What Is a Balanced Budget? Definition, Uses, and How to Achieve It

What Is a Balanced Budget?

A balanced budget is a budget where revenues are, or are expected to be, equal to or greater than total expenses. A budget can be considered balanced after a full year of revenues and expenses have been recorded. Proponents of a balanced budget argue that budget deficits burden future generations with debt.

The Importance of a Balanced Budget

The term "balanced budget" often refers to government budgets. For example, governments may issue a press release stating that they have a balanced budget for the upcoming fiscal year, or politicians may campaign on a promise to balance the budget once in office.

The term "budget surplus" is often used in conjunction with a balanced budget. A budget surplus occurs when revenues exceed expenses, and the surplus amount represents the difference between the two. In a business setting, a company can reinvest surpluses back into itself, such as for research and development expenses; pay them out to employees in the form of bonuses; or distribute them to shareholders as dividends.

In government, a budget surplus happens when tax revenues exceed expenditures for the year. Since 1970, the U.S. government has achieved a budget surplus four times. It happened during consecutive years from 1998 until 2001.

A budget deficit, by contrast, is the result of expenses eclipsing revenues. Budget deficits necessarily result in rising debt, as funds must be borrowed to meet expenses. For example, the U.S. national debt, which is in excess of $35 trillion as of October 2024, is the result of accumulated budget deficits over many decades.

Pros and Cons of Maintaining a Balanced Budget

Proponents of a balanced budget argue that excessive budget deficits saddle future generations with untenable debt. Like households or businesses, governments should balance spending and income to avoid financial trouble.

Most economists agree that an excessive public sector debt burden can pose a major systemic risk to an economy. Over time, taxes may have to be raised or the money supply increased (devaluing the currency) to service the debt.

This can result in a crippling tax bill once taxes are eventually raised, excessively high interest rates that crimp business and consumer access to credit, or rampant inflation that may disrupt the entire economy. 

On the other hand, running consistent budget surpluses tends to not be politically popular. While it may be beneficial for governments to sock away surpluses for so-called "rainy day funds" in case of a downturn in tax revenue, the government is generally not expected to operate as a for-profit business.

Surplus government funds often lead to calls for lower taxes or more spending, as they can attract special interest spending. Running a generally balanced budget may help governments to avoid the perils of either deficits or surpluses.

However, some economists feel budget deficits and surpluses serve a valuable purpose, via fiscal policy, enough so that risking the dire effects of excessive debt may be worth the risk, at least in the short run. Keynesian economists insist that deficit spending represents a key tactic in the government's arsenal to fight recessions.

During economic contraction, they argue, demand falls, which leads to gross domestic product (GDP) declines. Deficit spending, Keynesians say, can be used to make up for deficient private demand or to stimulate private sector spending by injecting money into key sectors of the economy.

During good economic times, they argue (though perhaps less forcefully), governments should run budget surpluses to restrain private sector demand driven by excessive optimism. For Keynesians, a balanced budget in effect represents an abdication of the government's duty to use fiscal policy to steer the economy one way or another. 

The Bottom Line

A balanced budget refers to a financial situation in which revenue is equal to or exceeds expenses. A balanced budget applies to a range of situations though it's commonly used in the context of government budgeting. Proponents of a balanced budget argue that spending that is greater than revenue can be fiscally damaging. Others believe that budget deficits stimulate economic activity and can be useful to fight recessions.