University of Kerbala
Prof. Dr. Tawfiq Abbas Abdoun
Karbala University / College of Administration and Economics / Department of Economics
Financial sustainability refers to the ability to service public debt in the medium and long terms without the occurrence of a financial crisis or severe pressures on public financial conditions, such as having to reduce public spending by a large percentage or stopping public spending on some government activities. It exceeds the government’s ability to serve it and makes public finances unsustainable.
In other words, it means that any deficit in the budget is covered in the future by future revenues.
It is related to the government’s ability to meet its outstanding debts on an ongoing basis without exposure to the risk of bankruptcy, or the government’s ability to change its fiscal policy while continuing its ability to pay debts.
Financial sustainability is also defined as the situation in which a country can continue spending and income policies for a long period without reducing its financial solvency or facing the risks of bankruptcy or failure to meet its future financial obligations.
Or it is the ability to generate sufficient revenues to cover the budget deficit. Financial sustainability is also linked to two basic concepts: tax and public debt, and each of them has an impact on the possibility of achieving sustainability, and the government should not resort continuously to raising tax rates to solve its financial problems in order to address the problem of budget deficit, and that Because high tax rates discourage savings and encourage consumption. The problem of sustainability is not the level of public debt, but rather the way that money is used. Public debt is not a problem as long as it does not negatively affect economic growth in the country. In addition, if borrowing helps develop the economy and increase productivity, then the debt remains sustainable. Even if the ratio of public debt to GDP is high, as in developed countries.
The characteristics of financial sustainability are as follows:
1- Income diversification: Income is diversified by securing financial stability by creating a large donor base and using other means to collect financial resources. Relying on one income channel poses a risk to financial institutions.
2- Strategic and financial planning: This is related to non-profit organizations, where a source must be obtained to collect cash resources that have no restrictions, and therefore there must be some countries that the organization resorts to to achieve the desired goal, for example, donations are made for a specific project so that the organization does not have A lot of flexibility with regard to the employment of the organizational management, especially with regard to general costs such as rent and electricity bills.
3- Sound and financial management: It requires building a positive relationship with people interested in the work of the organization or affected by it, who are the philanthropists, volunteers, employees and others, which helps in achieving a strong position and ensuring a safe future for the organization and assistance during the crisis it faces.
4- Generating private income: This is done by allocating additional funds or keeping some cash reserves during critical days. Therefore, there must be resources to continue flexible operation in abnormal times.
As for financial sustainability indicators, they can be reviewed through the following:
1- Public debt-to-GDP ratio indicator: This indicator measures the level of debt in relation to the economic activity of the state, and it is possible that all means of gross production are available to finance the burden of public debt, and this may not be true. The government’s ability to deteriorate or improve the government’s situation.
2- The Tax Gap Index: This indicator is based on measuring the tax-to-GDP ratio necessary to stabilize the domestic public debt-to-GDP ratio, which represents the difference between the necessary ratio to stabilize the domestic public debt-to-GDP ratio and the actual tax-to-GDP ratio. Total.
3- Primary Deficit Index: It is a simple indicator to measure financial sustainability and starts from calculating the ratio of the primary balance of the budget to the gross domestic product necessary to stabilize the ratio of public debt to net domestic product. The calculated ratio of the primary balance to net domestic product is compared with the value actually achieved. If the gap is positive This causes an accumulation of debt, and without a change in the followed fiscal policy, this makes the debt unsustainable over time.
Sources:
1- Firas Tahrir Muhammad Al-Jumaili, Prof. Dr. Ismail Hammadi Mijbil, Analysis of some financial sustainability indicators and their role in reducing the problem of budget deficit in the Iraqi economy for the period (2005-2020), Iraqi Journal of Economic Sciences, Year 11, Issue 77, June 2023, pp. 308-309.
2- M. M. Ali Khaled Abdullah, Prof. Dr. Mayeh Shabib Al-Shammari, College of Administration and Economics, University of Kufa, Analysis of Financial Sustainability Indicators in Iraq for the period (2003-2017), Al-Kout Journal of Administrative and Economic Sciences, Issue 35, 2020, p.166 167.
3- Osmani Mokhtar, Awakeel Rabeh, Indicators of Financial Sustainability in Algeria 1990-2016, Maarif Journal, Department of Economic Sciences, Year 13, Issue 35, December 2018, pp. 406-407.
