Why is fiscal sustainability important for long-term economic stability?

Fiscal sustainability is crucial for long-term economic stability as it ensures government solvency and prevents economic crises.

Fiscal sustainability refers to the ability of a government to maintain its financial commitments without accumulating unsustainable levels of debt. It is a key aspect of macroeconomic stability and is crucial for the long-term health of an economy. When a government is fiscally sustainable, it can meet its current and future obligations, fund public services, and invest in infrastructure and development projects without resorting to excessive borrowing.

A government that is not fiscally sustainable may find itself in a position where it is unable to meet its debt obligations. This can lead to a loss of confidence among investors, causing interest rates to rise and making it even more difficult for the government to finance its debt. In extreme cases, this can lead to a sovereign debt crisis, which can have severe economic and social consequences.

Fiscal sustainability also has implications for economic growth. When a government is fiscally sustainable, it can invest in public goods and services that promote economic growth, such as education, healthcare, and infrastructure. On the other hand, a government that is not fiscally sustainable may have to cut spending on these areas in order to service its debt, which can hinder economic growth.

Moreover, fiscal sustainability can influence a country's credit rating. Credit rating agencies, such as Standard & Poor's, Moody's, and Fitch, assess the fiscal sustainability of governments as part of their rating process. A high credit rating can lower borrowing costs and attract investment, while a low credit rating can have the opposite effect.

In conclusion, fiscal sustainability is important for long-term economic stability because it ensures that a government can meet its financial commitments, prevents economic crises, supports economic growth, and influences a country's credit rating. Therefore, maintaining fiscal sustainability should be a key priority for policymakers.