The Golden Rule: Lessons for Developing Countries

How can developing nations build a better economic future?



In 1997, the Chancellor of the Exchequer, Gordon Brown initiated a number of fiscal guidelines, most notably the Golden Rule which was prescribed in the Finance Act 1998. It has attracted similar acts being passed out in various developed nations—like France, Germany, Spain, and Switzerland—over the years.

Government expenditure is divided into two, capital and current. So, the golden rule of fiscal policies asserts that governments should only obtain debt for capital expenditures. This basically, states that a government can only amass debt for projects that possesses the ability of providing future revenue. Future revenue, in this sense means that the projects retain the ability of establishing prospective funds, directly or indirectly. Current expenditures, which have as their basic attribute being expenditure on goods and services that are immediately consumed, are thereby disqualified.

This, in turn, means that governments will not borrow to make…

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