Balanced budget definition
/What is a Balanced Budget?
A balanced budget occurs when planned revenues match or exceed the amount of planned expenses. The term is usually applied to government budgets, where revenues are relatively fixed and funding reserves are minimal, so expense levels must be tightly controlled. A budget surplus arises when revenues exceed expenses, and a budget deficit occurs in the reverse situation.
A budget deficit by the federal government can be useful in a period of declining economic activity, since the excess spending can bolster economic activity. Conversely, the best opportunity to enact a budget surplus is during a period of strong economic growth, when the government is in the best position to pay down debt, thereby preparing for deficit spending during the next recession.
Advantages of a Balanced Budget
It can be critical for a government entity to achieve a balanced budget, for two reasons. First, it may not be able to sell enough debt securities to fund the shortfall, or at least not at a reasonable interest rate. Second, future taxpayers are saddled with the burden of paying for the shortfall, perhaps through increased taxes. In the latter case, the impact of a series of budget deficits can be a debt load so large that the government must impose punitive levels of taxation to bring the budget under control.
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Disadvantages of a Balanced Budget
The concept of a balanced budget can be misleading when overly optimistic assumptions are used in the formulation of the budget, so that the actual probability of a balanced budget occurring is quite low. When actual results indicate that a deficit has occurred, an entity may have to scramble to secure sufficient financing to offset the deficit. It may also be necessary to restructure operations (usually with expense cuts) to ensure that the deficit does not continue.
Balanced Budget Best Practices
For an organization to reliably maintain a balanced budget, it should compile a revised revenue forecast every month, so that managers can determine whether there appears to be a revenue shortfall occurring. Also, actual expense outcomes should be compared to budgeted expense levels on a monthly basis, so that excess expenditures can be spotted at once. These ongoing reports are needed to verify that a balanced budget can still be achieved. If not, management will have to take steps to increase revenues, cut expenses, or both.