This paper investigates the dynamic implication of balanced-budget rules. We introduce public goods to an overlapping generations model with production and assume that public goods in each period are financed by the labor income taxes. We show that in our model, if the cost of providing public goods is financed by lump-sum taxes, endogenous fluctuations would never occur. But in cases where the government adopts proportional taxes, periodic and chaotic equilibria can exist. © 2003 Blackwell Publishing, Inc.