Explain why governments aim to achieve fiscal sustainability.
Singapore intends to gradually raise the retirement age to 65 by 2030, driven by rising life expectancy, labour shortages, and the need to ensure long-term fiscal sustainability.
a. Explain why governments aim to achieve fiscal sustainability. [10]
Introduction
Fiscal sustainability refers to a government’s ability to manage its finances in a way that allows it to meet both current and future obligations without incurring excessive debt or destabilising the economy. It involves striking a balance between government revenues (such as taxes and investment returns) and expenditures (such as public services, infrastructure, pensions, and healthcare). Ideally, governments aim not just for a balanced budget, but to generate budget surpluses that can be saved and invested for future use. These reserves provide governments with the flexibility to respond to crises, support long-term development goals, and maintain economic stability without resorting to unsustainable borrowing.
Building Reserves
A major reason why fiscal sustainability is important is to build and maintain reserves, which act as a strategic buffer for uncertain times. In Singapore, for instance, years of budget surpluses have allowed the government to accumulate significant national reserves. These reserves are managed by sovereign wealth funds such as GIC and Temasek Holdings, which invest them globally in diversified portfolios.
The returns from these investments—specifically the Net Investment Return Contribution (NIRC)—are then channelled back into Singapore’s annual budget. This mechanism allows the government to fund public spending without raising taxes, ensuring that essential services such as education, healthcare, and infrastructure can be expanded without increasing the financial burden on current taxpayers. It promotes intergenerational equity, allowing current and future generations to benefit from today's prudent fiscal management.
Reserves also allow governments to respond effectively to crises. During the COVID-19 pandemic, for example, Singapore was able to dip into its reserves to finance emergency measures, such as stimulus packages, wage subsidies, and public health support. These interventions helped stabilise the economy, protect jobs, and maintain public confidence—without incurring significant public debt. In contrast, countries without sufficient reserves had to rely on large-scale borrowing, pushing up debt levels and constraining their future policy options.
Preventing Excessive Public Debt and Interest Burdens
Another central reason for maintaining fiscal sustainability is to avoid the accumulation of unsustainable debt. When governments run persistent budget deficits, they typically borrow to finance the gap—often by issuing government bonds. While borrowing is sometimes necessary, especially during downturns, excessive and prolonged borrowing leads to a rising public debt burden.
High levels of public debt come with significant opportunity costs. A growing portion of government revenue must be allocated to interest payments, which limits the fiscal space available for critical long-term investments in healthcare, education, or infrastructure. The more resources are committed to servicing debt, the fewer are available for productive, growth-enhancing policies.
Beyond budgetary constraints, high debt levels can also trigger macroeconomic instability. If investors lose confidence in a country’s ability to repay its debts, they may demand higher interest rates or stop lending altogether. This raises borrowing costs and can lead to a sovereign debt crisis, as witnessed in the case of Greece during the Eurozone debt crisis. Capital flight, loss of investor confidence, and currency depreciation can compound the crisis, leading to widespread economic disruption and social unrest.
Moreover, a government that is preoccupied with debt management may lose the flexibility to implement counter-cyclical fiscal policy—such as stimulus spending during recessions. This limits its ability to stabilise the economy during downturns and undermines long-term development goals.
Conclusion
In conclusion, fiscal sustainability is essential for maintaining long-term economic stability, protecting against future shocks, and preserving the government’s ability to invest in social and economic development. By building reserves, governments gain the flexibility to respond decisively during crises without resorting to harmful levels of borrowing. Simultaneously, avoiding excessive debt accumulation helps ensure that future generations are not burdened by past policy choices. In Singapore’s case, the decision to raise the retirement age is a forward-looking move that supports fiscal sustainability by managing demographic pressures, controlling long-term spending obligations, and maintaining the country’s strong financial footing into the future.
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