Balanced budget multiplier (1940S)

Axiomatic theories relating to consumer behavior and rationality, and are an essential part of consumer demand theory and indifference curve analysis.

A balanced budget (equilibrium)(particularly that of a government) is a budget in which revenues are equal to expenditures. Thus, neither a budget deficit nor a budget surplus exists (the accounts “balance”). More generally, it is a budget that has no budget deficit, but could possibly have a budget surplus. A cyclically balanced budget is a budget that is not necessarily balanced year-to-year, but is balanced over the economic cycle, running a surplus in boom years and running a deficit in lean years, with these offsetting over time.

Balanced budgets and the associated topic of budget deficits are a contentious point within academic economics and within politics. Many economists argue that moving from a budget deficit to a balanced budget decreases interest rates, increases investment, shrinks trade deficits and helps the economy grow faster in the longer term.

Economic views

Mainstream economics mainly advocates a cyclic balanced budget, arguing from the perspective of Keynesian economics that permitting the deficit to vary provides the economy with an automatic stabilizer—budget deficits provide fiscal stimulus in lean times, while budget surpluses provide restraint in boom times. Keynesian economics does not advocate for fiscal stimulus when the existing government debt is already significant.

Alternative currents in the mainstream and branches of heterodox economics argue differently, with some arguing that budget deficits are always harmful, and others arguing that budget deficits are not only beneficial, but also necessary.

Schools which often argue against the effectiveness of budget deficits as cyclical tools include the freshwater school of mainstream economics and neoclassical economics more generally, and the Austrian school of economics. Budget deficits are argued to be necessary by some within post-Keynesian economics, notably the chartalist school:

Larger deficits, sufficient to recycle savings out of a growing gross domestic product (GDP) in excess of what can be recycled by profit-seeking private investment, are not an economic sin but an economic necessity.

Budget deficits can be calculated by subtracting the total planned expenditure from the total available budget. This will then show either a budget deficit (a negative difference) or a budget surplus (a positive difference).

The axioms of rationality are:

– completeness (the ability to order every available combination of goods according to preference);

– transitivity (relationship between different combination preferences); and

– selection (the consumer will aim for the most desired combination).

The axioms of behavior comprise the axioms of dominance (also known as the axioms of greed), which are:

– continuity (relating to indifference curve analysis); and

– convexity (the assumption that the indifference curve will be convex to the origin).

Also see: consumer demand theory