What Are the Pros and Cons of a Federal Balanced Budget?

Sean Ross is a strategic adviser at 1031x.com, Investopedia contributor, and the founder and manager of Free Lances Ltd.

Michael Boyle is an experienced financial professional with more than 10 years working with financial planning, derivatives, equities, fixed income, project management, and analytics.

U.S. Debt: An Overview

The history of U.S. debt goes back to the American Revolution. Almost all of the deficits in the early days of our country were the result of war. The federal government managed to pay off its entire debt in 1835. It was the first time that the country was debt-free. Since then, wars, economic conditions, and stock market crashes have all had a hand in forcing the government to accumulate the nation's debt.

Few issues are more contentious in contemporary American politics than the federal government's budget. Those who argue in favor of a balanced budget claim the growing federal debt will have harmful effects for taxpayers in the future.

Others counter that a government budget isn't like a household budget and shouldn't be viewed as such. These individuals say that deficits need to be run to ward off economic or foreign threats and that a nation's debt isn't an urgent problem.

Ultimately, proponents of balanced budgets also support restricting the power and scope of the government. However, their opponents want the government to have the power and the funds to affect wide-reaching change, if needed.

Key Takeaways

• The American government has run up deficits since the American Revolution mainly because of wars, economic conditions, and stock market crashes.
• The idea of a balanced budget is a contentious issue.
• Proponents say balancing the budget protects future generations as well as social programs like Social Security.
• Many mainstream economists don't believe the U.S. government must balance its budget because any drastic action could derail the economy.
• Some conservatives suggest passing a law or Constitutional amendment to ensure that the nation maintains a balanced budget.

Economists Are Divided on Deficits and Debt

Running the country with a balanced budget means the government would have to operate without a deficit. Sounds good, right?

Economists are divided on the question of just how important it is for the U.S. to tackle its budget deficit and total outstanding debt.

• The mainstream view is that the debt isn't a big cause for concern, so tackling the deficit isn't urgent.
• Others argue that the government's debt eventually will become a problem and should be tackled now.
• Still, other economists argue that government budget deficits don't matter—up to a point. This group generally falls in the minority.

The national debt is the total amount of money that the U.S. owes. The deficit is the difference between the government's revenue and spending each year. Every year's deficit adds to the national debt. As of September 5, 2023, the U.S. national debt was $32.8 trillion.

Arguments for Balancing the Budget

One of the main points of the argument for a balanced budget is to protect coming generations from the effects of accumulated debt.

Consider the national debt at the end of the fourth quarter of 1980 when it was $930.2 billion compared to $31.4 trillion at the end of the first quarter of 2023. Continuously running a deficit like this, some say, would make debt ever more unsustainable in the future.

The ever-rising amount of debt may also force investors to question whether the U.S. government will ever be able to repay its debts. This, they say, results in surging interest rates that will quash private-sector investment as well as the economy.

Interest rates that rise too quickly could make it very difficult for the government to afford interest payments on the national debt, leading to default or still higher inflation.

Proponents of balancing the budget also claim that running large deficits when an economy is at full employment can shift economic activity from the private sector to the public sector. This can, therefore, tamp down growth in the long run.

No Need to Worry About Deficits for Now

Just how easy would it be to implement ways to balance the budget? Not very, according to some economists. That's because the taxes you pay each year to the Internal Revenue Service (IRS) are counted as revenue, which is used to reduce the deficit.

But there's no guarantee that this revenue stream will be realized or, ultimately, how much it'll be. After all, not everyone pays their taxes, let alone files a tax return.

The more mainstream view among economists is that the nation's debt may ultimately become a problem, but it's not one we need to face by balancing the budget right now. U.S. government bonds are still considered the safest investments in the world, and decades of predictions of bond-market doom have yet to be realized.

Economists also caution that taking drastic measures to balance the budget could have a negative impact on the economy. A balanced budget would require steep spending cuts and tax increases, which could amount to a double body blow to the nation's economy.

And it could have the opposite effect—actually increasing the deficit by lowering tax revenue and causing the government to spend more on social programs.

