Definition of Balanced Budget – A financially successful organization is defined as one that can add value while still maintaining profits, which means that its revenues must be greater than its costs.
To measure financial success, organizations closely monitor cash inflows and cash outflows to ensure they are meeting or meeting their budget expectations. In this case, the organization will achieve a balanced budget.
Implementation of a balanced budget can help companies reduce the risk of loss in a certain period. This is one reason why the budget must be prepared according to needs and executed in a way that is right on target.
Before we discuss a balanced budget, we must first know the meaning of a budget in general, so that Sinaumedia friends can understand the meaning of a balanced budget more clearly.
Understanding the budget is a plan in a business or organization that is compiled in aggregate and described in monetary units for a predetermined period or period of time.
The budget is often referred to as a financial plan because the budget prepared is expressed in monetary units. Corporate budgeting is a process that is planned and controlled for the purpose of estimating company finances.
A company within a company must have a budget plan as a form of tracking the company’s internal economic growth. Budgets that have important goals and interests in a business are usually prepared at the beginning of the year for a period of one year or more.
The purpose of the budget is to clearly and formally present the goals/expectations of the organization. In this way, the organization avoids confusion and provides direction on what management wants to achieve.
The next objective of the budget is to provide detailed information about planned activities. In this way, uncertainty will be reduced and the direction of individuals and groups within the organization will become clear to achieve the goals of the organization.
In this article, Sinaumedia will help you understand what a balanced budget is and how it can be created for the benefit of your business. Let’s look at the following explanation about the meaning of a balanced budget!
Definition of Balanced Budget
Based on the interpretation of the Financial Services Authority (OJK), the definition of a balanced budget is a budget whose total revenue is at least equal to the total expenditure for a certain period.
If you look at the explanation above, it is clear that a balanced budget must at least contain numbers that represent the same value between business expenses and income earned. In other words, conditions in this position do not experience losses, but also do not gain from implementing the budget.
A balanced budget, also known as a balanced budget , is a condition in which the total costs of a business equal the amount of revenue generated by a business.
In Indonesia, the term balanced budget is often referred to as a balanced budget . But in fact, these two terms actually have different meanings in English.
The meaning of a balanced budget in English is a balanced budget. While the meaning of the term balanced budget itself is a balance budget.
Furthermore, some also define this balanced budget as equilibrium cost income. That is, the income is not the same as the company’s expenses in a certain period.
The preparation of the budget in the company must be done as efficiently as possible. This aims to maximize budget execution, so that various business goals and targets can be achieved in accordance with the predetermined budget.
However, fulfillment of the budget must also be carried out by considering the various policies of the company itself. These different policies will of course also affect the successful implementation of a company’s budget.
A balanced budget occurs when an organization’s actual revenue meets or exceeds projected costs during a certain financial cycle, usually on a fiscal or calendar year basis, depending on the organization’s accounting book policies. When a balanced budget is achieved, the organization publishes “net break-even point” or “net surplus” financial results.
For an organization to continue to deliver results, it must create a clear and achievable balanced budget and then enable new spending and savings opportunities to help expand its reach. This term is most often used in governmental or public affairs, where the financial result is a budget surplus or a budget deficit.
Known Policies in the Budget
Actually, budget policies can be divided into several categories, namely:
1. Balanced Budget Policy
Balanced fiscal policy is a fiscal policy in which revenues (from the oil and gas, non-oil and gas sectors) are equal to government spending. Indonesia itself during the Long Term Development Phase I/PJP I (1969/1970–1994/1995) implemented a dynamic balanced budget.
September inflation penetrated 1.17%, the highest since December 2014 which is meant as a dynamic means a situation where income is easier to obtain than originally planned, in this case the government will make adjustments to spending so that it can maintain a good physical balance of the budget.
Likewise, with state revenue that is greater than the initial value of the plan, the ability to build reserves that can be used when state revenue is insufficient to fulfill the plan shows that various programs have been prepared/planned.
2. Unbalanced Budget Policy
An unbalanced budget is divided into two types, namely: budget deficit and budget surplus. In a given year, the government will generally experience a budget surplus or deficit. The budget deficit is a situation where the total expenditure is greater than the total revenue from taxes and oil and gas.
