Question

a balanced budget amendment is espoused by many in Congress. A balanced budget amendment would be a law prohibiting the government from having a budget deficit. While there are many benefits of such an amendment, this paper is on the drawbacks. What are the disadvantages and when would they occur? Include a graph.

Answer 1

Balanced budget amendment is a Rule by constitution which makes sure that each and every state would be careful in spending their expenses, ie each state should not expend more than its income. It ensures a proper balancing between Governmental projected incomes and expenses.

Likewise in US, the constitution of US amended the balanced budget for restricting Fed from expending more cash than incoming cash of each year. Even though Balanced budget amendment has so many benefits, the same incorporates some disadvantages also. They are as follows.

Disadvantages:-

• Difficulty in implementing:- Balance budget is only an estimate of future cash flows. Reliability on such estimations will not make a good picture. Acting on the basis of projections is different from actual.
• Over projection of Surpluses:- It should be necessary that if the economy develop more faster than the debt of Fed, the Debt - GDP rate will reduce even though the amount of total debt raises. Here balanced budgets may collapse the situations. This budget consider only surpluses rather than the total debts to the economy.
• Increases Debt burden:- A weak economy is the one which have low tax and high spending. Where as a strong economy spends less and deals with more tax. Balanced budget amendment of Fed will make damages to the economic development in the long run by creating more debt and may lead to heavy recessions.
• Worsen the time or recessions:- A recessions happen in an economy along with the contraction of such an economy. In such a time balanced budget will induce Government to increase the tax rates which can entirely worsen the recession period. This may lead to weakening of such an economy.
• United States provide funds to their debtors in their own currency. Therefore, such nations will gain more freedom with the creditors. Hence, nations such as UK, US, Japan etc have low rate of interest for their debts. Hence, the debt burden of Fed is not at a stage to create a situation of financial crisis. Balanced budget amendment will not consider such a criteria.