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What is Golden Rule in Fiscal Policy?

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posted Aug 11 by Purabi Sarkar

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The Golden Rule is a guideline for the operation of fiscal policy, especially in countries who uses high borrowing to run the budget. It states that over the economic cycle, the Government should borrow only to invest and not to fund current spending (current expenditure means day to day running expenses). In layman's terms, this means that the government should borrow to finance investment that benefits future generations.

Now days, in India, we have a high revenue deficit. The revenue deficit is financed out of capital budget surplus. This capital budget surplus is brought by huge borrowing. If capital budget surplus is borrowing, revenue deficit is due to high subsidies, interest payments etc. All such payments are benefiting the present generation. But the burden of debt payment goes to the future generation. To correct this, the government should use the borrowed money to benefit the future generation also.

Basic principle of the golden rule is that while practicing the budget, the government should follow intergenerational equity. If the government uses the borrowed fund to finance current expenditure or the expenditure to pay pension and salaries, the benefit will go to the present generation. On the other hand, the people who have to repay the debt is the future generation. Hence, the repaying group or the future generation should also get the benefit of government borrowing and spending. Here, the best way is to spend the borrowed money of projects like infrastructure which benefits the future generation.

The policy suggestion of golden rule is that government’s budget should have no revenue deficit. Revenue deficit is a situation where the government’s day to day earnings from tax and non tax revenues are not enough to finance is day to day activities.

answer Aug 16 by Ananya Saha
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