Explain why governments aim to achieve fiscal sustainability.
Singapore plans to progressively increase the retirement age to 65 by the year 2030 due to longer life expectancy, a lack of manpower, and concerns over fiscal sustainability.
(a) Explain why governments aim to achieve fiscal sustainability. [10]
Fiscal sustainability refers to the ability of a government to manage its spending and debt levels in a way that ensures it can meet its current and future obligations without resorting to excessive borrowing or creating economic instability. In its simplest form, fiscal sustainability can mean maintaining a balanced budget, where government revenues are equal to government expenditures. However, in an ideal scenario, governments aim to generate budget surpluses, where revenues exceed expenditures. This ensures that they can build reserves, reduce debt burdens, and maintain flexibility in responding to future challenges.
Build reserves
One key objective of achieving fiscal sustainability is to build reserves, which can be used in various strategic ways. For instance, Singapore has historically utilised budget surpluses to grow its reserves, which are then invested. By investing these reserves in diversified portfolios (through GIC & Temasek Holdings), Singapore earns returns that are subsequently channeled back into the budget (via the Net Investment Return Contribution), enabling the government to increase public spending without the need to raise taxes. This process allows for enhanced public services and infrastructure development without imposing additional financial burdens on its citizens, thus promoting economic growth and maintaining political stability.
Beyond investment, reserves also serve as a crucial buffer during economic downturns or crises. During the COVID-19 pandemic, Singapore tapped into its reserves to finance discretionary expansionary fiscal policies, such as stimulus packages, wage support schemes, and healthcare spending, which were critical to stabilising the economy. In such times, having substantial reserves enables the government to implement necessary interventions without excessive borrowing, avoiding the associated risks of increased debt servicing costs or the crowding out of private sector investment.
Prevent debt accumulation
Fiscal sustainability also plays a key role in preventing the accumulation of large public debts. When governments run persistent budget deficits, they often resort to borrowing, typically by issuing government bonds. However, debt financing comes with significant costs. Interest payments on debt represent a large and ongoing financial commitment. This presents an opportunity cost, as funds that are used to service debt could instead be allocated to vital public services such as education, healthcare, and infrastructure. In the long run, high levels of debt can constrain a government’s ability to implement necessary fiscal policies, reducing its ability to respond effectively to future economic challenges.
Moreover, excessive debt can lead to financial instability if a government struggles to meet its debt obligations. In extreme cases, governments may face the risk of defaulting on their debt, which can undermine confidence in the economy and trigger a financial crisis. Investors may lose trust in the government’s fiscal management, leading to capital flight and increased borrowing costs. This erosion of investor confidence can have a cascading effect, weakening the overall economy, as seen in past sovereign debt crises in countries such as Greece. Furthermore, when a government is forced to focus on managing debt repayments, it loses the flexibility to conduct fiscal policy that supports economic growth, making it harder to invest in long-term development.
Conclusion
In conclusion, governments aim to achieve fiscal sustainability not only to ensure stable public finances but also to build resilience against economic shocks, avoid the pitfalls of excessive debt, and maintain the ability to pursue long-term social and economic goals. In Singapore’s context, the progressive increase in the retirement age to 65 by 2030 reflects a broader strategy to manage demographic changes, mitigate fiscal pressures from rising healthcare and pension costs, and promote fiscal sustainability, ensuring the government’s ability to support its citizens in the decades to come.
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