Deficits Don't Matter—To a Point

One view of government deficits and debt that has risen to prominence in recent years is one related to Modern Monetary Theory (MMT). Proponents of MMT, usually liberal economists and politicians, argue that deficits and debts generally don't matter because the government, unlike a household, can simply print more money.

But there's one catch. This theory only holds when inflation is weak or at least contained. MMT supporters say that government borrowing becomes a problem only when it raises aggregate demand to inflationary levels.

Because a government is able to print money and raise taxes, its budget should not be compared to a household budget.

Arguments Against a Balanced Budget Law

Some conservatives suggest passing a law or even a Constitutional amendment requiring the government to balance its budget. Running a deficit, therefore, would be deemed unconstitutional. Enacting a law like this would also ensure that a balanced budget is presented to Congress and that any excess spending is capped.

Most mainstream economists argue that this is a risky way to tackle the debt—one that could hamstring the government in times of economic crisis or other emergencies when additional spending is required. Ratifying such a law could lead to increased unemployment as well as deeper and longer recessions.

Experts say a constitutional amendment may also lead to a breakdown in certain federal social programs, including Social Security and retirement programs for military personnel and veterans to name just a few.

Since federal spending must offset revenue collected in the same year, some of these programs would not be able to rely on anything collected in previous years even if they had a surplus balance.

When Was the Federal Budget Balanced?

The national debt was paid off in 1835 and this is the only time that the national budget had a $0 balance. The country has run under many deficits since then. And the last time that the U.S. had a surplus balance was in 2001.

Which Presidents Balanced the Federal Budget?

A balanced budget occurs when spending equals revenue. But a balanced budget may also be one where a surplus exists. President Andrew Jackson paid down the national debt in 1835, which resulted in a $0 balance. The country had a surplus budget in 2001 under President Bill Clinton.

Is a Balanced Federal Budget a Good Thing?

That depends on who you ask. Some economists say a balanced budget is necessary because it helps to protect future generations from untenable taxes and helps to keep interest rates low. It also keeps the economy growing. Opponents, though, say that to reduce the deficit, taxes would need to be raised. And they suggest that the deficit isn't necessarily a problem because investors don't consider U.S debt to be a problem. They see federal bonds as among the safest investments on the market.

The Bottom Line

Balancing the nation's budget isn't an easy feat and it's nothing like trying to keep your household budget balanced. The U.S. has run deficits ever since it gained independence from Great Britain. The government has to spend in order to keep running and providing services. Federal government debt has always been one of the safest, most attractive investments. This is why some aren't eager to balance the budget.

But those who support balancing the budget feel that not doing so spells dire financial trouble for future generations of Americans who will be saddled with high taxes.

1. Treasury Direct. “The History of the Debt.”
2. Fiscal Data. "Debt to the Penny."
3. FRED. "Federal Debt: Total Public Debt."
4. Council on Foreign Relations. “Does Fitch’s Downgrade of U.S. Debt Really Matter?.”
5. Committee for a Responsible Federal Budget. “What Would It Take to Balance the Budget?.”
6. International Monetary Fund. “The Very Model of Modern Monetary Policy.”
7. Brookings Institute. “How Worried Should We Be If the Debt Ceiling Isn’t Lifted?”
8. Council on Foreign Relations. “What Happens When the U.S. Hits Its Debt Ceiling?”
9. Congressional Budget Office. “Common Budgetary Terms Explained.”
10. Fiscal Data. “What Is the National Deficit?”
11. DataLab. "Federal Deficit Trends Over Time."

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The International Finance Corporation (IFC) is an organization dedicated to helping the private sector within developing countries.

In financial planning or the budgeting process, a balanced budget means that revenues are equal to or greater than total expenses.

A fiscal deficit is a shortfall in a government's income compared with its spending. A government that has a fiscal deficit is spending beyond its means.

A fiscal imbalance is a situation that occurs when future income streams for government units don't balance the future debt and spending obligations.

The debt ceiling is a limit that Congress imposes on the amount that the federal government can owe. Discover the current debt ceiling and its economic impact.

Fiscal drag refers to a situation where increased taxes lead to a decrease in consumer spending, resulting in a drag on the economy.

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