Balanced Budget Multiplier

A situation in which a government increases spending and taxes at a rate that keeps its budget in balance. It is thought that some of the money collected in increased taxes comes from what people otherwise would have saved. Because the government then spends the money, spending is increased in the aggregate, which drives economic growth.

balanced budget multiplier

a change in AGGREGATE DEMAND brought about by a change in GOVERNMENT EXPENDITURE, which is exactly matched by a change in revenues received from TAXATION and other sources. The change in government expenditure has an immediate effect on aggregate demand and generates income of an equivalent size. By contrast, the change in taxation does not change aggregate demand by an equivalent amount because some of the increased/reduced DISPOSABLE INCOME will be offset by changes in SAVING.

Consequently, an increase in government expenditure and taxation of equal amounts will have a net expansionary effect on aggregate demand and incomes, while a decrease in government expenditure and taxation of equal amounts will have a net contractionary effect. See BUDGET, FISCAL POLICY.

Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005

References in periodicals archive

Section III examines the balanced budget multiplier as well as derives a graphical illustration.

Since the aggregate supply function will play a significant role on evaluating the balanced budget multiplier, we now turn to derive this function in detail.

It indicates that an increase in government expenditures fully covered by taxes will raise the national income, that is, the balanced budget multiplier is positive.

Working capital finance and the balanced budget multiplier

The balanced budget multiplier is unambiguously less than the conventional government spending multiplier as long as the tax rate is less than 1.

The balanced budget multiplier revisited

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