What Happens When Best Practices in Budget Balancing Are Not Respected

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It is wrong to assume that the federal government needs to have a balanced budget every year. Most times there is always a budget deficit. This means that having a balanced budget proves that the government is ignoring the economic theory and lessons from past history. When best practices in budget balancing are not respected, the consequences are described in one simple phrase: “Balanced Budget Amendment”.

The Balanced Budget Amendment is a constitutional rule which requires that the state does not spend more than its income. Therefore, best practices require that the government maintains a balance between the project receipts and the expenditures.

A Balanced Budget Amendment can be a bad turn-out for the government. Usually, when a government goes for the Balanced Budget Amendment, it means the government has failed in maintaining best practices with their balanced budget for the fiscal year. Nevertheless, there are both pros and cons of Balanced Budget Amendment.

A Balanced Budget Amendment is not advisable for any government unless the system is designed very well to sustain the amendment. A good system requires law makers to consider the fiscal consequences of their decisions and correct them.

When a government fails to maintain best practices in budget balancing, it slashes its spending. This hurts the economy, increases taxes, increases unemployment and loses a lot of money in form of debt. The federal government borrows money in order to make up the difference, and to mitigate the consequences of the failure in best practices to ensure a balanced budget.

When best practices in budget balancing are not respected the credit rating of the currency drops. This means the Gross Domestic Product (GDP) is going down the drains. The contributing factors to this situation include failure in best practices in the following ways:

  • The Fiscal Crisis in the Country Threatens the Long Term Economic Growth: According to the citing made by the former Director Congress Budget Office Douglas Holtz Eakin there are disastrous long term consequences. In the next eleven years, people will have as much as double the debt they have currently. This means the percent of GDP will continue in an upwards trajectory.
  • Implementing the Balanced Budget Amendment will lead to more taxes and fewer jobs: According to studies states with strict balanced budget requirements have taxes and still spend less than other states. For such states the per-capita spending is lesser. Therefore when states do not respect the best practices in budget balancing have higher spending. 
  • Higher taxes will continue to damage the economy: The fact is that as taxes increase, there will be more deficit and spending reductions. These damage the economy and will continue to get worse. Unemployment rate will also increase because of failure to ensure best practices in budget balancing. The government will subsequently have to exercise close spending because of adopting the Balanced Budget Amendment.

Therefore, it is important for governments to ensure compliance with best practices to maintain a good budget balance, even though it is quite impossible. At least, respecting the best practices will prevent a Balanced Budget Amendment which has worse consequences for the government and the country.

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