Across the West most economies are in better shape. People have jobs and corporate profit growth is strong. In spite of this fantasy economics, the rich world is actually confronted with a brutal spending crunch. Moreover, governments are spending a lot more than they are taking in. No administration is more profligate than America’s. In 2024 the world’s largest economy is projected to run a budget deficit of more than 7% of GDP-- a level unheard of outside recession and wartime.Two factors explain the splurge. The first relates to taxes. Across the rich world, receipts are surprisingly weak. In America revenue from “income taxes” deducted from pay fell slightly last year. Meanwhile “non-witheld income taxes” including on capital gains, tumbled by a quarter. Taxmen are suffering because of market ructions in late 2022 and early 2023. Tech firms, which pay big salaries, let staff go, trimming income tax hauls. As stock prices fell, it became more difficult for households and investors to sell shares for a profit, reducing the pool of capital gains. Senior staff at the private-equity firms, who often receive income in the form of investment returns rather than a conventional salary, had a bad year. The second factor is state spending. Following the whatever-it-takes fiscal policy of the covid-19 pandemic, governments have retrenched, but not fully.
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