The multiplier assumes that the increase in government spending is financed by selling bonds to the public. When the increase in government spending is financed by raising taxes, this multiplier is called the balanced-budget multiplier. This name reflects the fact that in this case the fiscal action has no impact on the size of the government’s budget deficit or surplus.

An increase in government spending of one dollar increases aggregate demand by one dollar, but an increase of taxes by one dollar decreases aggregate demand by less than one dollar, because the extra dollar for taxes comes partly from reducing saving. Consequently, a net positive impact on aggregate demand results from a balanced-budget change in government spending. We can conclude that the Keynesian multiplier process does not necessarily require creation of a budget deficit.

The balanced-budget multiplier is quite small, however, rendering unconvincing the Keynesian plea for fiscal policy in this context. In very simple models of the economy it is easy to show that the balanced-budget multiplier is 1.0. More realistic models of the economy that incorporate automatic stabilizers, however, push this number well below 1.0.