Question

Question: At times, politicians have argued that we should have a law that requires Congress to balance the... At times, politicians have argued that we should have a law that requires Congress to balance the federal budget. Some politicians believe this is the fiscally responsible approach while others think it is better to allow the federal government the leeway to determine the budget based on the state of the economy. Some politicians worry about running a deficit as this will add to the federal debt. Most states in the US have balanced budgets. What are the arguments for a balanced budget and what are the arguments against having one?

Answer 1

A balanced budget is a budget where revenues equal expenditures. A balanced budget can also refer to a budget where revenues are greater than expenditures.

Most economists have also agreed that a balanced budget would decrease interest rates, increase savings and investment, shrink trade deficits and help the economy grow faster over a longer period of time.

Keynesians argue for balanced budgets over the course of the business cycle. If a country rigidly pursues a balanced budget regardless of the circumstances, critics argue that economic downturns would be needlessly painful.

A balanced budget, particularly a government budget, is a budget with revenues equal to expenditures. There is neither a budget deficit nor a budget surplus; in other words, "the accounts balance.” More generally, it refers to a budget with no deficit, but possibly with 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.

Arguments for a Balanced Budget

Most economists agree that a balanced budget would:

• decrease interest rates, making it easier for businesses and individuals to invest;
• increase savings and investment, which would provide security to individuals;
• shrink trade deficits; and
• help the economy grow faster over a longer period of time.

In the US, every state other than Vermont has a version of a balanced budget amendment, which prohibits some deficits. The federal government does not have such an amendment.

Arguments Against a Balanced Budget

The mainstream economic view is that having a balanced budget in every year is not desirable. If a country rigidly pursues a balanced budget regardless of the circumstances, critics argue that economic downturns would be needlessly painful. If balanced budgets were required and if the budget was in deficit during a recession, critics argue that the required cuts would make the economy even worse off.

Keynesian economists argue that government budgets should be balanced over the business cycles. During recessions governments should run deficits. Keynesians argue that increasing government spending and decreasing taxes can minimize the painful effects of a recession. Once an economy moves into a growth cycle, Keynesians believe the government should shift its perspective and try to run a budget surplus by decreasing spending and increasing taxes. By balancing deficits in recessions and surpluses in growth, Keynesians believe that the government can obtain the benefits of a balanced budget without facing the risks of making recessions worse due to spending and revenue limitations.