Balanced budget

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From a Keynesian point of view, a balanced budget in the public sector is achieved when the government has enough fiscal discipline to be able to equate the revenues with expenditure over the business cycles. In other words, a government's budget is balanced if its income is equal to its expenditure. This allows for a deficit in periods of low economic prospects that however needs to be matched by a surplus in periods of high economic activity.

Because of the multiplier effect , it is possible to change aggregate demand (Y) keeping a balanced budget. The Government increases its expenditures (G), financing it by an increase in taxes (T). Since only part of the money taken away from households would have actually been used in the economy, the change in consumption expenditure will be smaller than the change in taxes. Therefore the money which would have been saved by households is instead injected into the economy, itself becoming part of the multiplier process. In general, a change in the balanced budget will change aggregate demand by an amount equal to the change in spending.

Y_1 = c_0 + c_1 \left ( Y - T \right ) + I + G

Y_1 = \frac {1} {1 - c_1} \left ( c_0 + I + G - c_1 T \right )

G = G + \alpha \,

T = T + \alpha \,

Y_2 = \frac {1} {1 - c_1} \left ( c_0 + I + \left ( G + \alpha \right ) - c_1 \left ( T + \alpha \right ) \right )

\Delta Y = Y_2 - Y_1 = \frac {\alpha} {1 - c_1} \left ( 1 - c_1 \right ) = \alpha

\Delta T - \Delta G = \alpha - \alpha = 0 \,

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