What is the Definition of a Balanced Budget Amendment?

You have probably heard the term "balanced budget amendment" used quite often in the news over the past couple of weeks. A balanced budget amendment was one of the key ingredients in the "Cut, Cap and Balance Act of 2011", which was brought forth by House Republicans and authored by Jason Chaffetz, Mick Mulvaney and Reid Ribble.

A "balanced budget amendment" states that a country (or state) can not spend more than what it takes in during a fiscal year.

So, for instance, if a country is projecting total revenues for their next fiscal year of $3 trillion, then projected expenditures must be no more than $3 trillion. This would produce a balanced budget ($3 trillion revenues - $3 trillion expenditures = balanced budget).

Balanced Budget - IllustrationAlmost all US states have to adhere to some form of balanced budget language in their laws. As we have seen in recent years in states such as California and Illinois, balancing the books when the economy is under duress can be a very difficult and trying exercise.

Some argue that "belts need to be tightened" during economic recessions, and that balanced budget amendments make sense because millions of households across the country have to balance their books every year, so why shouldn't the government do the same thing? Others argue that balanced budget amendments hurt more than help during times of economic stress, and that deficit spending is sometimes needed in order to kickstart an economy during hard times.

*It should be noted that most balanced budget amendments allow for some wiggle room during times of war or national emergency