In the United States, the Constitution can be amended through Article V. It specifically states there are two methods for amending the governing document. The first, and only method ever used, requires the proposed amendment be passed by the House of Representatives and the Senate by a two-thirds vote in each body. Then 75% of the states must affirm the proposed amendment.
The other method requires two-thirds of the states in the U.S. to call for a Constitutional Convention through their individual legislatures. Once called to order, the Convention can propose a limitless number of amendments to the Constitution. 75% of the states must still approve of an amendment for it to become law.
A balanced budget amendment would make it Constitutionally mandatory for the government to operate without a deficit in each fiscal year.
The primary benefit of such an amendment is that it would protect future generations against accumulated debt. In 1979, the national debt of the United States was $827 billion. In 2017, the national debt was $20.2 trillion. With the amendment, this debt could begin to be reined in to prevent fiscal irresponsibility.
The primary issue with a balanced budget amendment is that it would limit the tools available to the government during times of economic difficulty. Countering recessions or responding to a national emergency would require the costs be offset on other budget lines, which would likely limit the help people may need to simply survive.
Here are some additional balanced budget amendment pros and cons to think about.
List of the Pros of a Balanced Budget Amendment
1. It would eliminate the threat of a debt spiral.
Debt that is out of control puts a nation into crisis. Although the world is not concerned about the stability of current U.S. debt bonds, continuing to build debt without a plan to get out of it can create a higher perceived risk to investors. That would require higher interest payments, which would create more debt, and that would increase the budget deficit. Then it would continue to repeat. This amendment would stop that cycle.
2. Too much debt is always unsustainable.
Even with more than $20 trillion in debt at this point, the United States is still holding a sustainable level of debt. As more debt accumulates, however, that sustainability will eventually go away. Interest payments on the debt become a liability that taxpayers will be forced to pay in some way. Higher taxes, lower spending on needed government services, and other costs would make themselves known within society.
3. It would reduce actual debt while funding real liabilities.
The national debt figure of $20 trillion (or more) includes unfunded liabilities that the U.S. government happens to have. This includes money into Social Security, employee retirement and pension programs, and Medicare. According to the Heritage Foundation, the actual U.S. debt is around $4 trillion. A balanced budget amendment could begin to address all these concerns while eventually reducing the liabilities of interest payments.
4. It wouldn’t stop emergency deficit spending.
Deficit spending can be good for the economy, especially when there is an emergency situation. In the past, the U.S. traditionally used deficit spending for emergencies only, such as during World War II. A balanced budget amendment could allow for this deficit spending to occur during times of a national emergency while still requiring politicians to budget with responsibility.
List of the Cons of a Balanced Budget Amendment
1. It would be difficult to enforce.
You know when you’ll receive a paycheck and how much it will be, but you’re trusting that your employer will pay you when they say they will. The same is true for the government. They have an idea of how much money will come in through taxation and other sources of income, but there is no guarantee that everyone will follow through on their promise to pay. That means a balanced budget amendment would likely need to work with a budget projection instead of an actual budget.
2. Creditors provide leeway for countries with debt in their own currency.
The United States issues debt in its own currency. Despite high levels of national debt and large deficits, the overall interest rates on U.S. debt bonds are comparable to any other nation in a similar circumstance. That means that a financial crisis involving debt might be waiting in the future if nothing is done to balance the budget, but it may be several generations into the future.
3. A budget isn’t the only factor to consider for growth.
A balanced budget can be a good thing, but it isn’t the only financial tool used to evaluate the health of a government or entity. Amazon had its debt grow by over 450% over a 10-year period, but its overall growth rose faster than its total debt, which was reflected in its earnings-to-interest ratio. To evaluate financial health for the government, a debt as GDP percentage may be a more accurate evaluation. Growth rates above zero indicate that the debt burden is shrinking, not growing, even if the actual national debt total continues to rise.
4. It could prolong a recession.
The requirement to have a balanced budget could actually cause more harm than good when looking at the cycles of economic growth. Recessions occur when economic activities shrink. Weak sales reduce profits. Smaller profits reduce job opportunities. Government spending can alleviate or eliminate this issue, but wouldn’t be able to do so if this amendment was passed, making it part of the Constitution.
5. It could create more debt instead of less.
Government deficits have patterns that increase or decrease, based upon the results of economic activity. When the economy is strong, then there is less of a need to create a safety net, so more taxes are generated. When an economy is weak, more safety net spending is required, so fewer tax revenues are produced. If a balanced budget amendment were to deepen and prolong recessions, then from a long-term perspective, it could create more debt instead of eliminating it.
6. It could force privatization.
To eliminate unfunded responsibilities, a balanced budget amendment could force certain programs or services to be privatized, such as Social Security. A likely outcome of this would be to have bonds issued to each person in the amount they were promised. Although this would become their private property, there would be no guarantee that the value of the bonds would be equal to the promise or pay-in provided over that person’s lifetime.
These balanced budget amendment pros and cons show us that, with proper structuring, it could be a beneficial tool that could stop debt cycles from devastating future generations. At the same time, a poorly structured amendment could cause financial difficulties and more debt for current generations.
Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.