balanced budget multiplier

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.

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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