My “Golden Rule” of fiscal policy, first unveiled in 2011, is based on two principles.
- To enable more prosperity, the primary goal of fiscal policy should be to reduce the burden of government spending.
- To achieve good fiscal policy, cap government spending so that it grows slower than the economy’s productive sector.
When people ask whether a balanced budget should be a primary goal, I explain that fiscal balance is good.
But I then point out that spending limits are the only effective way to achieve that goal.
If they don’t believe me, I direct them to pro-spending-cap studies from left-leaning bureaucracies such as the International Monetary Fund (here and here) and the Organization for Economic Cooperation and Development (here and here).
There are also similar studies from the European Central Bank (here and here).
And maybe in the future I can direct them to a proposal prepared for the European Commission by the German government.
In an article for the International Business Times, Jan Strupczewski explains the proposal to have nations abide by my Golden Rule.
…a German paper prepared for discussions on the rules to be held in the coming months…called for the use of the expenditure benchmark as a way to steer public spending, keeping increases in net primary expenditure below increases in potential growth rate of the economy. …The bigger a country’s debt, the bigger the gap between increases in spending and potential growth would have to be, leading to a overall decline in the government deficit and therefore also debt, the paper said.
Here are some additional details, as reported by the EU Observer.
Berlin proposes “common quantitative benchmarks”… The paper states that highly-indebted countries’ GDP growth should always exceed the growth of expenditure, a function described as the “convergence margin.” …If a country’s output is expected to be 1.5 percent, its spending is limited to 0.5 percent of GDP. …Limiting government spending to one percent beneath projected growth.
This is remarkable. Germany, governed by a Social Democrat, is proposing a spending cap that is even better than Switzerland’s debt brake.
P.S. There already are fiscal rules in the European Commission, but they are ineffective since they focus on red ink rather than government spending.
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Image credit: Sébastien Bertrand | CC BY 2.0.
