What is a Balanced Budget- Meaning, Importance, Advantages and Disadvantages

What is a balanced budget?

A balanced budget is one where an entity's revenue is equal to its expenses. The term balanced budget is generally used for government budgets. A surplus situation, i.e. where the revenue is more than the expenses. In such a case, it’s also called a surplus budget. However, where the expenses are higher than the revenue, it’s also called a deficit budget, which is usually financed by government borrowing. A balanced budget reflects a good management of the economy by the government.

How does a balanced budget work?

A balanced budget occurs when the government prepares its annual plan in a manner that its expenses don’t exceed its revenue. In such a scenario, it can match its spending on wages, infrastructure creation, defence sector, healthcare, pension, subsidies, etc against the revenue it is going to earn through taxes, duties, monetization of assets, interest, etc.

Components of a balanced budget

There are two components in a balanced budget.

1. Revenue earned by the government or a company:

A government earns revenue through taxes, import, export and other duties, monetization of assets, interest income and so on. A company earns its revenue through the sale of goods and services.

2. Expenses to be incurred by the government or a company:

This includes spending on infrastructure, healthcare, defence, salaries, pensions, and subsidies in case of a government. A company spends on land and building, plant and machinery, office equipment, raw materials, and salaries.

Importance of a balanced budget

A balanced budget is important to ensure that governments spend within the limits of their revenue. It brings discipline into the way governments approach spending. It helps them to focus on projects and schemes that are most needed for the growth of the economy and its people. Governments are forced to borrow in case there is a deficit budget to make up for the shortfall in revenue. When governments know they can easily borrow, it can tempt them to spend excessively, sometimes indulging in wasteful expenditure and populist schemes.

At the same time, surplus budgets may not be liked at times as people may feel that the government is excessively taxing them or not passing on them the benefits that it can. It can lead to demands for lower taxes and doles.

On occasions, it may be prudent for governments to run a budget deficit, as advised by famous economist, John Maynard Keynes. This is when growth is lacking or there is a need to raise investments and the revenue isn’t enough to support it. In such a case, governments can run a deficit and borrow to fund infrastructure projects. This investment will create jobs and spur economic activity.  

Balanced budgeting examples

Countries like Ireland, Germany, Switzerland, and South Korea usually post budget surpluses, which could be considered a balanced budget. Kuwait posted a budget surplus in 2022-23, thanks to high oil prices in the year. In the last couple of years, Brazil has also posted monthly budget surpluses, owing to booming exports of commodities, mainly agricultural.

Advantages of a balanced budget

1. Systematic or Disciplined Approach:

A balanced budget is important to ensure that governments spend within the limits of their revenue. It brings discipline into the way governments approach spending.

2. Maintains Government's Focus:

It helps them to focus on projects and schemes that are most needed for the growth of the economy and its people.

3. Managing Economy:

A government that does not borrow also ends up keeping interest rates low, leaving funds for investments by the private sector.

4. Efficient Resource Allocation:

It also prevents unhealthy competition between political parties to resort to populist schemes and borrow excessively to fund their pet projects. This leads to a fair and equitable society that lives in harmony.

Disadvantages of a balanced budget

Lack of Focus on Different Sectors: The government or the private enterprise can end up too narrowly focused on numbers and finances while overlooking the need to improve infrastructure and create jobs. That can create social disharmony too in the long term. Thus, it may not be a bad idea to run a deficit and borrow to create vital long-term infrastructure like roads, ports, and power. This will in turn create jobs and increase tax revenue for the government.

Disclaimer: ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is a Member of National Stock Exchange of India Ltd (Member Code :07730), BSE Ltd (Member Code :103) and Member of Multi Commodity Exchange of India Ltd. (Member Code: 56250) and having SEBI registration no. INZ000183631. Name of the Compliance officer (broking): Ms. Mamta Shetty, Contact number: 022-40701022, E-mail address: complianceofficer@icicisecurities.com. Investments in securities markets are subject to market risks, read all the related documents carefully before investing. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Such representations are not indicative of future results. The securities quoted are exemplary and are not recommendatory. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investors should consult their financial advisers whether the product is suitable for them before taking any decision. The contents herein mentioned are solely for informational and educational purpose.