What is the Golden Rule of Government Spending?
The fiscal policy of the golden rule states that governments should borrow exclusively for investments, not for current spending. Thus, only engage in long-term projects should the government borrow money. Taxes should finance short-term spending.
Understanding the Golden Rule
Supporters of the golden rule of government spending, which limits borrowing to investments, want to shield future generations from debt from present expenditures. Other actions impact future generations’ debt, say economists. They believe the golden rule is not the best method to ensure intergenerational justice. Some embrace the golden rule to restrict government size.
Several nations follow the fiscal policy golden rule. Spending less than the government gets in is its cornerstone, regardless of nation. Most nations that have accepted the rule—except the U.S.—have had to amend their constitutions or laws.
Some countries have seen a decrease in deficits as a percentage of GDP. During recessions and emergencies, governments may need more flexible budgetary policies.
Talmud, the New Testament, and the Koran teach “do unto others as you would have them do unto you,” while government spending follows a different golden rule.
International Golden Rule Applications
Over the last 30 years, many countries, especially industrialized economies, have implemented fiscal strategies that incorporate the golden rule. These policies usually exempt economic emergencies, whether legal or government policy.
Canada, New Zealand, Sweden, Switzerland, and Germany have sometimes used golden rule strategies to cut expenditure and debt. The U.K. implemented a golden rule in 1998. By 2007, economic issues and tax revenue deficiencies hampered compliance. The U.K. abandoned the program before the 2008 financial crisis because the economy needed government support and stimulation.
The E.U.’s golden rule experience shows that economic volatility makes it better as a suggestion than an obligation. The European Union established the Stability and Growth Pact in 1997 to monitor and stabilize the EMU and coordinate fiscal policies among E.U. states. E.U. members must develop fiscal strategies to limit deficits to 3% of GDP and debt to 60%. The 2005 regulatory changes increased freedom, while the 2008 financial crisis brought new restrictions and monitoring.
The 2020 COVID-19 epidemic forced the E.U. to postpone SGP borrowing restrictions until 2023. Some members want further changes for future flexibility. The E.U. proposed a further suspension of limitations until 2023, in May 2022.
The US Golden Rule
The U.S. federal government has no golden rule budgetary policy. While some U.S. fiscal policy pundits advocate for a golden rule, others suggest a flexible, multi-faceted approach. Policymakers have advocated balanced budget laws and constitutional amendments.
The federal government has a budget limit. Congress raises the debt ceiling when the government’s borrowing authority reaches its maximum, sparking political discussion. Congress approved the Gramm-Rudmann-Hollings law in 1985, setting yearly deficit objectives that, if not met, would lead to sequestration. The Supreme Court declared the law unlawful the following year.
On Jan. 13, 2023, Treasury Secretary Janet Yellen predicted the U.S. would hit the $31.38 trillion borrowing maximum Congress authorized in December 2021 on Jan. 19. That day, she said Treasury could take “extraordinary measures” to avoid a shutdown until “early June.”After that, Congress must act to prevent a government shutdown and debt default.
Why Is Not Borrowing for Current Expenses the ‘Golden Rule’ of Government Spending?
Supporters say restricting government borrowing to repayable programs safeguards future generations. They won’t be indebted for past expenditures that benefited others but not them. The “golden rule” compares it to the ethical golden rule and shows that its adherents consider it equally important.
Is the E.U. following the government spending golden rule?
In May 2022, the European Commission proposed extending its borrowing ceiling suspension through 2023Priorities were funding the transition to a digital green economy independent of Russian gas and recovering from the epidemic.
What’s the U.S. debt limit?
The debt ceiling is the amount the U.S. can borrow for Social Security, Medicare, military pay, debt interest, and tax refunds. Nobody has defaulted on U.S. debt.
The Verdict
The golden rule of government expenditure is a modern version of the ancient golden rule. This idea holds that future generations shouldn’t pay for government spending from the past. It states that governments should only borrow for long-term investments.
The U.S. has not tried a fiscal policy that follows this criterion, but other countries have. Financial emergencies have forced its suspension. E.U. borrowing ceilings have been on hold since 2020.
Conclusion
- According to the golden rule of spending, governments should borrow solely for long-term initiatives.
- The norm states that revenue should fund current expenditures, not national debt.
- European and Asian nations use variations of the golden rule, while the U.S. does not.
- The golden rule usually allows for economic calamities like the 2008 financial crisis and the 2020 COVID-19 pandemic.
