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Finance / Cash Flow

Fiscal Sustainability

August 24, 2012 by Dr. Jon Warner in Finance / Cash Flow

Fiscal Sustainability

Fiscal sustainability is a concept that refers to the ability of any institution (a government, bank, hospital, business (large or small), or not-for-profit for example) to sustain its current spending strategy, policies and approach in the long run without threatening solvency or defaulting on some of its liabilities or promised expenditures.

This rather grand definition sounds complex but actually boils down to something quite simple – are we spending money responsibly or in a long-term sustainable manner?

For a government, fiscal sustainability means that it must raise enough in taxes (fairly and reasonably) to fully fund its public expenditure programs. As there has often been a big negative gap for many countries in recent years, borrowing has been the only way to “balance the books.” This may not be a problem in the short-term, and if the borrowing levels are small, but where these borrowings are large in scale (such as in Argentina, Greece, Ireland, Italy and Portugal in recent times) then these are not fiscally sustainable strategies and things will quite quickly start to fall apart at many levels (as we have seen in many of these countries).

For a bank, fiscal sustainability essentially means borrowing money at a lower rate than it is lent out to others and ensuring that the borrowers can repay their debts over the long-term. Unfortunately, these simple guidelines have been ignored by many financial institutions in recent times and the negative effects have rippled around the world, affecting even whole country economies in some cases.

For a hospital, fiscal sustainability means making sure that public, private and insurance coverage funds are greater than the costs of rendering care. Once again, many hospitals have borrowed money for capital purposes (to erect new buildings or buy new equipment) or to pay higher expenses only to find that the expected revenues did not increase enough. In such circumstances, even whole new parts of a hospital (such as a new ward) may therefore not have enough money left to operate at all.

For a business of any size, fiscal sustainability means finding customers who are willing to pay enough for goods and services to pay all of the expenses of the supplying enterprise, including its overhead costs. Businesses therefore have to scale up and down as market demand shifts (seasonally or over the longer-term). In recent times, many businesses seem to have forgotten this need to stay fast and flexible and once again used borrowing as a short term stop-gap. This only works if customers increase or pay more for goods and services – if they don’t the business will quickly cease to exist.

Finally, for non-profits, fiscal sustainability means providing a wanted service within the bounds of a fixed budget (usually coming from grants or donations) over a fixed period. Like businesses, non-profits therefore have to carefully watch expenses and ensure that they can be flexible as the need arises. But unlike businesses, they need to quickly scale-down expenditures when funding reduces. As charitable funding often comes from Government or from businesses (and even individuals), if they are struggling to make ends meet, then a non-profit will see a decline in funding very quickly and programs will suffer.

Summary

Fiscal sustainability sounds like a high level financial requirement mainly applicable to large-scale governments. However, as we have seen, it applies to many forms of organization and should therefore be taken very seriously by everyone, even at an individual level. The simple question for us all is therefore: are the revenues we earn (or contribute to earning) greater than our expense? If they are not, this is not sustainable for very long.

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About Dr. Jon Warner

Dr. Jon Warner is a prolific author, management consultant and executive coach with over 25 years experience. He has an MBA and a PhD in Organizational Psychology. Jon can be reached at OptimalJon@gmail.com

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About the Editor and Primary Author

Jon Warner

Jon Warner is an executive coach and management consultant and in the past has been a CEO in three very different companies. Read more

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