Golden Rule (Economics) - Explained
What is the Golden Rule?
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Table of ContentsWhat is Golden Rule in Economics?Why is the Golden Rule Important for Fiscal Policy?Academic Research on the Golden Rule
What is Golden Rule in Economics?
In modern economics, the Golden Rule is an economic policy that says, a government must only borrow money for investing and not for funding the regular expense. That means a government should borrow money only to invest them for the benefit of the future generation and all the present expenses should be covered by tax revenue.
Why is the Golden Rule Important for Fiscal Policy?
The term Golden Rule was originally used in some ancient religious writings and the most popular version of it says, Do unto others as you would have them do unto you. In economic policy, the golden rule is not to burden the future generation with debt. According to the golden rule of fiscal policy, a government is only allowed to borrow money to invest it and not utilize it for the benefit of the current generation. The golden rule has been applied by many countries in their fiscal policy although the nature of application differs from one country to another. In most of the cases, the countries had to make some changes in their constitution in order to apply golden rule completely. However, in all the countries the basic is the government spends less than it earns. The countries that adopted the golden rule policy witnessed a significant reduction in their deficit after applying the rule. Switzerland is one of the countries that adopted the golden rule successfully in formulating their economic policy. As part of the policy, the Swiss government limited their spending to the projected revenue in the financial year. As a result, since 2004 the country has managed to keep its spending growth under 2% per year. The country has also increased its economic output faster than its spending. Germany has also adopted this rule and the countrys spending growth was reduced to below 0.2% from 2003 to 2007. It also enabled to create a budget surplus. New Zealand, Canada, and Sweden have applied this rule and experimented with it from time to time and managed to turn their deficit to surplus. The European Union applied its own version of the golden rule and mandated the nations with debts higher than 55% of GDP to reduce their structural deficit to less than 0.5% of GDP. In the United States, several attempts were made by different lawmakers to apply the golden rule, but none succeeded as the constitution of the United States does not require a balanced budget, nor does it impose any limits on spending. One of the most remarkable efforts to adopt the golden rule was made in 1985 by passing the Gramm-Rudmann-Hollings bill. The bill specified annual deficit targets and if the target is missed; an automatic sequestration process would start. The bill was later ruled out by the Supreme Court of the United States as unconstitutional and it was abandoned. In 1990, under the presidency of President Bill Clinton, the country witnessed budget surpluses due to certain temporary policies including a rise in tax and spending reduction.
- Fiscal Policy
- Expansionary vs Contractionary Fiscal Policy
- Stabilization Policy
- Robin Hood Effect
- Ricardo Barro Effect
- Autonomous Spending
- Autonomous Consumption
- Golden Rule
- Ricardian Equivalence
- Balanced Budget - Deficit and Surplus
- National Debt
- Standardized Employment Budget
- Deficit Hawk
- Twin Deficits