Balanced budget
Encyclopedia
A balanced budget is when there is neither a budget deficit or a budget surplus – when revenue
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 Vermont
having a balanced budget amendment
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 kicker
.
mainly advocates a cyclically balanced budget, arguing from the perspective Keynesian economics
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
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 economics
more generally, and the Austrian school of economics. Budget deficits are argued to be necessary by some within Post-Keynesian economics
, notably the Chartalist school.
movement believes that balanced budgets are an important goal. Every state other than Vermont
has a balanced budget amendment
, providing some form of ban on deficits, while the Oregon kicker
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.
Revenue
In 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 Vermont
Vermont
Vermont 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 amendment
Balanced Budget Amendment
A 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 kicker
Kicker (Oregon tax rebate)
The 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
Mainstream 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 economics
Keynesian economics
Keynesian 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
"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 economics
Neoclassical economics
Neoclassical 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 economics
Post-Keynesian economics
Post 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
Fiscal 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 Vermont
Vermont
Vermont 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 amendment
Balanced Budget Amendment
A 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 kicker
Kicker (Oregon tax rebate)
The 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.