The Golden Rule is a guideline for the operation of fiscal policy, especially in countries where high borrowing is resorted to run the budget. It states that over the economic cycle, the Government should borrow only to invest and not to fund current spending (current expenditure means day to day running expenses). In layman’s terms, this means that the government should borrow to finance investment so that it can benefit future generations.
Basic principle of the golden rule is that while practicing the budget, the government should follow intergenerational equity. If the government uses the borrowed fund to finance current expenditure (revenue expenditure) or the expenditure to pay pension and salaries, the benefit will go to the present generation. On the other hand, the people who have to repay the debt is the future generation. Hence, the repaying group or the future generation should also get the benefit of government borrowing and spending. Here, the best way is to spend the borrowed money of projects like infrastructure which benefits the future generation.
More about the golden rule: What is Golden Rule of Fiscal Policy? (in the Indian budgetary context).
