Balanced Budget: Meaning, Reasons and Problems
Meaning of a Balanced Budget
A balanced budget is a government budget in which the estimated revenue is exactly equal to the estimated expenditure for a particular financial year. In other words, the government plans to spend only the amount of money it expects to receive during the period. There is therefore neither a budget surplus nor a budget deficit. For example, if a government expects to receive ₦500 billion as revenue and also plans to spend ₦500 billion, the budget is said to be balanced.
A balanced budget helps the government to maintain financial discipline because its planned expenditure does not exceed its expected revenue. It reduces the need for the government borrowing and the interest payments associated with borrowing. However, a balanced budget may not always be suitable, especially during an economic recession when the government may need to spend more than it earns in order to stimulate economic activities and create employment.
Reasons for a Balanced Budget
A government may aim for a balanced budget for the following reasons:
To avoid excessive borrowing
One reason why a government may aim for a balanced budget is to avoid excessive borrowing. When the government revenue is enough to meet its planned expenditure, there is little or no need to borrow money to finance its activities. This helps the government avoid accumulating large debts and the interest payments associated with those debts. For example, if a government expects to receive ₦1 trillion and plans to spend exactly ₦1 trillion, it does not need to borrow to cover a budget shortfall.
To Reduce Debt Burden
A balanced budget helps the government control public debt. When the government consistently spends more than it earns, it may have to borrow repeatedly, causing its debt to increase. A balanced budget reduces the need for new borrowing. Thus, it helps prevent an accumulation of debt. This also reduces the amount of the government revenue that must later be used to repay loans and pay interest instead of financing public services such as education, healthcare and infrastructure.
Read More: The Meaning, Objectives, and Types of Fiscal Policy
To Promote Financial Discipline
A balanced budget encourages the government to spend within the limits of its available resources. Since the government revenue is limited, a balanced budget requires the government departments and agencies to plan their expenditure carefully and avoid unnecessary spending. It can therefore encourage proper financial management and reduce waste of public funds. In this way, the government is expected to give priority to important areas rather than spending beyond what it can afford.
To Reduce Inflationary Pressure
A balanced budget can help reduce inflationary pressure because it prevents government from making excessive expenditure without sufficient revenue to support it. When the government spends far more than it receives, particularly when the deficit is financed through money creation, the supply of money in the economy may increase faster than the production of goods and services. This can increase demand and contribute to rising prices. Maintaining a balanced budget can therefore help the government avoid some forms of excessive demand and inflationary pressure.
To Maintain Confidence in Public Finances
A balanced budget can increase confidence in the government's ability to manage public money responsibly. When government demonstrates that its planned expenditure is supported by its expected revenue, lenders, investors and citizens may have greater confidence in its financial management. This can make it easier for the government to obtain funds when borrowing is genuinely necessary. It can also improve confidence in the wider economy because excessive and uncontrolled government borrowing can create concerns about the government's ability to repay its debts.
Read More: Money And Trade: The Dynamic Roles Of Commercial Banks In Nigeria
Problems of a Balanced Budget
A balanced budget can make it difficult for the government to respond to economic recessions and emergencies because it requires revenue to equal expenditure. During a recession, the government may need to increase spending on infrastructure, employment programmes and social services to stimulate economic activity. If the government insists on keeping expenditure equal to revenue, it may have to reduce spending or increase taxes at a time when households and businesses are already experiencing financial difficulties. This can worsen unemployment, reduce demand and slow economic growth.
Another problem is that a balanced budget may limit government investment in long-term development projects. Large projects such as roads, railways, schools, hospitals and power infrastructure often require more funds than current government revenue can provide. If the government refuses to borrow because it wants to maintain a balanced budget, important development projects may be delayed or abandoned. Also, increasing taxes simply to maintain a balanced budget can reduce people's disposable income and discourage private investment.
Summary
A balanced budget occurs when the government revenue equals the government expenditure.
Formula: Revenue = Expenditure.
It reduces the need for the government borrowing.
It helps reduce the government's debt burden.
It promotes financial discipline.
It can help reduce inflationary pressure.
It can increase confidence in government financial management.
However, maintaining a balanced budget may limit the government spending during a recession when increased spending may be needed.
