Fiscal resilience is not only about keeping debt and deficits under control. It is about ensuring that governments can protect people, maintain essential services, and respond credibly when shocks hit.

Fiscal risks often build gradually and may remain unnoticed during relatively stable periods. Weak state-owned enterprises, hidden guarantees, inadequate disaster financing, the rising cost of repaying debt, or dependence on a narrow tax base may not immediately threaten the budget. But when a crisis hits, these vulnerabilities can quickly become serious pressures on public finances.

That crisis may be a pandemic, flood, earthquake, energy-price shock, conflict abroad, or a sudden increase in borrowing costs. These shocks can lead to higher spending, lower revenues, more borrowing, and difficult funding choices.

This is where fiscal risk can become an issue of public trust.

When governments have little fiscal space, citizens experience these pressures through delayed infrastructure projects, reduced social support, unreliable utilities, deteriorating schools and hospitals, or sudden increases in taxes or prices set by the state.

People may never read a fiscal risk statement or debt sustainability analysis. But they know whether hospitals remain open, electricity continues to flow, social assistance arrives on time, and public institutions continue to function.

How fiscal risks can disrupt public services and erode trust

Many governments are confronting shocks with less fiscal space than in the past.

Global public debt rose to just under 94% of gross domestic product (GDP) in 2025 and is projected to reach 100% by 2029. In 2024, low- and middle-income countries paid a record $415.4 billion in interest on their external debt, further constraining resources for development priorities.

The weaker the fiscal position before a shock, the harder it is to protect development priorities when that shock arrives. COVID-19 showed how quickly a health emergency could become a fiscal crisis. Pakistan’s 2022 floods affected 33 million people. Beyond destroying homes, farms, infrastructure, and public facilities, the disaster created immediate relief and reconstruction needs while disrupting livelihoods.

Small island economies can face even greater exposure. Tonga’s 2022 volcanic eruption and tsunami caused damage estimated at about 18.5% of GDP.

Make fiscal risks visible before they become fiscal surprises.

These examples show how quickly shocks can test fiscal capacity. When governments enter a crisis with limited buffers, significant underlying fiscal risks, or inadequate pre-arranged financing, their ability to protect essential services, support affected households, and sustain development priorities can quickly come under pressure.

Changing weather and environmental conditions are likely to intensify these pressures. Physical and transition risks therefore need to be incorporated into budgeting, public investment management, debt management, oversight of state-owned enterprises, and broader fiscal planning.

Not every fiscal shock begins at home. Conflict, commodity-price movements, and disruptions to global trade can reach budgets through energy and food prices, shipping costs, exchange rates, interest rates, tourism, trade, and remittances.

Higher energy prices can raise subsidy costs, while higher interest rates increase debt-service costs, and weaker growth reduces tax revenues.

Preparing for fiscal shocks

Governments cannot prevent every shock. The objective is not to eliminate fiscal risk, but to identify it earlier, reduce its impact, and ensure that essential government functions can continue.

First, make fiscal risks visible before they become fiscal surprises. Finance ministries need a consolidated view of major risks, including debt, guarantees, state-owned enterprises, public–private partnerships, natural hazards and disaster-related risks, and other contingent liabilities. Fiscal risk statements, stronger reporting, and better analysis can help governments identify pressures earlier and explain policy choices more transparently.

Second, arrange financing before the emergency. Governments can combine fiscal buffers—public funds kept in reserve for unexpected events—with risk-financing tools such as contingent financing, insurance, and reserve mechanisms. Preparing financing in advance can reduce dependence on expensive emergency borrowing or abrupt expenditure cuts as well as supporting faster responses.

Third, protect essential services and development priorities. Governments should know beforehand which expenditures must continue during a crisis—health, education, social protection, emergency response, and critical infrastructure. This means linking fiscal risk management with medium-term budgeting, public investment management, business-continuity planning, and social protection systems.

Fiscal sustainability is usually assessed through debt, deficits, financing requirements, and fiscal balances. These measures remain essential.

But fiscal resilience has another dimension: whether citizens can rely on government when conditions deteriorate.

Citizens experience fiscal resilience not through fiscal indicators alone, but through whether public institutions continue to deliver. When foreseeable risks result in sudden cuts, delayed payments, disrupted services, or repeated emergency measures, trust can suffer.

Governments cannot prevent every crisis. But they can identify fiscal vulnerabilities before they materialize, strengthen buffers and institutions, arrange financing before an emergency, and protect essential services when the next shock arrives.

Fiscal resilience, in the end, is not only about ensuring that the budget survives the next crisis. It is about ensuring that public institutions—and public trust—survive with it.

https://blogs.adb.org/blog/fiscal-risks-can-undermine-public-trust-not-just-public-budgets