Golden Rule (fiscal policy)

A fiscal rule adopted by Chancellor of the Exchequer, Gordon Brown for HM Treasury in the UK to provide a guideline for the operation of fiscal policy. The Golden Rule states that over the economic cycle, the Government will borrow only to invest and not to fund current spending.

The justification for the Golden Rule derives from macroeconomic theory. Other things being equal, an increase in government borrowing raises the real interest rate consequently crowding out (reducing) investment because a higher rate of return is required for investment to be profitable. Unless the government uses the borrowed funds to invest in projects with a similar rate of return to private investment, capital accumulation falls, with negative consequences upon economic growth.

References

• Fiscal Policy in the UK (HM Treasury)
• HM Treasury. Reforming Britain's economic and financial policy: towards greater economic stability. Basingstoke: Palgrave, 2001. ISBN 0333966112.