Question

Define what is a balanced budget and arguments for a balanced national budget. (5 mrks)

Answer 1

A balanced budget is a financial government planning or budgeting process where total government revenues are equal to or greater than total government expenditures implying no deficit .

Arguments for balanced budget:

Most economists agree that a balanced budget would:

1.decrease interest rates, hence making it easier for businesses and individuals to increase imvestments;
2.increase savings and investments, which would provide security to individuals;
3.reduce trade deficits; and
4.help the economy grow faster over a long period of time.

Arguments Against a Balanced Budget

According to the mainstream economic view , it is not desirable to have a balanced budget in every year . If a country still pursues a balanced budget regardless of the circumstances, the economic downturns would be very painful. If balanced budgets were required and if the budget was in deficit during a recession, the required tax cuts would worsen the economy.

According to Keynesian economists , government budgets should be balanced over the business cycles.

1.During recessions governments should run deficits. The  increas in government spending and decrease in taxes can minimize the effects of a recession.

2. When  the economy moves into a growth cycle, the government should run a budget surplus by decreasing spending and increasing taxes.

Thus By balancing deficits in recessions and surpluses in growth cycle, the government can use the benefits of a balanced budget and avoid the risks of making recessions worse due to spending and revenue limitations.