Investing in the future is becoming increasingly expensive, but the cost of delaying investment may be rising as well. Amid inflation, mounting government debt, and policy uncertainty, governments face higher financing costs as they invest in infrastructure, energy security, and supply chain resilience. Businesses face the same challenge as they expand their artificial intelligence capabilities and adjust production capacity. Daniel Liu, Director of the Regional Development Study Center at the Chung-Hua Institution for Economic Research (CIER), said balancing fiscal discipline, capital allocation, and long-term competitiveness has become a critical challenge for governments and businesses alike.
Long-Term Interest Rates Reflect Broader Risks, Making Fiscal Discipline Critical
Liu noted that changes in bond markets illustrate the various factors influencing long-term funding costs. When inflation risks rise, governments persist in borrowing, or fiscal and policy outlooks become uncertain, investors typically require higher risk premiums, resulting in increased long-term government bond yields. Long-term interest rates reflect not only central bank monetary policy but also market evaluations of future inflation, public debt, and sovereign creditworthiness. Consequently, interest-rate reductions alone may not sufficiently alleviate long-term financing pressures.
High interest rates will also increasingly affect government budgets. As existing debt matures and governments issue new bonds to repay old obligations, rising interest expenses may crowd out funding for education, public infrastructure, R&D, and other priorities. This could create a cycle in which fiscal pressures and economic growth increasingly affect one another. Across-the-board investment cuts may ease short-term fiscal pressures, but they could also weaken future productivity and tax revenue, ultimately constraining the government’s fiscal capacity.
Public Investment Must Deliver Results as Security and Growth Should Reinforce Each Other
Liu emphasized that governments with limited fiscal resources should avoid prioritizing all investments equally or allocating budgets based solely on short-term expenditure levels. Instead, a comprehensive assessment of each project’s benefits, financing costs, ongoing maintenance expenses, and long-term economic impact is necessary.
National defense, energy security, and supply chain resilience provide an essential foundation for reducing exposure to external shocks. However, related spending also draws on fiscal and industrial resources. Liu said security investment could also strengthen economic resilience if combined with technology R&D, talent development, and industrial upgrading. Conversely, if such spending excessively crowds out infrastructure and innovation investment, it could weaken long-term development capacity.
Fiscal discipline therefore involves more than controlling deficits and debt. It also requires ensuring that public spending generates long-term benefits. Through clearly defined cost-benefit assessments and budget priorities, the government must preserve its fiscal credibility while maintaining the resources necessary to support economic growth.
AI Investment Competes for Capital, Potentially Weighing on SME Productivity
Liu observed that businesses encounter comparable challenges in capital allocation. The rapid expansion of AI is prompting increased investment in data centers, computing equipment, and related infrastructure. As major technology firms and governments simultaneously seek capital, other businesses may experience higher financing costs. However, the volume of debt issuance alone does not conclusively indicate that AI investment will crowd out other industries. The ultimate impact will depend on capital availability, investment returns, and realized productivity gains.
AI development often requires substantial upfront capital, while returns may take years to materialize. If revenue growth falls short of expectations, companies will face higher interest expenses and longer investment payback periods. In a high-interest-rate environment, stronger returns on low-risk assets may also discourage businesses from investing in long-term R&D and innovative ventures.
Large companies are better positioned to finance investment through existing profits. Small and medium-sized enterprises, however, may postpone equipment upgrades, energy-efficiency improvements, and digital transformation because they face less favorable financing conditions. If disparities in access to capital continue to widen, they could eventually translate into growing gaps in corporate productivity and industrial competitiveness.
Taiwan Should Reduce Investment Barriers While Balancing Financing Support and Fiscal Sustainability
For Taiwan, the policy priority should be to lower barriers to investments that generate long-term benefits. The government can continue investing in power grid infrastructure, talent development, and industry-academia R&D platforms to strengthen the foundations businesses need for growth. Financing assistance for small and medium-sized enterprises can be tied to equipment upgrades, energy-efficiency improvements, and productivity gains to improve the effectiveness of capital deployment.
Fiscal planning should look beyond annual spending and borrowing levels. It should also assess whether public investment can stimulate private investment, increase productivity, and expand the future tax base. Taiwan should establish a resource allocation mechanism that balances fiscal sustainability with economic growth.
Liu emphasized that, in a high-interest-rate environment, both governments and businesses must carefully evaluate the timing of investments. While debt-financed investments entail financing costs, postponing investment may result in missed opportunities for technological advancement and market expansion. True fiscal and investment discipline involves more than minimizing current expenditures; it requires employing risk assessments and cost-benefit analyses to allocate limited resources to areas that generate the greatest long-term value, thereby preventing short-term savings from eroding future competitiveness.
Source: Daniel Liu (October 9, 2026). How Should We Invest in the Future amid High Interest Rates? United Daily News. https://udn.com/news/story/7340/9804053