The Rise and Fall of the Norm of Budget Balance - Seeking a Budgetary Logic Behind Federal Budget Deficits

Abstract

Deficits and debts are very complex issues for eternal public debate. The norm of budget balance - whether as a value judgment or ideal, as a political symbol or as a budgetary principle - often appears in literature and public debate over federal budgetary and fiscal policies. This paper offers a preliminary examination of this norm. The purpose is to provide a perspective on how federal has evolved, where it is going and how deficit and debt issues are to be tackled in a theoretically reasonable and practically acceptable way. The paper traces the genesis of the norm, dissects the different elements of the norm for their inner logic, and divides the elements into an annual component and a cyclical component. Using historical data, the paper finds that the norm of budget balance had its heyday from the 19th century till roughly 1960; the tax-smoothing theory well explains its operation. Since then, budget balance has been ignored, for which no theory offers adequate explanation. This paper finds that new functions of the federal government opened a window for entitlements while electoral politics developed downward pressure on taxation, which is the logic behind chronic deficits and increasing debts. The paper also finds that decline of the norm has left a vacuum in research; current literature identifies difficulties in federal but is shy of specific answers. This paper proposes the concept of balanced budgeting as a new paradigm for further discussion and as a potentially rich area for future research.