What is Fiscal Responsibility?

Fiscal responsibility is an economic concept that can have a couple of different definitions depending on the circumstances, though it almost always involves strategies for managing debt and adopting practices of so-called “smart” spending. A lot of how the term is interpreted depends on the economic theory held by the person or organization offering the definition. Some say being fiscally responsible is just a matter of cutting debt, while others say it's about completely eliminating debt while also planning for the future. Still others might argue that it's a matter of controlling the level of debt without completely reducing it. Perhaps the most basic definition of fiscal responsibility is the act of creating, optimizing and maintaining a balanced budget. People can do this independently, certainly, as can organizations of any size or format; in most cases, though, this particular term is used in the context of corporate spending and governmental finance.

The word "fiscal" refers to money generally and can include personal finances, though it most often is used in reference to public money or government spending. Fiscal matters in these settings involve everything from income from taxes and revenue to investments or treasury holdings. In a governmental context, a pledge of fiscal responsibility is a government’s assurance that it will judiciously spend, earn, and generate funds without placing undue hardship on its citizens. It includes a moral contract to maintain a financially sound government for future generations on the understanding that a functional society is difficult to maintain without a financially secure government.

Responsibility often begins with a balanced budget which, broadly speaking, is one with no deficits and no surpluses. The expectations of what might be spent and what is actually spent are equal under this sort of scheme. There are a number of different views and expectations for maintaining a balanced budget, with some models advocating a budget deficit during certain economic times but a budget surplus during others. Other schools of thought consider a deficit as irresponsible at any time, no matter the situation. There isn’t really a hard-and-fast rule about this, and in most cases it’s a matter of circumstances and leadership.

Fiscal irresponsibility is essentially what happens when a person, group, or government fails to meet the “balanced” or “responsible” threshold. It is usually attributable to a lack of effective financial planning, which can include decreasing taxes in one area while drastically increasing spending in another or cutting costs in one arena only to see them skyrocket in another. These sorts of situations can cause a situation in which the outgoing expenditures exceed the cash coming in. No government, business, or private citizen can thrive for long while operating with a deficit. Debt can usually be floated for a while, but sooner or later it almost alwayscatches up.

When a government is fiscally irresponsible, its ability to function effectively is severely limited. Emergent situations and disasters typically arise unexpectedly, even with the best planning, and a government needs to have quick access to reserve funds in order to mediate damages and send help when needed. A fiscally irresponsible government isn’t able to sustain programs designed to provide fast relief to its citizens, and depending on the extent of the budgetary problem, may not even be able to fund its own programs in ordinary times. Not only does this cause problems internally, but it can also cause a lack of confidence on a global scale that can negatively impact everything from currency exchange rates to general economic stability.

Bringing order to a financial situation or budget isn’t always as hard as it seems at the outset, at least not when looking at things on a very basic level. Any government, business or person can take steps to become more fiscally responsible. One useful method is to implement some sort of financial transparency, which can reduce waste, expose fraud, and highlight areas of financial inefficiency.

Transparency is often most applicable to corporate and governmental spending, where making facts and figures public can have very real consequences. Individuals can agree to be transparent with friends or family members too, though, which often leads to personal accountability and change. Not all aspects of government budgets and spending can be brought into full public view because of various risks to security, but offering an inside look at government spending can offer a nation’s citizens a sense of well-being and keep leaders honest. Similarly, a private citizen who is honest with himself about where he is spending his money is better able to determine where he might be able to make cuts that would allow him to live within his means.