What are the implications of a balanced budget amendment?

A balanced budget amendment would require the government to not spend more than its income, impacting fiscal policy.

A balanced budget amendment is a constitutional rule requiring that a state cannot spend more than its income. It implies that the government must ensure that its expenditure does not exceed its revenue. This would have significant implications for fiscal policy, which is the use of government revenue collection and expenditure to influence a country's economy.

Firstly, it would limit the government's ability to implement counter-cyclical fiscal policy. During a recession, governments often engage in deficit spending, where they spend more than they earn to stimulate economic activity. This is done by either increasing government spending or cutting taxes, both of which increase the budget deficit. However, a balanced budget amendment would prevent this, potentially exacerbating economic downturns.

Secondly, it could lead to pro-cyclical fiscal policy, which could destabilise the economy. During periods of economic growth, government revenues increase due to higher tax receipts. Under a balanced budget amendment, this would require an increase in government spending or a decrease in taxes, which could overheat the economy. Conversely, during a recession, falling revenues would necessitate spending cuts or tax increases, which could deepen the recession.

Thirdly, it could limit the government's ability to invest in long-term projects. Many investments, such as infrastructure or education, require significant upfront costs but generate returns over a long period. A balanced budget amendment could force the government to cut these investments, potentially harming long-term economic growth.

Lastly, it could lead to creative accounting and budgetary gimmicks to meet the balanced budget requirement. This could involve shifting spending to off-budget entities or moving expenditures into future years. Such practices could undermine fiscal transparency and accountability.

In conclusion, while a balanced budget amendment may seem like a prudent fiscal rule, it could have significant implications for fiscal policy and economic stability. It could limit the government's ability to respond to economic downturns, potentially lead to pro-cyclical fiscal policy, limit long-term investments, and encourage budgetary gimmicks.