Balanced Budget Amendment

A balanced budget amendment is a constitutional or statutory provision requiring a government to spend no more than it collects in revenue each fiscal year, or over a defined period. It constrains the ability to run budget deficits and forces the government to cut spending or raise taxes whenever revenues fall.

How balanced budget amendments work

A balanced budget amendment typically requires that annual expenditures not exceed revenues. Some versions allow exceptions:

• War: Temporary suspension during wars or national emergency.
• Recession: Suspension when unemployment is above a threshold.
• Supermajority: Special majorities (two-thirds or three-fifths) can override the amendment.

Without exceptions, a balanced budget amendment forces rigid behavior: whenever revenues fall (in a recession), spending must fall or taxes must rise immediately.

Examples internationally

Germany: Has a constitutional “debt brake” requiring near-balance in structural budgets (allowing counter-cyclical deficits).

US states: Most state constitutions require balanced budgets (with limited exceptions). This forces states to cut spending or raise taxes during recessions.

Switzerland, Mexico, Chile: Structural or semi-structural balanced budget rules.

United States federal: Has been proposed many times but never adopted. Some deficit-reduction packages have included modified balanced budget requirements.

The fiscal policy trade-off

A balanced budget amendment creates a trade-off:

Benefit: It constrains deficit growth and national debt accumulation. It enforces fiscal discipline and prevents politicians from perpetually running deficits.

Cost: It prevents counter-cyclical fiscal stimulus. During recessions, when the government should increase spending or cut taxes to support demand, a balanced budget requirement forces the opposite — spending cuts or tax increases that deepen the downturn. This is pro-cyclical policy.

Most economists argue this cost is substantial. The automatic stabilizer benefits of allowing deficits during recessions and surpluses during booms outweigh the discipline benefits of a balanced budget requirement.

Balanced budget amendments and austerity

Balanced budget requirements often force austerity during recessions, when demand is weak and government support is most valuable. A government facing plunging revenues must cut spending just when people need support most, amplifying the recession. This is why many economists view strict balanced budget requirements as economically harmful.

However, proponents argue that without such constraints, governments will chronically run deficits and accumulate debt unsustainably.

Exceptions and flexibility

Many balanced budget amendments include exceptions to reduce rigidity:

Structural balance: Rather than requiring a balanced actual deficit, some rules require balance in the “structural” or cyclically-adjusted deficit, allowing larger actual deficits during recessions.

Multi-year budgets: Some rules allow deficits in some years if offset by surpluses in others.

Emergency provisions: War, natural disaster, or deep recession may trigger temporary suspensions.

These modifications reduce the pro-cyclical impact while maintaining long-run discipline.

See also