Balanced Budget  

Definition of Balanced budget: When total government spending equals (or is greater than) government tax recipts.

Usually, governments have a political incentive to spend more money than they actually have. This leads to a budget deficit because they need to borrow from the private sector. However, if the government increase taxes then they might be able to balance the budget.

Balanced Budget over course of Economic Cycle

Usually, during a downturn in the economy the government get a fiscal deficit. However, during a period of growth this deficit declines due to increased tax revenues and lower spending. Therefore, when people refer to a balanced budget they usually mean during the course of the trade cycle

The chancellor's golden rule is to allow government borrowing of up to 3% of GDP

Balanced Budget Constitutional Amendment

The US has toyed with the idea of a constitutional amendment to legally bind the Government to limit borrowing. It was felt that a legal amendment would prevent political pressures from creating a large deficit. However, the amendment was narrowly defeated. Amongst other arguments, it was suggested that a balanced budget can be harmful in a period of recession.

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