Everyone from individual families to the federal government use budgets to track their financial needs and account for revenue and expenditures over time. Budgets, in their simplest form, compare money earned and money spent in a given period of time, such as a year. A balanced budget is one in which revenues are equal to expenses, but this ideal case is often difficult to attain.
Balanced budgets may be balanced annually, biennially or cyclically. An annual balanced budget, which is the type many state governments are required by law to produce each year, is balanced for the year it covers. Every year the government must create a new balanced budget. Biennially-balanced budgets cover two years of accounting. This means one year can have a deficit if the following year has a surplus of the same amount, and vice versa. Finally, cyclically-balanced budgets depend on economic conditions to determine when they must be in balance. They can feature deficits during times of economic hardship, but should also include reasonable surpluses during periods of strong economic growth.
When a budget includes a deficit, it means that the government must borrow money to cover the gap between its expenses and its revenue. Over time this borrowing adds up, and interest charges from lenders, who include individual citizens who buy bonds and foreign governments, increase the cost of borrowing even further. A balanced budget means there's no need to borrow money, and therefore no need to pay it off in the future.
Options for Change
State and federal budgets are extremely complex and may run into the billions or trillions of dollars. Producing a balanced budget requires scrutiny of even the minor items that compose it. This means that lawmakers who propose and vote on budgets have opportunities to question the importance of every expense, and a corresponding opportunity to seek increased revenue from existing sources already in the budget.
Making changes to a balanced budget is as simple as adding or removing an equal amount from elsewhere in the budget. For example, if a state adds a new program that costs $10 million, budget officials must either add a $10 million source of revenue or eliminate $10 million of spending. In this way balanced budgets present an obstacle to frivolous changes, but do allow for change when it's financially accounted for.
The term balanced budget sometimes applies to any budget that doesn't have a deficit, This means that balanced budgets can routinely have surpluses. A budget surplus guards against emergency spending and also gives the government options about what to do with the money, such as invest in public programs, pay down debt or offer tax rebates to stimulate the economy further.