When the government intends to accelerate economic growth, then of course a deficit fiscal policy must be pursued. This is usually done when the economy is in a recession. Basically, this budget deficit is not a new thing in fiscal policy. Managing the budget deficit is a tool of budget policy.
3. Dynamic Budget Policy
A dynamic budget is a budget that is certain to increase compared to the budget implemented in the previous year. It is also carried out by trying to increase income and save expenses, so that there is an increase in state savings aimed at the benefit of the people.
4. Deficit Budget Policy
A budget deficit is a budget where actual government spending exceeds revenue. This means that ordinary government revenues and development revenues are not sufficient to finance all government spending.
The above conditions indicate that the state budget is experiencing a deficit, so the government must seek loans from the central bank or print new money to finance development.
5. Budget Surplus Policy
A surplus budget is a budget whose revenue is greater than total government spending. This policy is usually implemented when economic conditions are experiencing inflation, so the government must make upward adjustments to the prices of various goods and services in the market.
How to Create a Balanced Budget
Creating a balanced budget involves reviewing current progress – what is working and what is not – setting new goals to establish reasonable thresholds for costs and revenue and making necessary adjustments to achieve your goals.
1. Reviewing Financial Statements
Financial reports are maintained by organizations to track and measure yearly growth and progress and are excellent indicators of an organization’s financial past and future. Organizational financial reports (income statement, balance sheet, and cash flow statement) can help you better understand your past performance and financial life.
2. Compare Realization With Last Year’s Budget
How did the organization’s realization compare to last year’s balanced budget? Is there a budget surplus or deficit? Identify areas that work well and those that don’t. Funding for education may be within budget, but defense spending may be over budget. What is the impact on the current balanced budget?
3. Create a Financial Estimate
Based on last year’s performance, set realistic goals to avoid further deficit results. Focus on reducing costs and increasing revenue while setting priorities among different types of budgets.
4. Determine the Cost
Identify all types of expenses that are the responsibility of the organization, both short term and long term, based on financial statements and contractual commitments. Review contracts or specified payment terms to determine future obligations.
It’s important to overstate expenses to include a cushion for any unexpected expenses that arise, while not exceeding potential income to ensure a balanced budget.
5. Estimate Revenue
How does the revenue performance compare to the previous budget? Customize and forecast revenue estimates based on outstanding collections, existing contacts/policies, and new revenue opportunities.
With sufficient historical data, the average of last year’s performance can be an indicator of either future performance, or even the same month in previous years. Better to underestimate the expected benefits than not achieve the desired goal. However, make sure that your expected revenue exceeds your estimated costs to maintain a balanced budget.
6. Subtract Planned Expenses from Estimated Income
Subtract the total expected expenses from the estimated total income to ensure that the expenses are equal to or less than the expected income. It will show the budget surplus versus deficit.
Economic Views of a Balanced Budget
Classical economists argue that a balanced budget should be a goal of government policy. Thus, the government does not need to borrow and increase debt. Debt can affect budget sustainability, as the government must repay principal and interest, which can be difficult during periods of economic stagnation such as a recession.
When governments run perpetual budget deficits, debt burdens pile up, increasing the risk of default. Debt accumulation contributes to increasing interest rates in the economy and high interest rates discourage private investment as they incur high financing costs.
In addition, implementing austerity measures to pay down debt can hurt the economy. The government must increase taxes, cut spending, or choose a combination of the two. Both options have a negative impact on aggregate demand and economic growth in the short term.
Society has to deal with increasing taxes and, at the same time, decreasing public services due to reduced budgets. Meanwhile, Keynesian economists argue that deficit management is an important option to stimulate the economy. The government must pass it to pull the economy out of recession.
During a recession, it is difficult to encourage households to increase consumption and firms to increase investment. Instead, they tend to take effective action. Households are reluctant to spend more as their job and income prospects deteriorate.
Even so, the company found household demand weak, forcing them to reduce production and seek efficiencies. As a result, the economy is dependent on the government to emerge from recession. For that, the budget deficit is an option.
