If a country has a balanced budget then it will recieve more favourable interest rates from the financial market. Lower interest rates will result in higher borrowing and lending to businesses and entrepreneurs
2) Improvement in the balance of payments
A balanced budget should improve the balance of payments. If interest rates in the U.K. fall, then there will be less incentive to hold the pound sterling.
For this reason the supply of pounds on the FOREX will increase, leading to a depreciation of the currency, thus making exports cheaper and imports more expensive.
3) Crowding Out
Budget deficits can result in a crowing out of the private sector. If the government borrows from the private sector then the private sector has less funds to spend and invest.
This is an issue for some economists because it is believed that spending by the government is far less efficient than spending in the private sector.
4) Large Repayment / Increased inequality
Large amount of borrowing will inveitably result in a larger amount or repayment. Repayment may be financed by increases in taxation and public sector cut backs. This is known as fiscal austerity and often features in U.K news because of the coalitions plans to eliminate the structural budget deficit.
Fiscal austerity hits low income households hardest and result in rising inequality. Since the lower income households have a higher propensity to consume, the combination of high tax and high spending reduces the overall savings of lower income groups leading to higher wealth inequality.
In the very long-run the government may face social consequences arising from inequality such as crime and rioting.
5) E.U Sactions
If the government runs a deficit it could face E.U sanctions. The Stability & Growth pact limits budget deficits to no more than 3% per annum.
Case Against - The Government should not balance it's budget
1) Deficits and surpluses are an instrument to control the economy
Sometimes the private sector is weak and consumer spending and investment is low. Government can conduct expansionary fiscal policy causing a deficit in the short run but economic growth and lower unemployment in the long-run.
A budget deficit can be sustainable providing fiscal stimulus creates economic growth, which can pay off the debt in the long run. Furthermore the government doesn't have control of monetary policy therefore controlling growth of inflation is down to fiscal policy.
2) Capital Spending
A budget deficit may be benefitial if it is used to finance capital spending such as new infrastructure projects (supply-side fiscal policy).
This will allow a faster rate of growth, an increase in employment and will generate higher tax revenues for the government in the long-run through automatic fiscal stabilisers, which can be used to pay for the borrowing.
3) Unexpected circumstances
In some extreme circumstances the government needs spend money and run a budget deficit, in the situation the government is known as the 'lender of last resort'. E.g. during the banking crisis, the government spent approximately £500 billion to bail out banks.
Evaluation
A deficit is not a problem if fiscal policy is effective:
Gordon Browns Golden Rule states that the government only borrow to invest. This should have the following effect: