What is a Golden Rule?

The Golden Rule states that a government can only borrow to invest, not to cover existing spending when it comes to fiscal policy. To put it another way, the government should only borrow money to support initiatives that will benefit future generations.

At the same time, current spending must be covered and funded from existing or new Taxes.

Briefly Understanding the Golden Rule

The term "golden rule" is found in the New Testament, the Talmud, and the Koran, among other ancient works. Each one tells a storey on the golden rule: Do unto others as you would have them do unto you. The golden rule in fiscal policy aims to prevent future generations from becoming overburdened by debt by confining borrowed money to investments exclusively, rather than burdening future generations for the sake of current spending.

Many countries have effectively adopted this golden rule in fiscal policy. Although the specifics of its implementation differ from country to country, the Underlying idea of spending less than the government receives is constant. A revision in the constitution was required to ensure proper execution of the rule in most countries that have adopted it. After many years of severe deficit spending, countries that have implemented some variant of the golden rule have seen their deficits as a percentage of GDP decrease.

Golden Rule's Global Applications

Switzerland implemented a debt brake, limiting government expenditure to the current business cycle's predicted average revenue. Since 2004, Switzerland has maintained an expenditure growth rate of less than 2% each year. Meanwhile, it has been able to grow the Economy at a greater rate than it has spent.

Between 2003 and 2007, Germany used a similar debt brake to keep spending below 0.2 per cent, resulting in a budget surplus. Canada, New Zealand, and Sweden performed the same approach at various times, turning deficits into surpluses. The European Union has adopted its version of the golden rule, mandating any nations with debts exceeding 55% of GDP to decrease their structural deficits to 0.5 per cent of GDP or less.

The United States' No Golden Rule

Although Congress has made countless attempts to do so, the United States has yet to codify any golden rule that would demand a spending cap. The United States Constitution does not make it mandatory to have a Balanced Budget or place any restrictions on expenditure or sovereign debt issues.

President Clinton's budget surpluses in the 1990s resulted from temporary policies that included tax increases and spending cuts. The Gramm-Rudmann-Hollings bill, passed in 1985, established annual deficit targets that, if not met, would result in automatic sequestration. The law was declared unconstitutional by Supreme Court, and it was repealed.