Balanced budget

3 Key Takeaways

• A balanced budget means a government’s income matches its expenditure
• It implies there is neither a budget deficit nor a budget surplus
• Balanced budgets are seen as prudent fiscal policy by many economists

What is a Balanced Budget?

A balanced budget refers to a situation where a government’s total revenue from sources like taxes is equal to its total expenditures on things like public services, social security, and interest payments. In a balanced budget, the government avoids both deficit spending (spending more than revenue) and a surplus (collecting more revenue than spending). Many economists view balanced budgets as a sign of fiscal responsibility and sustainable public finances.

Importance of a Balanced Budget

• Promotes fiscal discipline and avoids accumulating public debt
• Helps maintain confidence in a government’s ability to repay loans
• Can improve a country’s credit rating and borrowing costs
• Provides economic stability by matching spending with revenue sources
• Avoids burdening future generations with excessive debt

How a Balanced Budget Works

To achieve a balanced budget, a government must ensure its tax revenues cover all planned expenditures for the fiscal year. This may involve adjusting tax rates, reducing spending, reallocating funds, or finding new revenue sources. Some key methods include:

Revenue side:

• Increasing tax rates on income, sales, etc.
• Expanding the tax base by reducing exemptions
• Finding new sources like user fees, licenses etc.

Expenditure side:

• Cutting spending on discretionary programs
• Reforming entitlement programs like pensions
• Reducing public workforce and operating costs

Examples of Balanced Budgets

• UK budget was balanced or in surplus from 1998-2001
• Canada ran balanced budgets from 1997-2008
• Sweden has run budget surpluses in many recent years
• Germany constitutionally requires a balanced federal budget

Real World Application

Balanced budgets aim to improve fiscal sustainability and intergenerational equity by preventing excess borrowing that saddles future taxpayers with debt. Many US states have balanced budget requirements and work annually to match revenues and expenses. The EU’s Stability and Growth Pact also encourages member countries to have budgets in balance or surplus over the economic cycle.