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. 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.

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. However, 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.

Related Courses

Capital Budgeting 
Governmental Accounting