The Case Against Balanced Budgets

Abstract

A proposal by the Fahey government in late 1994 to amend the NSW state Constitution so as to require ‘balanced’ budgets is one of a number of signs which suggest that the simple notion that total government expenditure should not exceed total tax revenue has gained real influence in Australia, particularly at the state level. This article explains why fiscal responsibility does not require overall budget balance. A balanced budget requirement of this type is not appropriate even if one were to make allowances for recession‐induced (‘cyclical’) deficits, and to seek to ban only ‘structural’ deficits. The reason for this is there are inherent irregularities in capital expenditure, and only through varying debt levels is it possible to reconcile reasonable stability of tax levels with stable levels of provision of public services (including services from public capital infrastructure).