Golden Rule (fiscal Policy)

Golden Rule (fiscal Policy)

The Golden Rule is a guideline for the operation of fiscal policy. The Golden Rule states that over the economic cycle, the Government will borrow only to invest and not to fund current spending. In layman's terms this means that on average over the ups and downs of an economic cycle the government should only borrow to pay for investment that benefits future generations. Day-to-day spending that benefits today's taxpayers should be paid for with today's taxes, not with leveraged investment. Therefore, over the cycle the current budget (i.e., net of investment) must balance or be brought into surplus.

The core of the 'golden rule' framework is that, as a general rule, policy should be designed to maintain a stable allocation of public sector resources over the course of the business cycle. Stability is defined in terms of the following ratios:

  1. The ratio of public sector net worth to national income
  2. The ratio of public current expenditure to national income
  3. The ratio of public sector income to national income.

If national income is growing, and net worth is positive this rule implies that, on average, there should be net surplus of income over expenditure.

The justification for the Golden Rule derives from macroeconomic theory. Other things being equal, an increase in government borrowing raises the real interest rate consequently crowding out (reducing) investment because a higher rate of return is required for investment to be profitable. Unless the government uses the borrowed funds to invest in projects with a similar rate of return to private investment, capital accumulation falls, with negative consequences upon economic growth.

Read more about Golden Rule (fiscal Policy):  The Golden Rule in The United Kingdom, The Golden Rule in France, The Golden Rule in Germany, The Golden Rule in Spain, The Golden Rule in Italy

Famous quotes containing the words golden and/or rule:

    Fair Hope! our earlier Heaven! by thee
    Young Time is taster to Eternity.
    The generous wine with age grows strong, not sour,
    Nor need we kill thy fruit to smell thy flower.
    Thy golden head never hangs down
    Till in the lap of Love’s full noon
    It falls and dies: Oh no, it melts away
    As doth the dawn into the day,
    As lumps of sugar lose themselves, and twine
    Their subtle essence with the soul of wine.
    Abraham Cowley (1618–1667)

    This administration is going to be a compassionate administration. We believe in the Golden Rule of doing unto others as you would have them do unto you.
    Lyndon Baines Johnson (1908–1973)