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Balancing Act

Tuesday 13 July 2010 - by Bernadette Mill

There is a growing call for balanced budgets to be introduced after the financial and sovereign debt crises. Bernadette Mill investigates the merits of such a system

In its concluding statement of the mission on Euro-Area Policies in June, the International Monetary Fund urged member states in the European Union to strengthen their deficit reduction plans by moving to a balanced budget model.

It said: “The Commission’s calls for a stronger focus on medium-term debt sustainability in the excessive deficit procedure, and the early peer review of budgets and reform plans are particularly apposite.

“However, member states should also face stronger incentives to comply with common rules. One avenue is through greater national ownership, by adopting rules-based fiscal frameworks with a strong legal basis and effective enforcement at the national level. It would be essential to anchor national rules in the key objective of the Stability and Growth Pact, namely a balanced budget in structural terms, and possibly more ambitious debt reduction.”

In the US, this system is already in place. All states, except for Vermont, have a balanced budget rule. California has a rule to ensure that all deficits are eliminated but is flexible as to how the State chooses to achieve a balanced budget.

Similarly, the Republic of Georgia introduced a balanced budget rule to revive its failing economy which saw GDP per head nearly triple between 2004 and 2008. These measures limited government expenditure and meant that the Georgian economy grew even during the global economic downturn. The success of these measures has caused the Georgian President, Mikhail Saakashvili to propose incorporating them into the Georgian Constitution.



These measures would comprise of limiting government expenditure to 30 per cent of GDP and the budget deficit at 3 per cent of GDP. The proposals also include capping the level of national debt at 60 per cent of GDP. The Georgian government is showing a keen determination to tackle rising debt as it is also proposing to ban off-balance sheet accounting and ensure that spending and borrowing limits are honoured over a fixed three to five-year period.


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