Question

Critique the following argument: “If households are expected to live by a balanced budget then why shouldn’t the government maintain a balanced budget.”

Answer 1

If the federal government runs a balanced budget and it reduces the expenditure, it has to reduce the tax rate in order to nullify each- others effect. This implies, the resultant outcome has the budget in balance again. A balanced federal budget is not considered healthy for an economy because recession requires the interference by the government. The obvious advantage of a balanced budget is to have a lower financial burden on the government, the government has to spend a major proportion of its revenues on entitlements which are necessary payments and have to be paid irrespective of the state of the economy The current system of paying off social security benefits seems unfit for future. Social security is a compulsory or mandatory program that is considered as entitlement. This indicates that it has to be paid by the government even when the government has to adopt balanced budget. Expenditure on social security will increase as people leaving the labor force are greater in proportion to those entering it. Aged population will develop serious health ailments so the budgetary allowances may rise for medical facilities and may reduce for education as a large proportion of the population is ageing. In case of a balanced budget the government can always be assured that the budget is in control because it just follow the simple rule of matching the revenues with the taxes A balanced budget is not recommended for an economy suffering from frequent recessions. When government stimulates the economy by increasing its expenditure on because the value of the balanced budget multiplier is only one. This will increase the financial burden on the government which would increase the debt-GDP ratio. Hence, it is usually not recommended spending programs it should not increase the tax rate. If it does, it has to spend a lot more