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A government is fiscally sustainable if the present value of its current and future revenues equals the present value of current and future spending plus existing debt. Unsustainable deficits eventually force painful adjustments: higher taxes, spending cuts, inflation (if the central bank accommodates), or default. Assessing sustainability requires long-term budget projections and assumptions about demographic trends, growth, and interest rates.
From your study of government deficit and debt dynamics, you know how the debt-to-GDP ratio evolves over time: it rises when the primary deficit (spending minus revenue, excluding interest payments) is positive, and when the interest rate on existing debt exceeds the economy's growth rate. Fiscal sustainability asks a more pointed question than "is the deficit large?" — it asks whether the government can credibly service its obligations over the long run without resorting to measures that would constitute a form of failure. A government that runs large deficits but is growing rapidly may be perfectly sustainable; one running a small deficit in a stagnant economy with high debt may not be.
The theoretical foundation is the intertemporal government budget constraint (IGBC). This says that the current stock of outstanding debt must equal the present value of all future primary surpluses — the excess of revenues over non-interest spending in every future period. Written informally: Debt today = PV(future revenues) - PV(future non-interest spending). If this constraint is satisfied, the government is solvent in principle: markets can expect it to repay. If the IGBC is violated — if the present value of projected primary surpluses falls short of current debt — then something must give. The adjustment options form a taxonomy of fiscal distress: austerity (raise taxes or cut spending to generate primary surpluses), financial repression (force domestic institutions to hold low-yield government debt), inflation (if the central bank monetizes deficits, eroding the real value of nominal debt), or explicit default (restructuring or repudiation). Which adjustment occurs depends on institutional constraints — central bank independence, legal protections for creditors, political economy of tax increases versus spending cuts.
The critical ratio in sustainability analysis is the comparison of r - g: the interest rate on government debt minus the GDP growth rate. When r < g, the economy grows faster than debt accumulates, and even a government running a primary deficit can see its debt-to-GDP ratio stabilize or fall — the denominator expands faster than the numerator. This was the situation in many advanced economies for decades after WWII, and arguably in the 2010s when interest rates were near zero. When r > g, debt dynamics are explosive without primary surpluses: each dollar of debt compounds faster than the economy that supports it, and the debt-to-GDP ratio rises without bound. The r - g comparison is thus the first diagnostic for fiscal sustainability — not the level of debt in isolation, but whether the dynamics are self-correcting or self-reinforcing.
Assessing sustainability in practice requires fiscal projection models that combine baseline assumptions about demographics (aging populations raise pension and healthcare costs), productivity growth, interest rates, and the political feasibility of revenue increases. These projections are inherently uncertain — a 1 percentage point change in the assumed long-run growth rate can swing the 30-year debt trajectory by tens of percentage points of GDP. The IMF's and Congressional Budget Office's fiscal sustainability reports illustrate how sensitive conclusions are to these assumptions. The practical implication for fiscal policy analysis: sustainability is not a binary assessment but a range of scenarios, and the relevant policy question is whether *current* policy, projected forward, converges to a stable debt ratio under reasonable assumptions — or whether it requires future adjustments whose political feasibility is doubtful. Countries that habitually rely on optimistic growth assumptions to declare sustainability are essentially deferring the adjustment, with compound interest accruing on the delay.