What is a Balanced Budget?

//What is a Balanced Budget?
What is a Balanced Budget? 2017-10-01T01:41:37+00:00

Definition: A balanced budget, typically founded in governmental budgeting, is a financial plan that stipulates expenditures should equal revenues and not create a deficit for the entity.

What Does Balanced Budget Mean?

What is the definition of balanced budget? The term is mostly used when referencing governmental spending and programs. You can think of this like a governmental plan to break even. Once all revenues have been collected and expenditures have been paid, the government has zero revenues left over. It does not have a surplus with extra cash in the bank. Likewise, it doesn’t have a deficit where it owes extra money at the end of the year. Revenues equal expenditures.

Balanced budgets are typically evaluated on an ongoing basis. They are evaluated before they pass to see if the estimates are accurate, during the period to track the progress, and after business cycle to see if they were successful.

Many budget hawks in Congress advocate for a balanced budget amendment that would require the Federal Government to balance its books each year and not generate annual deficits. Clearly this hasn’t happened yet.

Let’s look at an example.

Example

Jim is a finance student and offered free help after school to organize and generate budgets for other college students. He heard that during students’ first year of college, they tend to underestimate food and entertainment costs. Many students run out of money and must borrow from their parents or friends before the end of their freshman year. To reduce the risk of that happening, Jim asks them to accurately assess their spending and income and create a zero based budget.

In order to manage spending on food, he instructs them to set aside money for food in an envelope each payment period and to only spend that money on food—nothing else. Additionally, he asks them to do the same thing for entertainment.

Now the two problem areas are settled. After subtracting fixed costs from their average earnings per period, they can determine the flexibility they have with the two expenses. Eventually, he constructs a budget with them that projects the total amount of expenses and total amount of income making sure the two are equal. All of the money that came in was allocated to expenses. No more money was spent and no additional debt was required to fund extra spending.

Summary Definition

Define Balanced Budget: Balanced budget means a financial plan’s cash inflows and outlays are equal and will not cause the entity to go into debt.