The Golden Rule: Lessons for Developing Countries



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 welfare payments, pay to make increases in civil servant salaries or “stomach infrastructure” as a Nigerian politician puts it. The golden rule ensures governments only make current expenditures it can afford, warranting that they live according to their means. A country living according to its means, makes sure that government expenditures no longer drastically outweighs its revenue. Reducing government budget deficit; it also leads to sustainable debt, where a country creates future debt obligation only after putting in measures to meet those obligations. As Professor Bamford of Cambridge notes about the matter, “[an end to] sacrificing future growth for current consumption.”

The evident success of this rule as noted in the preceding paragraph is shown by a significant reduction in deficit to GDP ratio. Hence, it is imperative to judge the success of this rule using available statistical information. Various developed countries apart from the United Kingdom have adopted this rule in the process of fashioning out their fiscal policies.

Spain is a major example of one of such countries that have towed Gordon’s fiscal policy path. Spain enshrined the act into its constitution on September 27th, 2011. The act aims to limit deficit to 0.4% of GDP from 2020, hence policies have been in place since 2012 to achieve this aim. The graph below shows conspicuous reduction in deficit to GDP ratio:


The rising line path shows a decrease in negative relationship between the budgeted expenditure and GDP which in turn indicates a fall in the percentage of GDP consumed by budget deficit.

The success trail of the golden rule has also been exemplified in France over the last three years. In its few years of application, France has experienced a significant and steady decrease in the percentage of deficit to GDP. As at 2011, the nation’s percentage of deficit to GDP stood at a little above 5%, based on recent statistical information a reduction of 1.5% in budget deficit to GDP has been achieved placing its budget deficit to GDP percentage in 2015 at 3.6%.


The rising line path shows a decrease in negative relationship between the budgeted expenditure and GDP which in turn indicates a fall in the percentage of GDP consumed by budget deficit.

As an act, a policy, or a recommendation no developing nation outside the Eurozone practices this concept. The tenets of this concept which recommends that debt should not be accumulated for recurrent expenditure is contravened regularly. The number of reasons can be classified into three, in the case of nations like Nigeria, to finance the hefty size of the public sectors, or in the case of similar nations like Puerto Rico, to absorb the effects on the local economy of a risky government plan, or maybe like Sri Lanka, to cater to highly expensive pet projects of the political leaders.  In any of those cases, developing nations all around the world do not adopt these doctrines.

A report from the United Nations Conference On Trade and Development (UNCTAD) comments about the current situation which developing nations find themselves in, as a result of the ability to accumulate debts easily to balance their underfunded budgets..

Easy access to cheap credit in boom times has led to growing debt levels across the developing world. Developing countries’ external debt stocks alone rose from $2.1tn in 2000 to $6.8tn in 2015, while overall debt levels rose by over $31tn between 2000 and 2014, with total debt-to-GDP ratios in many developing countries reaching over 120% and in some emerging economies over 200%

Over 400% increase in debt by developing countries have left much considerable harm to such nations, on a shallow surface it has led to a stagnation of such countries economic growth. The recent IMF report in July, saw the organization drop its projection of the increase in economic growth of developing economies which was at 6.8% in 2010 to 4.1% in 2016.

On a more critical outlook, the adoption of debt to finance current expenditure also sees government interest payments rise phenomenally. Puerto Rico which was mentioned earlier racked up debts worth $70 billion in an attempt to balance its budget. As at June 2016, the government saw all of its revenue go towards interest repayments of over $1 billion, and yet it wasn’t enough to meet the entire repayments leading to a default. Sri Lanka as at 2016 too, sees around 95% of its revenue go towards a similar case. Both countries have turned to lending institutions for bailout, and their cases are not isolated examples the UNCTAD report further states that:

Already, several countries have turned to multilateral lending institutions, such as the IMF and the World Bank, in order to obtain financial assistance: Angola, Azerbaijan, Ghana, Kenya, Mozambique, Nigeria, Zambia and Zimbabwe have already asked for bailouts or are in talks to do so.

Such high interest payments ensure that all forms of infrastructural developments are kept on hold, further restricting the ability of these developing countries to move towards advancement. It also expresses that the government will not possess the funds needed to assist the domestic private sector in growing, thereby threatening a recessionary spiral and all the unfavorable effect that comes with it. for such nations.

For France and Spain mentioned earlier, the adoption of the rule meant a major reduction in the rate of accumulation of national debt. The Eurozone countries who set a pegged budget deficit of 3% after the debt crisis have seen major improvement in their countries finances. Each and every country that has followed it from Latvia to Lithuania to France have been able to reduce the interference by creditors in their economical arrangements.

Glaringly, this is no easy rule to adopt, as the challenges any nation would encounter adopting this rule are nothing close to easy. Hence, the question that would be begging for answers from any policy maker rooting for the adoption of the rule is: “should developing nations really accept this rule taking into consideration the impending challenges?”, this article would be rounded up with a few suggestions on the imperativeness of this rule to developing nations.

Despite the challenges, the current situation in Puerto Rico, Greece, Sri Lanka and previous examples of Portugal and Spain shows how bad the consequences would be, by adopting an unsustainable approach to debt. It is clear that implementing such a rule would cause some challenges to the nation. However, as this article has shown the success of this concept coupled with the side effects of bypassing it, makes running away from this rule, synonymous to the drunkard repeatedly drinking to avoid a hangover.

Developing nations need to adopt this rule, not only by word of mouth but take a page from the developed nations. This rule to be effective has always been legally backed by an act of parliaments, or enshrined in the constitution. It is a must, an obligation for these nations to begin restricting their debt creation, if prospective sustainable economic growth is desired.

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