fiscal crisis

Actual or supposed inability of the state to raise enough tax revenue to pay for its programme. Theories of fiscal crisis were widespread in the 1970s, both among Marxists such as James O'Connor (The Fiscal Crisis of the State, 1973), and non-Marxists such as Samuel Brittan (The Economic Consequences of Democracy, 1977). These writers argued that no government could extract more in tax revenue without imperilling liberal democracy, nor could it cut services. Theories of fiscal crisis appeared to be discredited in the 1980s. In the United Kingdom, the Thatcher administrations lowered the top marginal rates of income tax. Because the burden of tax was shifted to indirect taxes, especially value added tax, enough people seem to have believed the false claim that the burden of tax had been reduced for democracy to survive. In the United States, there were significant tax reforms 1981 and 1986, which again broadened the tax base and cut marginal rates of income tax. New Zealand introduced a tax reform of similar scope. So long as taxes are collected in imperceptible ways—such as through National Insurance contributions—it seems that fiscal crisis can be put off.

But it may recur. The ageing of the population in advanced capitalist states means that health and social security expenditure per head must rise sharply to maintain the same level of service, to be paid for by levies on the economically active, who form a declining proportion of the population. Generally, politicians are unwilling to admit to this harsh truth, so it is predictable that talk of fiscal crisis will recur when the illusions cease to work.