Balanced budget

Balanced budget

From a Keynesian point of view, a balanced budget in the public sector is achieved when the government has enough fiscal discipline to be able to equate the revenues with expenditure over the business cycles. In other words, a government's budget is balanced if its income is equal to its expenditure. This allows for a deficit in periods of low economic prospects that however needs to be matched by a surplus in periods of high economic activity.

Balanced Budget Multiplier

Because of the multiplier effect, it is possible to change aggregate demand (Y) keeping a balanced budget. The Government increases its expenditures (G), balancing it by an increase in taxes (T). Since only part of the money taken away from households would have actually been used in the economy, the change in consumption expenditure will be smaller than the change in taxes. Therefore the money which would have been saved by households is instead injected into the economy, itself becoming part of the multiplier process. In general, a change in the balanced budget will change aggregate demand by an amount equal to the change in spending.

Y_1 = c_0 + c_1 left ( Y - T ight ) + I + G

Y_1 = frac {1} {1 - c_1} left ( c_0 + I + G - c_1 T ight )

G = G + alpha ,

T = T + alpha ,

Y_2 = frac {1} {1 - c_1} left ( c_0 + I + left ( G + alpha ight ) - c_1 left ( T + alpha ight ) ight )

Delta Y = Y_2 - Y_1 = frac {alpha} {1 - c_1} left ( 1 - c_1 ight ) = alpha

Delta T - Delta G = alpha - alpha = 0 ,

A balanced budget occurs when the Federal deficit = $0. Taxes paid to the government = government spending. The government neither adds money to, nor subtracts money from, the economy. If state and local governments, businesses and private individuals do not add money to the economy, the total amount of money in the economy remains static.

When the total amount of money in the economy remains static, the smallest inflation reduces the "real" value of money in the economy. Example: Assume the total amount of money in an economy were $100 trillion and inflation were only 3%. If no new money were created via federal deficit spending, the total real value of federal money in the economy would fall $3 trillion.

After five years, the real value of federal money in the economy would be only $86 trillion -- a $14 trillion drop!

ee also

* Balanced Budget Amendment (United States government)
* [ Nobel prize Winner William Vickrey: Fatal fallacies of Balanced Budgets]

Wikimedia Foundation. 2010.

Look at other dictionaries:

  • balanced budget — A budget in which the income equals expenditure. Bloomberg Financial Dictionary See: budget. Bloomberg Financial Dictionary * * * balanced budget balanced budget ➔ budget1 * * *    The situation in a government s budget where its expenditure… …   Financial and business terms

  • Balanced Budget — A situation in financial planning or the budgeting process where total revenues are equal to or greater than total expenses. A budget can be considered balanced in hindsight, after a full year s worth of revenues and expenses have been incurred… …   Investment dictionary

  • balanced-budget — adj. Balanced budget is used with these nouns: ↑amendment …   Collocations dictionary

  • balanced budget — noun a budget is balanced when current expenditures are equal to receipts • Hypernyms: ↑budget …   Useful english dictionary

  • balanced budget — noun A (usually government) budget in which income and expenditure are equal over a set period of time …   Wiktionary

  • balanced budget — /ˌbælənst bʌdʒɪt/ noun a budget where expenditure and income are equal …   Dictionary of banking and finance

  • balanced budget — financial plan in which income is equal to spending …   English contemporary dictionary

  • Balanced Budget Amendment — The Balanced Budget Amendment is any one of various proposed amendments to the United States Constitution which would require a balance in the projected revenues and expenditures of the United States government. Most such proposals contain a… …   Wikipedia

  • Balanced Budget Veto Amendment — The Balanced Budget Veto Amendment is a proposed amendment to the United States Constitution put forth in a paper by Anthony Hawks published by the libertarian Cato Institute, with the intention of establishing a self enforcing mechanism to… …   Wikipedia

  • Balanced Budget Act of 1997 — The Balanced Budget Act of 1997, USPL|105|33, USStat|111|251, was signed into law on August 5, 1997. It was an omnibus legislative package enacted using the budget reconciliation process and designed to balance the federal budget by 2002. Among… …   Wikipedia