When all anticipated revenues and all planned expenditures balance out, this is referred to as a balanced budget in financial planning or budgeting. This phrase is most commonly used to refer to budgeting in the government sector.
A balanced budget happens when earnings meet or exceed total expenses.
Balanced Budget Components
- Revenues
- Expenses
Balanced Budget Definition: Revenues
This represents the organization’s total revenue. Income taxes, corporation taxes, public insurance taxes, and consumption taxes are all sources of revenue for governments.
The sale of goods and/or services generates income for businesses and non-governmental organizations.
Balanced Budget Definition: Expenses
This covers whatever expenses the organization may have. Infrastructure, military, health services, pensions, subsidies, and other items that add to the overall economy would be examples of government expenses.
For businesses and nonprofit organizations, expenses include money spent on everyday operations and inputs necessary for output, such as rent and salaries.
How do you determine a balanced budget?
The budget balance equation is S = T – G – TR,
S = Government Savings
T = Tax Revenue
G = Government Purchases of Goods and Services
TR = Transfer Payments.
Balanced budget multiplier
The balanced budget multiplier, often known as the unit multiplier, describes how a balanced budget expands the economy.
In this case, a corresponding increase in taxes and a rise in government spending leads to a similar rise in revenue. This is the basic idea behind the balanced budget multiplier.
Advantages of balanced budget
- The possibility of a debt spiral would be avoided.
- High debt is not sustainable.
- It would lower current debt while funding current liabilities.
- It would not halt emergency deficit spending.
Disadvantages of balanced budget
- It would be challenging to implement.
- Creditors give nations with debt in their own money some wiggle room.
- Budgets are not the only thing to take into account for growth.
- It might extend a recession.
- It can increase debt rather than decrease it.
