Wednesday, June 6, 2007

Golden Rule of Borrowing in UK

The Golden Rule states that over the economic cycle, the Government will borrow only to invest and not to fund current spending.

Therefore, over the economic cycle the current budget (ie, net of investment) must balance or be brought into surplus.

The argument is that government borrowing has many disadvantages.

See: Problems of Government borrowing

The golden rule means that basically, borrowing is justified for 2 reasons:

  1. In a recession to increase AD (expansionary fiscal policy)
  2. To finance public sector investment, which can increase economic growth in the long term.
See: Advantages of Government borrowing

In practise, the golden rule open to manipulation and different interpretations. For example, by changing the start of the economic cycle to 2 years earlier, Gordon Brown was able to justify an extra £12 billion in borrowing

The chancellor Gordon Brown also has a sustainable investment rule. This states national debt should always be less than 40% of GDP.


1 comment:

Lawrence Low said...

Hi, I would like to clarify on this. Government spending on hospitals, roads, schools etc are considred as current spending or investment under the Golden Rule?

From the posting you mentioned that they are justified as investment. But I was a little confused when I search on wikipedia. It mentions that whatever that benefits taxpayers like roads, hospitals etc are called current spending.