Why a Budget Cap Is a Bad Idea

by Cynthia Gomez

When an entity -- be it a company or government -- operates at a deficit, the idea of a budget cap often comes up. A budget cap essentially puts a ceiling on spending. On its surface, the strategy may seem like a good one. After all, when you personally get into debt, you know that the first step to getting out of debt is to curb your spending. However, on a corporate or governmental level, the matter is a bit more complicated, and a budget cap is not necessarily as good a strategy as it may seem to some.


At any given time, a company (or government, for that matter) is both making money and spending money. However, a budget cap addresses only one side of that equation: the spending. You can't balance a budget unless you look at both money coming in and money going out. If more revenue suddenly starts coming in, that budget cap suddenly becomes unnecessary, but because it's still in place, the entity is unable to spend more of the money coming in to expand services to its constituents.

Circle Effect

The key problem with a budget cap is that it limits spending. But as any good businessperson knows, you need to spend money to make money. On the other hand, if you don't spend money, you can't make money. It's a circle effect. For instance, if a company caps spending on product development, then it will have less products to sell, and in turn it will make less money on sales, and thus the deficit will perpetuate itself.


A budget cap limits an entity's ability to respond to changing economic conditions. In a company, an increase in demand may require that a company produce more of whatever it sells. However, to do this, it may need to invest in more workers or better equipment. However, a spending cap prevents it from making these necessary expenditures, and as a result the company can't meet market demand and forfeits potential profits. In a government, if the budget for emergency management is capped at a certain amount, but Florida is hit by two major hurricanes one after the other while flooding and tornadoes rock the Midwest, the government will find itself unable to provide federal emergency assistance everywhere its needed and to the extent necessary.


In a company, spending caps often hurt individuals the most, since jobs are often slashed and salaries frozen before cuts are made anywhere else. When government spending caps are put into place, the first programs to get their budgets slashed are often those that help the most vulnerable people in a country.

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