Balanced budget

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From a Keynesian point of view, a balanced budget in the public sector is achieved when the government equates the revenues with expenditure over the business cycles. In other words, a government's budget is balanced if its income is equal to its expenditure. It is a budget in which revenues are equal to spending. ^[1]

[edit] Balanced Budget Multiplier

Because of the multiplier effect, it is possible to change aggregate demand (Y) keeping a balanced budget. The Government increases its expenditures (G), balancing it by an increase in taxes (T). Since only part of the money taken away from households would have actually been used in the economy, the change in consumption expenditure will be smaller than the change in taxes. Therefore the money which would have been saved by households is instead injected into the economy, itself becoming part of the multiplier process. In general, a change in the balanced budget will change aggregate demand by an amount equal to the change in spending.

$Y_1 = c_0 + c_1 \left ( Y - T \right ) + I + G$

$Y_1 = \frac {1} {1 - c_1} \left ( c_0 + I + G - c_1 T \right )$

$G = G + \alpha \,$

$T = T + \alpha \,$

$Y_2 = \frac {1} {1 - c_1} \left ( c_0 + I + \left ( G + \alpha \right ) - c_1 \left ( T + \alpha \right ) \right )$

$\Delta Y = Y_2 - Y_1 = \frac {\alpha} {1 - c_1} \left ( 1 - c_1 \right ) = \alpha$

$\Delta T - \Delta G = \alpha - \alpha = 0 \,$

A balanced budget occurs when the Federal deficit = $0. Taxes paid to the government = government spending. The government neither adds money to, nor subtracts money from, the economy. If state and local governments, businesses and private individuals do not add money to the economy, the total amount of money in the economy remains static.^{[citation needed]}^{[dubious – discuss]}

When the total amount of money in the economy remains static, the smallest inflation reduces the real value of money in the economy.^{[citation needed]}^{[dubious – discuss]} Example: Assume the total amount of money in an economy were $100 trillion and inflation were only 3%.^{[citation needed]}^{[dubious – discuss]} If no new money were created via federal deficit spending, the total real value of federal money in the economy would fall $3 trillion.^{[citation needed]}^{[dubious – discuss]}

After five years, the real value of federal money in the economy would be only $86 trillion -- a $14 trillion drop!^{[citation needed]}^{[dubious – discuss]}