The Fiscal Conundrum

Abstract

The fiscal conundrum is the third of the great structural tensions in the neo-liberal order which threatens to unravel western prosperity. Like the governance conundrum and the growth conundrum, with both of which it is intimately linked, the fiscal conundrum is not new. It has occupied political leaders in every era of the modern liberal political economy and the international market orders associated with them. It takes a particular form in the neo-liberal era, but questions of tax and spending have always been central to how the market order makes itself legitimate. The modern state is a tax state because it is mainly dependent for its revenue and therefore for the resources at its disposal on the taxes it is able to levy and collect on private households and corporate households. The state and its spending are necessary partly to reproduce the social conditions for a liberal market economy and partly to make the institutions and outcomes of that economy legitimate for its citizens. The fiscal conundrum for the neo-liberal order since the crash has been how to achieve this legitimation in the face of threats to social cohesion, such as extreme inequality, falling living standards, cuts in public services and a flat economy. In coping with the after-effects of the crash, governments have become painfully aware of the gap between what they need to spend and what they can raise in taxes or borrow.