Introduction
A country's fiscal position is determined by the balance between government revenues and expenditures. Revenues come from taxes such as income tax, value-added tax, corporate tax and excise duties, as well as non-tax sources like returns from sovereign investments. Expenditure covers public goods, merit goods such as education and healthcare, transfer payments, infrastructure and public sector wages. Fiscal sustainability refers to a government's ability to manage its finances so that it can meet both current and future obligations without incurring excessive debt or destabilising the economy. Ideally governments aim not just for a balanced budget but for surpluses that can be saved and invested for future use.
Building reserves
A major reason fiscal sustainability matters is to build and maintain reserves, which act as a strategic buffer for uncertain times. In Singapore, years of budget surpluses have allowed the government to accumulate significant national reserves, managed by sovereign wealth funds such as GIC and Temasek Holdings, which invest globally in diversified portfolios.
The returns from these investments, specifically the Net Investment Return Contribution, are channelled back into Singapore's annual budget. This allows the government to fund public spending without raising taxes, so essential services such as education, healthcare and infrastructure can expand without increasing the burden on current taxpayers. It promotes intergenerational equity, allowing current and future generations to benefit from prudent fiscal management.
Reserves also allow governments to respond effectively to crises. During the COVID-19 pandemic, Singapore drew on 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. Countries without sufficient reserves had to rely on large-scale borrowing, pushing up debt and constraining future policy options.
Preventing excessive public debt and interest burdens
Another central reason for 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 public debt carries significant opportunity costs. A growing portion of revenue must be allocated to interest payments, limiting the fiscal space available for long-term investment in healthcare, education or infrastructure. The more resources are committed to servicing debt, the fewer are available for productive, growth-enhancing policies.
High debt can also trigger macroeconomic instability. If investors lose confidence in a country's ability to repay, they may demand higher interest rates or stop lending altogether. This raises borrowing costs and can lead to a sovereign debt crisis, as seen in Greece during the Eurozone crisis. Capital flight, loss of investor confidence and currency depreciation can compound the crisis, leading to widespread disruption and social unrest. A government preoccupied with debt management may also lose the flexibility to run counter-cyclical fiscal policy, undermining its ability to stabilise the economy during downturns.
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. Building reserves gives the flexibility to respond decisively in crises without harmful borrowing, while avoiding excessive debt ensures 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 and maintaining a strong financial footing.