The world of government finance is filled with arcane terminology and concepts, like horizontal and vertical tax equity, unfunded actuarial accrued liabilities, and arbitrage on tax-exempt bonds, just to name a few. Thankfully, perhaps the most important concept in public finance—structural budget balance—is arguably also the easiest to understand. GFOA’s best practice on achieving a structurally balanced budget summarizes the principle as follows:
Most state and local governments are required to pass a balanced budget; however, a budget that may fit the statutory definition of a "balanced budget" may not, in fact, be financially sustainable. For example, it could include non-recurring resources such as asset sales or reserves to fund ongoing expenditures, and therefore not be in structural balance. A true structurally balanced budget is one that supports financial sustainability for multiple years into the future. A government needs to make sure it’s aware of the distinction between satisfying the statutory definition and achieving a true structurally balanced budget.
Not all financial principles translate directly between public finance and personal finance, but structural budget balance does. For example, you shouldn’t take on a larger mortgage than you can afford over the full term because you received a one-time compensation bonus that will cover only the first year of the higher payments.
Most government leaders are aware of the principle of structural balance, often summed up as “ongoing expenditures must be supported by ongoing revenues.” But how do governments determine what goes into each of those financial categories?
- Publication date: April 2025
- Authors: Steve Watson and Kyle Jen