The Effects of a Balanced Budget

Balancing the budget would have multiple effects on taxes and government spending.

A seemingly perennial news story is the struggle for legislators to balance state and federal budgets. A balanced budget is defined as when the amount of revenue taken in equals the amount of expenditures made by a government. A balanced budget is an evergreen promise from aspiring political candidates. However, the exact effects of a balanced budget are unknowable, because the effects are greatly affected by the choices legislators make in the budget balancing process.

Higher Taxes

In order to achieve a balanced budget, the government may have to raise taxes in order to increase its revenue. However, the exact amount that taxes would be raised and in what proportion would be left up to the individual legislatures. One possibility is to increase property and corporate tax rates to balance the budget. Others support raising the tax rates on wealthier individuals. In addition to raising taxes, additional tax revenue can also come by closing loopholes in the current tax code and by allowing current tax cuts to expire.

Cutting Programs

Many programs that are not constitutionally required may have to be cut to ensure a balanced budget. This can be done in a number of ways. Often, the pay of government employees is frozen or cut by 1 to 5 percent to help stop the increase of government spending. Another possible effect of a balanced budget is the elimination of jobs to create savings. An example of this would be increasing the class sizes in public school classrooms, then firing excess teachers to save on employment costs. Lastly, new spending by government organizations may be frozen. For instance, the government may put a halt to space exploration or weapons development for a year in an effort to save money.

Cutting Entitlements

Entitlement programs are the largest expenditure of the United States federal government. To achieve a balanced budget, many commentators, including the National Commission on Fiscal Responsibility and Reform, believe that cuts will have to be made to Social Security, Medicaid and Medicare. Common proposals for reducing the expenditures of these programs include raising the age of eligibility for Medicare and Social Security, privatizing Medicare or Social Security and changing Medicaid into a block grant given directly to the states. However, the exact effect of a balanced budget depends on the choices of legislators.

Reducing Government Borrowing

As of 2011, interest on the national debt is the third largest item in the federal budget after defense spending and entitlement programs. Whenever the budget wasn't balanced in the past, the deficit was paid for through the issuance of Treasury bonds. With a reduction in the amount of bonds being issued annually, old debt could begin to be retired and the amount that the government has to spend on interest payments would be reduced over time.

References

• National Commission on Fiscal Responsibility and Reform: National Commission on Fiscal Responsibility and Reform, Statement of Max Baucus
• RAND: The Impact of a Federal Balanced Budget on California's Budget
• Congressional Budget Office: Testimony on the Possible Effects of a Balanced Budget Amendment to the Constitution