What are the advantages and disadvantages of a balanced federal budget?

US Debt: Overview

The history of the U.S. debt dates back to the American Revolution. Almost all of the deficits in our country’s early history were the result of war. The federal government managed to pay off the entire debt in 1835. This was the first time the country was debt-free. Since then, wars, difficult economic conditions and stock market crashes have forced the government to accumulate public debt.

Few issues are more controversial in contemporary American politics than the federal government’s budget. Those who favor a balanced budget argue that the growing federal debt will have harmful effects on taxpayers in the future.

Others counter that a government budget is not like a household budget and should not be viewed as such. These people argue that deficits must be run to ward off economic or foreign threats, and that the country’s debt is not a pressing concern.

Ultimately, balanced budget supporters also support limiting the power and scope of government action. However, their opponents want the government to have the power and funds to make sweeping changes if necessary.

Key conclusions

The U.S. government has run deficits since the American Revolution, largely due to wars, economic conditions, and stock market crashes.
The concept of a balanced budget is a controversial issue.
Proponents argue that balancing the budget protects future generations as well as social programs such as Social Security.
Many mainstream economists believe the U.S. government does not need to balance its budget because any drastic action could derail the economy.
Some conservatives propose passing a law or amending the Constitution to ensure the country’s budget is balanced.

Economists are divided on deficits and debt

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

Economists are divided on how important it is for the United States to tackle its budget deficit and overall debt.

The mainstream opinion is that debt is not a cause for major concern, so addressing the deficit is not urgent.
Others argue that government debt will become a problem sooner or later and needs to be addressed now.
Still, other economists say government budget deficits don’t matter—to some extent. That group is usually in the minority.

The national debt is the total amount of money the United States owes. The deficit is the difference between the government’s revenues and spending each year. The deficit increases the national debt each year. As of September 12, 2024, the U.S. national debt was $35.2 trillion.

Arguments for balancing the budget

One of the main goals of a balanced budget is to protect future 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 $34.8 trillion at the end of the second quarter of 2024. Some argue that continuing to run such deficits will make the debt even more unsustainable in the future.

The ever-increasing amount of debt could also force investors to wonder whether the U.S. government will ever be able to repay its debts. This, they say, would result in skyrocketing interest rates that would stifle private-sector investment and the economy.

Rising interest rates too quickly could make it much harder for a government to pay the interest on its public debt, which could lead to default or even higher inflation.

Balanced budget advocates also argue that large deficits when the economy is at full employment can shift economic activity from the private sector to the public sector. This could therefore hamper growth in the long run.

There is no need to worry about deficits at the moment

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

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

The more popular view among economists is that the national debt may eventually become a problem, but it is not a problem we need to confront 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 not come true.

Economists also warn that taking drastic measures to balance the budget could have a negative impact on the economy. A balanced budget would require drastic spending cuts and tax increases, which could mean a double whammy for the country’s economy.

And it could have the opposite effect, i.e. increase the deficit by reducing tax revenues and forcing the government to spend more on social programs.

Deficits don’t matter – to some extent

One view of government deficits and debt that has gained prominence in recent years is that of Modern Monetary Theory (MMT). MMT proponents, usually liberal economists and politicians, argue that deficits and debt generally do not matter because governments, unlike households, can simply print more money.

But there’s a catch. This theory only holds true when inflation is weak or at least contained. MMTers argue that government borrowing only becomes a problem when it raises aggregate demand to inflationary levels.

Because the government can print money and collect taxes, its budget should not be compared to a household budget.

Arguments Against the Balanced Budget Act

Some conservatives propose passing a law or even a constitutional amendment that would require the government to balance its budget. Therefore, a deficit would be considered unconstitutional. Passing such a law would also ensure that Congress receives a balanced budget and limits any excess spending.

Most mainstream economists say this is a risky way to deal with debt—one that could paralyze the government in times of economic crisis or other emergencies when additional spending is required. Ratification of such a law could lead to higher unemployment and deeper and longer recessions.

Experts say the constitutional amendment could also lead to the collapse of some federal social programs, including Social Security and retirement programs for military personnel and veterans, to name a few.

Because federal spending must balance revenues collected in the same year, some of these programs would not be able to rely on any revenues collected in prior years, even if they had a surplus.

When was the federal budget balanced?

The national debt was paid off in 1835, the only time the national budget balance was $0. Since then, the country has struggled with a series of deficits. The last time the U.S. had a balance sheet surplus was in 2001.

Which presidents have balanced the federal budget?

A balanced budget occurs when expenditures equal revenues. But a balanced budget can also be one in which there is a surplus. President Andrew Jackson paid off the national debt in 1835, resulting in a balance of $0. In 2001, under President Bill Clinton, the country had a budget surplus.

Is a balanced federal budget a good thing?

It depends on who you ask. Some economists argue that a balanced budget is necessary because it helps protect future generations from unsustainable taxes and helps keep interest rates low. It also keeps the economy growing. Opponents, however, argue that taxes would have to be raised to reduce the deficit. And they suggest that the deficit is not necessarily the problem because investors do not see the U.S. debt as a problem. They consider federal bonds to be one of the safest investments on the market.

Summary

Balancing the national budget is no easy feat, and it has nothing to do with trying to balance a household budget. The United States has been running deficits since it gained independence from Great Britain. The government has to spend money to operate and provide services. The federal government’s debt has always been one of the safest, most attractive investments. That’s why some people are reluctant to balance the budget.

However, supporters of balancing the budget believe that failure to do so will mean serious financial problems for future generations of Americans burdened with high taxes.