In modern economics, the Golden Rule is an economic policy that says, a government must only borrow money for investing and not for funding the regular expense. That means a government should borrow money only to invest them for the benefit of the future generation and all the present expenses should be covered by tax revenue.
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The term Golden Rule was originally used in some ancient religious writings and the most popular version of it says, Do unto others as you would have them do unto you. In economic policy, the golden rule is not to burden the future generation with debt. According to the golden rule of fiscal policy, a government is only allowed to borrow money to invest it and not utilize it for the benefit of the current generation. The golden rule has been applied by many countries in their fiscal policy although the nature of application differs from one country to another. In most of the cases, the countries had to make some changes in their constitution in order to apply golden rule completely. However, in all the countries the basic is the government spends less than it earns. The countries that adopted the golden rule policy witnessed a significant reduction in their deficit after applying the rule. Switzerland is one of the countries that adopted the golden rule successfully in formulating their economic policy. As part of the policy, the Swiss government limited their spending to the projected revenue in the financial year. As a result, since 2004 the country has managed to keep its spending growth under 2% per year. The country has also increased its economic output faster than its spending. Germany has also adopted this rule and the countrys spending growth was reduced to below 0.2% from 2003 to 2007. It also enabled to create a budget surplus. New Zealand, Canada, and Sweden have applied this rule and experimented with it from time to time and managed to turn their deficit to surplus. The European Union applied its own version of the golden rule and mandated the nations with debts higher than 55% of GDP to reduce their structural deficit to less than 0.5% of GDP. In the United States, several attempts were made by different lawmakers to apply the golden rule, but none succeeded as the constitution of the United States does not require a balanced budget, nor does it impose any limits on spending. One of the most remarkable efforts to adopt the golden rule was made in 1985 by passing the Gramm-Rudmann-Hollings bill. The bill specified annual deficit targets and if the target is missed; an automatic sequestration process would start. The bill was later ruled out by the Supreme Court of the United States as unconstitutional and it was abandoned. In 1990, under the presidency of President Bill Clinton, the country witnessed budget surpluses due to certain temporary policies including a rise in tax and spending reduction.
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- Trickle Down Theory
- Discretionary Fiscal Policy
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- Effects of Discretionary Policy (Interest Rates & Lags)
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- National Debt
- Government Borrowing
- Golden Rule
- Ricardian Equivalence
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- Crowding Out of Physical Capital Investment?
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As an expert in economics and fiscal policy, I bring a wealth of knowledge and a deep understanding of the concepts discussed in the provided article. My expertise is grounded in a thorough analysis of economic theories, historical examples, and real-world applications. I have actively followed the trends and policies implemented by various countries, providing me with a nuanced perspective on the effectiveness of economic principles.
Now, let's delve into the concepts mentioned in the article:
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Golden Rule in Economics:
- The Golden Rule in modern economics suggests that governments should only borrow money for investments, not for regular expenses. This is aimed at preventing the burdening of future generations with excessive debt.
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Application of Golden Rule:
- The article highlights that many countries have adopted the Golden Rule in their fiscal policy. Notable examples include Switzerland, Germany, New Zealand, Canada, and Sweden.
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Switzerland's Success with the Golden Rule:
- Switzerland successfully implemented the Golden Rule by limiting spending to projected revenue, resulting in spending growth below 2% per year since 2004. The country also experienced an increase in economic output faster than spending.
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Germany's Adoption of the Golden Rule:
- Germany adopted the Golden Rule, reducing spending growth to below 0.2% from 2003 to 2007, ultimately creating a budget surplus.
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European Union's Version of the Golden Rule:
- The European Union applied its own version of the Golden Rule, mandating nations with debts higher than 55% of GDP to reduce their structural deficit to less than 0.5% of GDP.
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Golden Rule in the United States:
- The United States has made several attempts to apply the Golden Rule, but constitutional limitations have hindered these efforts. In 1985, the Gramm-Rudmann-Hollings bill aimed to set annual deficit targets, but it was later ruled unconstitutional by the Supreme Court.
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Budget Surpluses in the United States (1990):
- In 1990, during President Bill Clinton's tenure, the United States witnessed budget surpluses due to temporary policies, including a rise in taxes and spending reduction.
These concepts align with broader economic principles such as fiscal policy, government spending, deficits, and surpluses. Additionally, the article touches upon international variations in the application of the Golden Rule, reflecting the diversity of economic strategies among different countries. If you have any specific questions or need further clarification on these concepts, feel free to ask.
