The Contradictions of Balanced Structural Government Budgets

Abstract

The paper points to the push for balanced budgets in many countries. It briefly reviews the rationale for balanced budgets and finds them wanting. It is argued that a balanced budget and economy operating at potential output are in generally incompatible and hence a balanced structural budget is not possible. It is argued that there are major issues in the estimation of potential output and of the size of structural budget position, which creates severe difficulties in using the structural budget position as an objective of fiscal policy.

Keywords: balanced budget, potential output, structural budget

JEL Classification: E61, E62