Give some arguments for and against a balanced budget requirement

Answer 1

A balanced budget requirement would eliminate the possibility of a budget deficit. Given the recent increases in both the deficit and the debt as well as the increased spending that will be required given the retirement of the baby-boomers, a balanced budget and reductions in the national debt would be very well received. However, such a requirement would be extremely problematic if the economy were operating with a recessionary gap or an inflationary gap. During a recession, tax receipts naturally decline and payments made through automatic stabilizers naturally increase creating a budget deficit. In order to counteract this deficit, the government would have to raise taxes and/or decrease government spending. Both of these steps would make the recession more severe. During an expansion, tax receipts naturally increase and automatic stabilizers decrease creating a budget surplus. To counteract this surplus, the government would have to decrease taxes and/or increase spending which would lead to a further expansion of the economy and significant inflation.