-high interest rates that limit credit for businesses and consumers, or runaway inflation that throws the whole economy off track. That said, consistent surpluses aren't always popular politically. Governments aren't meant to run like profit-driven companies, but saving surpluses for tough times makes sense. Still, surplus funds often spark calls for tax cuts or more spending, as they attract special interests.

Aiming for a generally balanced budget can help governments sidestep the dangers of both deficits and surpluses. However, some economists believe deficits and surpluses have their place in fiscal policy, even if it means risking high debt in the short term. Keynesian economists, for example, see deficit spending as a crucial tool to combat recessions. When the economy contracts, demand drops, hurting GDP. Deficits can fill that gap by boosting private demand or injecting money into key areas.

In good times, these economists say governments should run surpluses to cool off overly optimistic private spending. To them, insisting on a balanced budget means the government is shirking its role in guiding the economy through fiscal policy.

What Are the Disadvantages of a Balanced Budget?

During economic slumps, governments might need to spend even if it creates a deficit to support the economy. Look at the early COVID-19 period—the federal government approved stimulus packages that increased the deficit but funded unemployment and social programs. Without that spending, the economic impact on people and families could have been much worse.

What Are State Balanced Budget Requirements?

These are rules that stop states from spending more than their annual tax revenues.

Which States Have Balanced Budget Requirements?

According to the Tax Policy Center, every state except Vermont has some constitutional or statutory requirement for a balanced budget. These vary—some mandate that governors propose balanced budgets, others that legislatures pass them, and some require both.

The Bottom Line

In summary, a balanced budget is when revenues meet or exceed expenses, and it's a concept often tied to government finances. Advocates say overspending harms fiscal health, but other economists point out that deficits can help during recessions.