The “Golden Rule” as a New Financial Management Tool for Local Governments

Abstract

The implementation of the so-called “golden rule” regarding the fiscal management of the sub-sector of the local-self-government (LSG) constituted a reaction to the growth of the debt within the sector of public finances and an attempt to curb the LSG deficit. In this manner the Legislator wanted to balance the budget regarding operating revenues and the operating expenditures and to allow for the use of public loans, thus permitting the generation of the debt only in regard to capital expenditures. The authors of the article evaluate the validity of introducing the new regulations, subjecting the “golden rule” to a positive critique and forming requirements for changes and improvements based on solutions to this problem utilized in other countries. An empiric data is presented that shows the consequences of overloading the LSG with the effects of the growing level of public debt in a situation when the responsibility for the majority of the debt (more than 90%) rests with the public governance at the government level. The authors also put forth the thesis that the implementation of the more restrictive rules on the central level is also necessary to optimize the entire system of public finances.

Keywords

• golden rule
• deficit
• local government units
• fiscal rule
• limiting debt