The Importance of Balanced Budget and Tax Neutrality in Financial Management

Balanced Budget

Balanced budget is when current revenues equal current expenditures; however, when a deficit budget occurs causing revenues to fall short of expenditures, it requires the government to borrow money or even tap into reserves to make up the difference. This becomes a requirement that shapes the entire budget process, thus making budget deliberations revenue-driven when revenues determine the level of spending. Balanced budget is elusive when authorities propose a balanced budget but the council approves an unbalanced one or state or local laws allow the deficit at the end of the year to be carried over to the next year. Furthermore, there are no consistent or enforced standards for the balanced budget since it may be manipulated at any time. On the other hand, a structurally balanced budget does not spend more on services than it receives in revenues. It plays an important role in good financial management; it bears strict discipline and helps sustain consistent delivery of goods and services to residents and to the community.

Tax Neutrality

Tax neutrality is described as characteristics by which taxes do not interfere with the natural flow of the competitive market. The interferences produce inefficiencies, they may negatively affect the performance of the market, reduce the opportunity for potential economic growth, and lead to economic losses. The elimination of such interferences can maximize the economy's production rate and increase customer satisfaction. Thus, it is in the market’s best interest to minimize interference and reduce tax liability. However, according to Bland, the absence of taxes may not be the key to economic prosperity, since the goods and services provided by the market are a large part of what our society needs, as there will always be a necessity for public goods and services, and some are in fact provided to the public through nonmarket ideals. Furthermore, tax neutrality may provide for non-market goods such as recreational parks and schools, making the collection of taxes a need of our society.