Balanced Budget Amendment

Running head: BALANCED BUDGET AMENDMENT

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BALANCED BUDGET AMENDMENT 2

Introduction

A balanced budget describes a government expenditure where only available revenues

are used in that the revenues and expenditures are equal. In this type of expenditure, there are

neither budgetary deficits nor surpluses existing even though in some cases surpluses may exist.

Balanced budgets can be cyclical where they are balanced over an economic cycle rather than

from year to year. It should be noted that the use of a balanced budget remains a controversial

issue among scholars such as politicians and academic economists who have varying views on its

benefits. Most governments are a legal enactment that allows for changes on the budgetary

systems in some situations such as when the country is at war with the particular country's

legislative arm approves the budgetary changes. At this juncture, this paper will aim to

investigate the pros and cons of having a balanced budget after which the researcher shall draw

inferences based on the side that will have stronger arguments.

Advantages of a Balanced Budget Amendment

Having a balanced budget amendment is beneficial in terms of helping in the

management of the federal government debts. Currently, the federal debt will surpass the $1.5

trillion mark by the end of the fiscal year arising from accumulated budgetary deficits over the

years. Government debts are an issue of concern as they significantly eat into government

revenues forming a larger proportion of government expenditures. Academic economists argue

that having a larger government debt proportion to the federal revenues can negatively impact on

development (Azzimonti, 2013). The assertion is based on the fact that the federal government

will be spending substantial amounts of its revenues to servicing the loans rather than on

development. Such a consequence counteracts the expected benefit arising from borrowing

meaning that it may stall economic development of the country. Furthermore, having a balanced

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budget will reduce wastage of resources both at the federal and state level through the

elimination of pork-barrel spending.

A balanced budget amendment will lead to a reduction in taxes and promotion of savings

at the federal government. Reduction in taxes shall be attributed to decline in government

expenditure on servicing of loans which in turn, it shall facilitate economic development through

promotion of investment. Furthermore, reduction in taxes shall increase the citizens’ disposable

income hence leading to increase in their expenditure habits (Gale and Samwick, 2014). The

consequence of this shall be an increase in demand for goods and services leading to the growth

of key sectors such as services, agriculture, leisure, and technology. The savings aspects come in

where the federal government has to save in order to cushion the government from future

economic problems. A government with sound economic policies such as savings instills

investor confidence that the country is ready to handle any uncertainties in the future. It is

imperative to note that, cutting taxes will have a chain of reactions which shall end with

increased tax avenues for the government which coincides with the supply side theory.

According to this theory, economic theory can be stimulated through reduced government

involvement which entails the reduction in taxes and government regulation (Islahi, 2015).

Reduced borrowing cushions the country’s currency from devaluation as it limits the

level of exposure to other currencies. The United States has the strongest currency globally and

therefore huge borrowing will expose it to the fluctuations in the international currency markets

leading to its devaluation. The devaluation can arise from a capital flight when investors shift to

other countries with promising or with a sustainable debt management strategies. Furthermore,

increased borrowing will have a give a negative outlook to the region in general as foreign

investors may perceive the borrowing to be unsustainable and therefore shy away. A similar

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scenario has occurred in Sub-Saharan African where the huge borrowing has given a negative

outlook to investors in terms of how they would repay the loans (Erhieyovwe and

Onovwoakpoma, 2013). If the debt reaches an unmanageable level, a country may be tempted to

borrow more in order to offset the loans which may push it further into the crisis. For a country

like the United States, devaluation of the dollar and negative investor outlook can have far-

reaching negative consequences on the global economy. The assertion is pegged on that fact that

variations in the economy have a direct impact on the economic growth in other countries since

the United States is the biggest global trade partner (Vamvakidis, and Arora, 2001).

Disadvantages of Balanced Budget Amendment

A balanced budget amendment limits a country's economic flexibility when it comes to

responding to a crisis. The rigidity arises when the federal government is provided with limited

options to sourcing of capital to abet crises such as natural disasters or even war. The

consequence can be slumped economic growth or at times increased the cost of the crisis in

terms of casualties or missed opportunities. Furthermore, it would exacerbate recessions leading

to loss of employment due to reduced investments. The ideology behind a balanced budget

amendment that, taxes are reduced and expenditures increased during good times and cutting

expenditure while increasing taxes during recessions is detrimental (Palley, 1997). It would mean

that the country will be undergoing fluctuating growth of the economy which can give a negative

outlook, particularly to foreign investors. The lack of stability in economic growth can also lead

to capital flight as investors shift to countries with more promising economic growth trends.

The United States issues debts in its own currency that has a strong support from

creditors. The United States dollar is the strongest and a global currency means that when the

country borrows, it is not vulnerable to changes in the value of other currencies. In such a case,

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the federal government’s debt is still far from becoming a crisis (Hale, Jones and Spiegel, 2016).

