A budget in which revenues are equal to expenditures
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What is a Balanced Budget?
A balanced budget is a budget (i.e., a financial plan) in which revenues are equal to expenditures, such that there is no budget deficit or surplus. Although the concept of a balanced budget applies to any organization that generates operating revenues and incurs operating expenses, it is most commonly applied to government budgets.
Although the term balanced budget points towards a breakeven between surpluses and deficits, it can also be a budget that posts a surplus but not a deficit. Therefore, revenues may be greater than expenses in a balanced budget, but not vice versa.
Components of a Balanced Budget
1. Revenues
For corporations and non-governmental organizations, revenues come from the sale of goods and/or services. For governments, the majority of revenues come from income taxes, corporate taxes, social insurance taxes, and consumption taxes.
2. Expenses
For corporations and non-governmental organizations, expenses include the amount that is spent on daily operations and factors of production, including rent and wages. For governments, expenses include spending on infrastructure, defense, healthcare, pension, subsidies, and other factors that contribute to the health of the overall economy.
Practical Examples
It is uncommon to come across balanced budgets where revenues and expenses are equal due to the volatility of the factors that contribute to a surplus and/or a deficit. For example, Canada reported revenues of $332.2 billion and expenses worth $346.2 billion, ending the year 2017 with a budget deficit of $14 billion.
On the other hand, countries like Germany, Switzerland, and South Korea posted a budget surplus, which could be considered a balanced budget.
It is also important to note that such a type of budget can be produced annually, biennially, and cyclically.
- An annual balanced budget balances the budget for the financial year that it covers.
- A biennial balanced budget allows the budget to fluctuate over two years. A surplus in one and a deficit in the other of the same amount will produce a biennially balanced budget.
- Cyclically balanced budgets account for economic conditions. They are usually in deficit when the economy is going through a downturn and in surplus during economic booms.
Importance
Planning a balanced budget helps governments to avoid excessive spending and allows them to focus funds on areas and services that require them the most. Furthermore, achieving a budget surplus can provide funds for emergencies, e.g., if the government wishes to increase spending during a recession without having to borrow.
Balancing the budget also allows governments to save on the interest rate charges that accrue on large loans from lenders (i.e., other countries and/or organizations like the International Monetary Fund (IMF) and the World Bank) and to have control over policies during times of distress.
Applications: Budget Variance Analysis
A budget variance analysis compares the actual budget outcomes to the baseline figures that are projected in the budget.
- When actual figures are better (i.e., revenues higher and/or expenses lower) than what is planned, the budget variance is called favorable variance.
- When actual figures are worse (i.e., revenues lower and/or expenses higher) than what is planned, the budget variance is called negative variance.
For corporations, a balanced budget often contributes to a favorable outcome from the budget variance analysis.
Additional Resources
Accounting Equation
Philosophy of Accounting
Budget Variance
See all FP&A resources
FAQs
A balanced budget (particularly that of a government) is a budget in which revenues are equal to expenditures. Thus, neither a budget deficit nor a budget surplus exists (the accounts "balance"). More generally, it is a budget that has no budget deficit, but could possibly have a budget surplus.
What is a good balanced budget? ›
A balanced budget is a financial plan allowing an individual or company to determine the revenue required to ensure they equal the organization's projected expenses. This tool can help organizations better understand their expenses and make positive financial and business decisions.
What is the argument for balance budget? ›
A balanced budget occurs when revenues are equal to or greater than total expenses. A budget can be considered balanced after a full year of revenues and expenses have been incurred and recorded. Proponents of a balanced budget argue that budget deficits burden future generations with debt.
What best describes a balanced budget? ›
A balanced budget is a practice that sees a government enforcing that payments, procurement of resources will only be done inline with realised revenues, such that a flat or a zero balance is maintained.
How to balance your budget? ›
We recommend the popular 50/30/20 budget to maximize your money. In it, you spend roughly 50% of your after-tax dollars on necessities, including debt minimum payments. No more than 30% goes to wants, and at least 20% goes to savings and additional debt payments beyond minimums. We like the simplicity of this plan.
What is a positive budget balance? ›
If the balance is positive, the government has a surplus (it spends less than it receives). If the balance is negative, the government has a deficit (it spends more than it receives).
What is an example of a good budget? ›
In the 50/20/30 budget, 50% of your net income should go to your needs, 20% should go to savings, and 30% should go to your wants. If you've read the Essentials of Budgeting, you're already familiar with the idea of wants and needs. This budget recommends a specific balance for your spending on wants and needs.
What is the #1 rule of budgeting? ›
The 50/30/20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should be split between savings and debt repayment (20%) and everything else that you might want (30%).
Who benefits from a balanced budget? ›
Planning a balanced budget helps governments to avoid excessive spending and allows them to focus funds on areas and services that require them the most.
What is a budget balance rule? ›
Balanced budget requirements (BBRs) are constitutional or statutory rules that generally prohibit states from spending more than they collect in revenue in a fiscal year. However, these state rules vary in stringency and design.
A stringent balanced budget amendment could endanger the economy during difficult economic times. A recession occurs when economic activity contracts. Weak sales cause weak profits cause layoff cause unemployment cause weak sales.
What is an example of a balanced budget? ›
For example, if Michael and Jessica bring home $75,000 a year but only spend $70,000, then they have a balanced budget because their expenses are equal to or less than their income. In this case, they can use the extra $5,000 in their budget to pay down debt or reach their savings goals.
What is a balanced budget kid definition? ›
Instilling the concept of a balanced budget, (when money going out is less than or equal to the money coming in) from the earliest age can help avoid serious financial pitfalls as kids grow up.
How to find budget balance? ›
Budget Balance - Key takeaways
A negative budget balance is called a deficit and a positive budget balance is called a surplus. The budget balance equation is S = T - G - TR, where S = Government Savings (Budget Balance), T = Tax Revenue, G = Government Purchases of Goods and Services, and TR = Transfer Payments.
What is a balanced budget quizlet? ›
Balanced Budget. Definition-A spending plan in which the revenues coming into an organization equal its expenditures. Sentence- But Tuesday's budget review was meant to maintain a balanced budget and avoid a flood levy. 1 / 23. 1 / 23.
What is a balanced budget 5th grade? ›
A budget is balanced when the total income equals the total expenses.
What is a budget plan balance? ›
Your bill will also show your Budget Plan balance that represents the amount you have paid during the plan year that is more or less than the total of your actual gas bills for the same period.
