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Main Findings
A balanced budget is a situation where the government's revenues are equal to or greater than its expenditures in a given period. A balanced budget is often seen as a sign of fiscal responsibility and discipline, as it avoids accumulating more public debt and interest payments.
A balanced budget is a situation where the total expected revenues are equal to the total planned spending.
This term is often used to describe the budgeting process of governments, but it can also apply to businesses and individuals. A balanced budget means that there is no budget deficit or surplus, and the accounts "balance".
Why is a Balanced Budget Important?
A balanced budget is important for several reasons. First, it shows that the entity is living within its means and not relying on debt to finance its activities. Debt can be a burden for future generations, as it requires interest payments and reduces the available funds for other purposes.
Second, a balanced budget can help maintain a healthy economy and prevent inflation or deflation. If the government spends more than it collects in taxes, it may have to print more money or borrow from other sources, which can devalue the currency and increase prices.
If the government spends less than it collects in taxes, it may reduce aggregate demand and cause an economic slowdown or recession. Third, a balanced budget can enhance the credibility and reputation of the entity, as it shows fiscal responsibility and discipline. This can improve the confidence of investors, creditors, and consumers, and lower borrowing costs.
Formula for a Balanced Budget
A balanced budget can be expressed as a simple formula:
Total Expected Revenue = Total Expected Spending
This formula can be applied to any entity that has a budget, such as a government, a business, or an individual. The total expected revenue is the amount of money that the entity expects to receive from various sources, such as taxes, fees, sales, grants, donations, etc.
The total expected spending is the amount of money that the entity plans to spend on various items, such as salaries, wages, goods, services, debt repayments, investments, etc.
How to Calculate a Balanced Budget
To calculate a balanced budget, one needs to estimate the total expected revenue and the total expected spending for a given period, usually a year.
Then, one needs to compare the two amounts and see if they are equal. If they are equal, then the budget is balanced. If they are not equal, then there is either a budget deficit or a budget surplus.
A budget deficit occurs when the total expected spending exceeds the total expected revenue. This means that the entity is spending more than it earns and has to borrow money or use its savings to cover the gap.
A budget deficit can be calculated by subtracting the total expected revenue from the total expected spending.
Budget Deficit = Total Expected Spending - Total Expected Revenue
A budget surplus occurs when the total expected revenue exceeds the total expected spending. This means that the entity is earning more than it spends and has extra money left over. A budget surplus can be calculated by subtracting the total expected spending from the total expected revenue.
Budget Surplus = Total Expected Revenue - Total Expected Spending
Examples of a Balanced Budget
Here are some examples of balanced budgets for different entities:
- The U.S. federal government had a balanced budget in 1998-2001 for the first time since 1969. The total revenues and outlays were equal at about $2 trillion each year.
- Apple Inc., one of the world's largest companies by market capitalization, had a balanced budget in 2019. The company reported revenues of $260.2 billion and expenses of $260.2 billion for its fiscal year ending in September 2019.
- John and Jane Smith, a married couple with two children, had a balanced budget in 2020. They earned $75,000 from their jobs and spent $75,000 on their living expenses, debt repayments, savings goals, and discretionary spending.
Some examples of countries that have achieved a balanced budget or a budget surplus in recent years are:
- Norway: Norway has consistently maintained a budget surplus of around 7% of its GDP since 2016, thanks to its large oil revenues and sovereign wealth fund.
- Germany: Germany recorded a budget surplus of 1.4% of its GDP in 2019, marking the sixth consecutive year of fiscal surplus. The surplus was attributed to strong tax revenues, low-interest rates, and restrained public spending.
- Switzerland: Switzerland registered a budget surplus of 3.6 billion Swiss francs (about 4 billion US dollars) in 2019, which was higher than expected. The surplus was mainly due to higher income from withholding tax and lower expenditures on social security and interest payments.
Limitations
A balanced budget may not always be desirable or feasible for a government, depending on the economic and political circumstances. Some limitations of a balanced budget are:
A balanced budget may constrain fiscal policy.
A balanced budget may limit the ability of the government to use fiscal policy as a tool to stabilize the economy or stimulate growth. For example, during a recession, the government may need to run a budget deficit to increase public spending and provide relief to the affected sectors and households.
Conversely, during an expansion, the government may need to run a budget surplus to curb inflation and save for future contingencies. A balanced budget may prevent the government from pursuing these countercyclical measures and exacerbate economic fluctuations.
A balanced budget may not reflect the optimal level of public debt.
A balanced budget does not necessarily imply that the level of public debt is optimal or sustainable. A government may have a balanced budget but still have a high debt-to-GDP ratio that imposes a heavy burden on the economy.
Alternatively, a government may have a budget deficit but still have a low debt-to-GDP ratio that allows for more borrowing capacity and investment opportunities. Therefore, a balanced budget should not be the sole criterion for assessing the fiscal health of a government.
A balanced budget may not account for off-budget items.
A balanced budget may not capture the full extent of the government's financial obligations and liabilities, as some items may be excluded from the official budget.
For example, some governments may use off-budget entities or special funds to finance certain expenditures or debts that are not subject to parliamentary approval or public scrutiny. These off-budget items may create hidden deficits or debts that undermine the credibility and transparency of the fiscal policy.
Conclusion
A balanced budget is a situation where the government's revenues are equal to or greater than its expenditures in a given period. A balanced budget is often seen as a sign of fiscal responsibility and discipline, as it avoids accumulating more public debt and interest payments.
However, a balanced budget also has some drawbacks, such as restricting fiscal policy options, ignoring the optimal level of public debt, and omitting off-budget items. Therefore, a balanced budget should be evaluated in light of the broader economic and social objectives of the government.
References
- Reuters (2020). US-Germany Economy Budget. https://www.reuters.com/article/us-germany-economy-budget-idUSKBN1ZD0XN
- Swiss Info (2020). Swiss Federal Budget Ends 2019 with Surplus. https://www.swissinfo.ch/eng/swiss-federal-budget-ends-2019-with-surplus-of-chf3-6-billion/45529218
- Investopedia (2020). Balanced Budget: Definition, Example of Uses, and How to Balance. https://www.investopedia.com/terms/b/balanced-budget.asp
- Wall-Street Mojo. Balanced Budget. https://www.wallstreetmojo.com/balanced-budget/
FAQ
A balanced budget is a situation in financial planning or the budgeting process where total expected revenues are equal to total planned spending.
Not necessarily. While a balanced budget can signify fiscal responsibility, there are times when government spending can stimulate economic growth, especially during a recession. Conversely, running a surplus during boom periods can help to cool down the economy.
A balanced budget is when total revenues are equal to total expenditures. A surplus budget is when total revenues exceed total expenditures.
A balanced budget amendment is a constitutional rule requiring that a state cannot spend more than its income. It requires a balance between the projected receipts and expenditures of the government.
A balanced budget, particularly a government budget, can have several impacts on the economy. It could potentially reduce the amount of public debt, provide more stability in the financial system, and create a predictable business environment. However, it could also limit the government’s ability to respond to economic downturns and invest in public goods.