The uncertainty of future economic activity makes enforceability of a balanced budget

amendment difficult as it would have to rely on budgetary projection. It may facilitate casual

making of the budgetary projections by the Congress. Basing on the fact that the Congress is at

liberty to suspend the balanced budget amendments during crises, it would be exploited to avoid

abiding by the balanced budget clause in the Federal Constitution. Furthermore, challenges in the

implementation of the balanced budget amendment may arise due to conflict of interest amongst

the congresspersons who want to undertake development projects in their constituencies for

political gain (Peter G. Peterson Foundation, 2012). The presence of these challenges means that

implementation of the balanced budget amendment shall take longer periods.

Enforcement of the balanced budget amendment act would mean that the federal

governments substantially cut its expenditures to reduce the need for borrowing to bridge budget

gaps (Gang, 1998). However, this would mean that the government reduces or eliminate essential

services such as defense and social services. In order to meet the amendment requirements, the

federal government may be forced to raise the tax rates to bridge deficits. Furthermore, due to

uncertainties, important projects may come up but there will be limitations when it comes to

financing. Cutting back expenditures on important social services such as healthcare, retirement

or education could bring about other secondary problems such as increased mortality rates, high

dependence rates and declined literacy levels. When it comes to reducing defense budgets, it

could jeopardize the balance of power and vulnerability to external attacks. It is imperative to

note that cutting back on budgetary allocation for essential services would increase the cost of

living thus contributing to the reduction in investment, employment levels and spending levels

among the citizens.

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Conclusions

The major concern revolving around the need for a balanced budget amendment revolves

around the issue of debts. Majority of those in support of a balanced budget base on the argument

that the budgetary system would promote economic development in the long-term by

encouraging investment and demand for goods and services produced in the country. On the

other hand, those against it argue that a balanced budget amendment is consequential as it would

result in uneven economic growth and increased cost of living for the citizens. Furthermore,

academic economics seems to be in support of a balanced budget amendment while the

politicians are against it, therefore, support federal government borrowing. These budgetary

systems are all valid but an assessment of which is the best between the two should be based on

the distinctive attributes of the country such as level of economic development and its

contribution to global stability.

The United States is a nation within the developed countries category with a bigger

influence on the global economy. Some of the roles played by the United States include

maintaining global stability. In such a case, cutting back on some expenditures such as for

defense would jeopardize global stability and security. There are other three issues that must be

considered these include; the United States dollar, proportion of debt to the gross domestic

product and sustainability in economic growth. Firstly, the United States uses its own currency to

issue debts and therefore not vulnerable to currency fluctuations. Secondly, debt to GDP ratio

should be at a maximum of 250% with a long-term repayment period of which the United States

Debt-GDP ratio stood at 106.10% in 2016 therefore, this is there is no cause for alarm. Lastly,

borrowing ensures sustained economic growth even in periods when the country is going through

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a recession. For the above reasons, there is no need for the United States Constitution to have a

balanced budget amendment.

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References

Azzimonti, M. (2013). The political economy of balanced budget amendments. Business Review,

(Q1), 11-20.

Erhieyovwe, E. K., & Onovwoakpoma, O. D. (2013). External debt burden and its impact on

Growth: An assessment of major macroeconomic variables in Nigeria. Academic Journal

of Interdisciplinary Studies, 2(2), 143.

Gale, W. G., & Samwick, A. A. (2014). Effects of income tax changes on economic growth.

Gang, G. (1998). Harrott Project: Balanced-budget Amendment. Home.olemiss.edu. Retrieved 8

January 2018, from http://home.olemiss.edu/~gg/paperhtm/blncbdgt.htm

Hale, G., Jones, P., & Spiegel, M. M. (2016, May). The rise in home currency issuance. Federal

Reserve Bank of San Francisco.

Islahi, A. A. (2015). Ibn Khaldun’s Theory of Taxation and its Relevance. Turkish Journal of

Islamic Economics, 2(2), 1-19.

Palley, T. (1997). THE ECONOMICS OF THE BALANCED BUDGET AMENDMENT: WHY

IT IS BAD FOR AMERICA (40th ed., pp. 5-13). Washingon DC: Thomas I. Palley.

Retrieved from

http://www.thomaspalley.com/docs/articles/macro_policy/sorry_politics_balanced_budge

t.pdf

Peter G. Peterson Foundation. (2012). Balanced Budget Amendment: Pros and Cons (pp. 1-2).

Peter G. Peterson Foundation. Retrieved from

https://www.pgpf.org/sites/default/files/sitecore/media%20library/PGPF/Articles/PDF/06

2112-Balanced-Budget-Explainer.pdf

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Vamvakidis, M. A., & Arora, M. V. B. (2001). The Impact of US Economic Growth on the Rest

of the World: How Much Does it Matter? (No. 1-119). International monetary fund.

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