What is the Golden Rule of Government Spending?
The golden rule of government spending is a fiscal policy asserting that a government should borrow solely to invest, not to fund current spending. In essence, borrowing should be reserved for investments that will yield long-term benefits, while short-term expenditures should be covered by tax revenues.
Key Points
- The golden rule aims for borrowing only to fund projects generating long-term benefits.
- Current expenditures should be financed through taxation, not borrowing.
- Different countries have adopted versions of this rule, though the U.S. has not.
- Economic emergencies often prompt flexibility in this rule’s application.
Embrace the Golden Rule: A Blueprint for Fiscal Responsibility
Advocates for the golden rule of government spending emphasize its role in protecting future generations from being overburdened with debt incurred for present-day expenditures. Some economists argue this rule isn’t the ultimate method for achieving intergenerational fairness but support its goal of limiting government size and reducing deficits relative to GDP.
Key Takeaways
Countries implementing this rule often face constitutional or statutory adjustments. Although it offers a framework for reducing deficits, flexibility in government fiscal policies remains crucial to address economic emergencies.
Global Success Stories: Learning from International Applications
In the past three decades, nations with advanced economies, including Canada, New Zealand, Sweden, Switzerland, and Germany, have integrated elements of the golden rule into their fiscal policies, reducing spending growth and debt levels. The UK’s golden rule policy, adopted in 1998, faced hurdles due to the 2008 financial crisis and economic contingencies. Similarly, the European Union adopted the Stability and Growth Pact (SGP) to ensure fiscal responsibility among member states, ultimately suspending it in response to the COVID-19 pandemic.
The United States’ Stance: A Journey Towards Fiscal Prudence
While the U.S. federal government hasn’t adopted a golden rule policy, legislative measures—such as the Gramm-Rudmann-Hollings bill in 1985—aimed to control budget deficits. However, these measures faced legal and practical challenges. Discussions about adopting a flexible, multifaceted approach to fiscal policy continue.
Frequently Asked Questions
Why is limiting borrowing for current expenses called the ‘Golden Rule’?
Supporters believe this approach prevents future generations from inheriting debt from expenditures that don’t benefit them. The term compares its fundamental nature to the ethical golden rule of mutual reciprocity.
Is the European Union following the golden rule now?
In May 2022, the European Commission proposed extending the suspension of borrowing limits through 2023 to focus on transitioning to a digitized green economy and recovering from the pandemic.
What is the US debt limit?
The debt limit is the total amount of money the U.S. is permitted to borrow to meet its obligations. To date, the U.S. government has never defaulted on its debts.
Conclusion: Embracing Responsible Fiscal Policies
The golden rule of government spending, rooted in ancient ethics, finds modern relevance in preventing future debt burdens. While several countries have experimented with this fiscal policy, its flexibility in times of economic emergencies highlights the need for adaptable economic strategies. Though the U.S. has not formally adopted this rule, discussions continue around implementing sustainable fiscal policies to ensure long-term economic stability.
Related Terms: fiscal policy, sovereign debt, budget deficit, gross domestic product, debt ceiling
References
- Institute for Fiscal Studies. “The IFS Green Budget 2009 – Chapter 5, The Fiscal Rules and Policy Framework”. Pages 82-83.
- Cato Institute. “A Golden Fiscal Rule Nurtures Prosperity”.
- Zeyneloglu, Irem. “Fiscal Policy Effectiveness and The Golden Rule of Public Finance”. Central Bank Review, vol. 18, no. 3, September 2018, pp. 85-93.
- Institute for Fiscal Studies. “The IFS Green Budget 2009 – Chapter 5. The Fiscal Rules and Policy Framework”. Pages 81-82, 85, 97-98
- European Commission, Economy and Finance. “History of the Stability and Growth Pact”.
- European Parliament. “Implementation of the Stability and Growth Pact Under Pandemic Times”. Pages 3-4.
- EuroNews.Next. “EU Commission to Propose Keeping Fiscal Rules Suspended in 2023-Officials”.
- Cato Institute. “The Golden Rule of Spending Restraint”.
- Center for American Progress. “Economic Stewardship in Times of Crisis”.
- Justia, U.S. Supreme Court. “Bowsher v. Synar, 478 U.S. 714 (1986)”.
- U.S. Department of Treasury. “Secretary of the Treasury Janet L. Yellen Sends Letter to Congressional Leadership on the Debt Limit”.
- U.S. Department of Treasury. “Debt Limit”.
