Question

Define or explain what “fiscal sustainability means. (2) What factors or elements must be considered in determining whether fiscal sustainability is being met? (3) Identify and explain at least three approaches that administrators use to reduce budgets to meet fiscal sustainability.

Answer 1

(1) Fiscal Sustainability: It is defined as the ability of a Government to sustain its policies including current spending and taxes in the long run without increasing its liabilities or defaulting on promised payments and expenditures.
(2) There is no general consensus regarding the criteria for fiscal sustainability. However, some of the indicators can be taken as the benchmark to check fiscal sustainability of the govt. Any govt. debt must be balanced by future cash flows -this is one of the indicators. Another one is the tax gaps. The infinite horizontal tax gap is achieved by raising taxes or cutting expenditures by 5% of the GDP.
(3) Three approaches to reduce budget for attaining fiscal sustainability are –
(a)Establishing a credible deficit reduction plan that is integrated with the country’s economic plan. The focus should be biased towards spending cuts.
(b) Disinvestment in public sector is another approach that has been successful in countries. Reduction in public sector staff to increase efficiency and productivity.
(c )Revising and replanning along with freezing govt programs that are redundant and add no major value.