Fiscal sustainability is a hot topic these days. It is central to the European debt crisis and the government debt problem in the U.S. But lately it has entered discussions about Canada’s upcoming federal budget, as well as the Report of the Commission to Reform Ontario’s Public Servicesheaded by Don Drummond.
In the Canadian context, fiscal sustainability is how governments can provide the goods and services that the population wants and needs, without going broke. To avoid insolvency, government expenditures must be matched by tax revenues over the long haul. In other words, government borrowing is acceptable to deal with short-term problems, but governments are supposed to repay what they borrow. Yes, governments are expected to pay off those credit cards just like us.
Understand that fiscal sustainability is easier said than done. It’s important to the economics of retirement for at least two reasons. A good deal of the market volatility that has been distressing investors is the direct result of the uncertainty felt by financial markets over the lack of fiscal sustainability around the world.
At the same time, achieving fiscal sustainability—for at least some governments—may have a direct effect on the economics of retirement. The cost of dealing with increasing public sector burdens, such as pensions and healthcare, resulting from an aging population, is a prime example.