Balanced budgets (particularly that of a government) refer to budgets in which revenues are equal to expenditures. Thus, neither a budget deficit nor a budget surplus exists (the accounts “balance”). More generally, it refers to a budget that has no budget deficit, but could possibly have a budget surplus. A cyclically balanced budget is a budget that is not necessarily balanced year-to-year, but is balanced over the economic cycle, running a surplus in boom years and running a deficit in lean years, with these offsetting over time.
Balanced budgets and the associated topic of budget deficits are a contentious point within academic economics and within politics. Most economists agree that a balanced budget decreases interest rates, increases savings and investment, shrinks trade deficits and helps the economy grow faster in the longer term.
Mainstream economics—mainly advocates cyclic balanced budgets, arguing from the perspective of Keynesian economics—budget deficits provide fiscal stimulus in lean times, while budget surpluses provide restraint in boom times. However, it should be noted that Keynesian economics does not advocate for fiscal stimulus when the existing government debt is already significant.
Alternative currents in the mainstream and branches of heterodox economics argue differently, with some arguing that budget deficits are always harmful, and others arguing that budget deficits are not only beneficial, but also necessary.
Schools which often argue against the effectiveness of budget deficits as cyclical tools include the freshwater school of mainstream economics and neoclassical economics more generally, and the Austrian school of economics. Budget deficits are argued to be necessary by some within Post-Keynesian economics, notably the Chartalist school.
- Larger deficits, sufficient to recycle savings out of a growing gross domestic product (GDP) in excess of what can be recycled by profit-seeking private investment, are not an economic sin but an economic necessity.
Budget deficits can usually be calculated by subtracting the total planned expenditure from the total available budget. This will then show either a budget deficit (a negative total) or a budget surplus (a positive total).