Meanwhile, when the economy is developing, the government can experience a surplus. The government spends less than it earns. In this way, the government can find a balance in the long term.
The Role of a Balanced Budget Against the Government
Some economists believe that balanced budgeting should be averaged over the business cycle. Several years the government experienced a budget deficit, but in other years the government experienced a budget surplus. So if you average it, it leads to a balanced budget.
What is the reason for the dispute? In the expansion process, on the one hand, tax revenue tends to increase in line with the development of economic and business activities. The government can collect more taxes as household income and business profits increase.
On the other hand, government spending tends to fall because the government spends less on certain goods. For example, the government spent less on unemployment benefits because unemployment fell during this period. Likewise with other welfare programs, it will decrease along with the increasingly prosperous society so far.
Additionally, spending cuts are essential to avoid an overheated economy. During the expansion, the economy prospered. Aggregate demand is increasing due to a strong increase in household consumption and business investment and prices are also on the rise. If government spending increases, it will increase aggregate demand further, creating stronger inflationary pressures.
Inflation that is too high is unhealthy for the economy because the purchasing power of money evaporates quickly. For this reason, budgets tend to be in surplus during expansions. Tax revenue on the one hand has increased. And on the other hand, public spending fell.
Meanwhile, during a recession, the government experiences a budget deficit. Besides the government having discretionary policies to stimulate economic activity, deficits also occur due to cyclical factors. During this period, tax revenues declined as the outlook for household income and corporate profits deteriorated. Thus, the government collects less taxes.
In addition, spending on social and welfare programs increased due to deteriorating economic conditions. For example, the government spends more on unemployment benefits because of high unemployment rates.
Examples of Balanced Budget Benefits
In this example, we see how a balanced budget works for a government entity. Please note that the categories and amounts used below are for illustrative purposes only.
Revenue (in billion)
Income tax: $3,500
Business sales tax: $2,750
Excise tax: $2,000
Social Security Tax: $750
Property tax: $500
Total earnings: $9,500
Expenditure (in billion)
National defense: ($3,400)
Medical expenses: ($2,900)
Tuition fees: ($1,500)
Social Security Benefits: ($250)
Total expenses: ($8,050)
Net income (surplus): $1,450
In the example, we see a balanced budget with a budget surplus. As you can see, total revenue exceeds total expenses by $1.450 billion—or $1.45 trillion—suggesting that the government entities in the example generated more than they spent during the year.
If net income is negative—meaning total expenses exceed total income)—it will indicate a budget deficit. This will require government entities to review actual spending, identify opportunities to reduce spending—increase savings—or increase revenue to balance the budget.
Definition of Balanced Budget Multiplier
The balanced budget multiplier refers to the change in total output when the government changes spending and taxes at the same rate. Here, balance is not needed when the government runs a balanced budget or income equals expenditure. Instead, the government changes income and expenditure in equal proportions. So, if the government has had a budget surplus or deficit in the past, this will not change compared to before.
For example, let’s say the government had a surplus in its previous budget of $100 from $700 in tax revenue minus $600 in spending. Because the economy was slowing, the government raised taxes and spent $200 more. Therefore, government revenue is $900 and expenditure is $800, keeping the surplus at $100.
So how do these budget changes create a multiplier effect in the economy? The multiplier effect occurs because the decrease in aggregate demand resulting from a tax increase is smaller than that due to an increase in government spending.
When the government increases spending by $100, it increases aggregate demand by $100. Remember the aggregate demand formula to satisfy it.
Aggregate Demand = Household Consumption= Business Investment= Government Spending= Net Exports
On the other hand, a $100 increase in taxes would reduce overall demand below $100. The increase only reduces your personal disposable income by $100. However, the impact on consumption and investment may be smaller depending on how sensitive the household and corporate sectors are.
That’s a complete discussion about the meaning of a balanced budget that will provide you with knowledge about the world of economics and business. In business, making a budget is one of the important things to be able to ensure that business planning is achieved perfectly. If you have difficulty making a budget or a balanced budget , you can read books on balanced budgets at sinaumedia.com. There are many books on balanced budgets in economics.