Balanced Budget

Balanced Budget

A balanced budget is a financial plan in which total expected revenues equal total planned spending. The concept is most commonly applied to government budgets but can also describe a business or household budget when income matches expenditures over a fiscal period.

Key takeaways

• A budget is balanced when revenues are equal to or greater than expenses.
• A budget can be evaluated prospectively (planned) or retrospectively (after a fiscal year).
• Surpluses (revenues > expenses) and deficits (expenses > revenues) are related concepts; persistent deficits increase public debt.
• Economists disagree about strict balance: some view deficits as fiscally risky, while others see them as useful tools for managing economic cycles.

How it works

Governments set budgets projecting tax and other revenues and planned expenditures. If actual revenues match or exceed spending, the budget is balanced (or in surplus). When spending exceeds revenues, the gap is covered by borrowing, producing a budget deficit that adds to accumulated national debt.

Examples:
* A budget surplus lets a government repay debt, build reserves, or increase spending/tax cuts.
* A budget deficit is financed by issuing debt, which accumulates over time.

The United States has recorded budget surpluses in limited periods (notably the late 1990s and early 2000s), while long-term deficits have contributed to a very large national debt accumulated over decades.

Advantages of a balanced budget

• Limits accumulation of public debt and the burden placed on future taxpayers.
• Reduces the risk of higher interest rates or inflation that can result from heavy borrowing or money supply expansion.
• Helps maintain fiscal discipline and investor confidence in government finances.

Disadvantages and trade-offs

• Strict balance can constrain government’s ability to respond to crises or recessions.
• Surpluses are politically unpopular; they often prompt pressure for tax cuts or increased spending rather than saved reserves.
• Some economists (notably Keynesians) argue that deficit spending is a legitimate tool to stimulate demand during economic downturns and that governments should run surpluses in boom times to offset this.

Illustration: During severe downturns, temporary deficit spending can fund unemployment benefits and stimulus programs to stabilize the economy—choices that strict balanced-budget rules might prevent.

State balanced-budget requirements

Most U.S. states have constitutional or statutory rules that require some form of balanced budgeting. These requirements vary: some obligate governors to propose balanced budgets, others require legislatures to pass them, and some require both. Only a very small number of states do not have such rules.

Bottom line

A balanced budget promotes fiscal sustainability by matching revenues with spending, but it is not a one-size-fits-all solution. Policymakers must weigh the long-term risks of sustained deficits against the short-term benefits of fiscal flexibility during economic downturns. Sound fiscal management often involves balancing discipline with room for countercyclical policy.