Sociology Index

FISCAL CRISIS

Fiscal crisis refers to a long-term situation where government expenditures exceed government revenues. The fiscal crisis of the state is thought to drive much contemporary government policy on social programs.

Within modern Marxist theory (neo-Marxism), the term fiscal crisis has been used more specifically to refer to a situation where governments have increased their role in society in serving the needs of private capital, but have not been able to adequately tax private capital to support the expenditures.

For example, technical employment training has now largely become a preserve of the state (rather than the private employer), leaving the state with additional expenditures, but without corresponding revenues.

According to neo-Marxism, this tendency is linked to the development of economic concentration and monopoly and inbuilt in the capitalist economic system.

Fiscal crisis and fiscal reform in developing countries - In recent years, policy-makers in developing countries have responded to crisis of macroeconomic instability with two sets of measures:

conventional stabilisation policies and policies of economic liberalisation. The fiscal implications of this double agenda are set out, following three lines of enquiry. First, how can policies be kept consistent, when some liberalisation measures have large adverse fiscal consequences? Second, can a fiscal deficit be reduced without damaging the provision of public services vital for growth and poverty alleviation? Finally, since lack of tax revenue is usually the binding constraint on government intervention, how can this most easily be relaxed? - J Toye -  Abstract.

The Fiscal Crisis of the State Reconsidered: Two Views of the State and the Accumulation of Capital in the Postwar Economy - John A. Miller, Department of Economics, Wheaton College, Norton.
This paper argues that the theoretical categories in The Fiscal Crisis of the State (1973) by James O'Connor produce empirical results that fail to explain the financial crisis of the state in the 1960s and 1970s. The argument has three steps: (1) a theoretical examination of the connection between O'Connor's analysis of state expenditures and revenues and the accumulation of capital; (2) an empirical estimation of O'Connor's expenditure and revenue categories for the United States from 1952 to 1980; and, (3) the presentation of an alternative theoretical understanding of the relationship between the state and the accumulation process that produces more plausible empirical results than O'Connor's.

Globalization, Tax Competition and the Fiscal Crisis of the Welfare State 
REUVEN S. AVI-YONAH, University of Michigan Law School 
A revised version of this working paper is in 113 Harvard Law Review, May, 2000. 
Abstract: The current age of globalization can be distinguished from the previous one (from 1870 to 1914) by the much higher mobility of capital than labor (in the previous age, before immigration restrictions, labor was at least as mobile as capital). This increased mobility is the result of technological changes and the relaxation of exchange controls. The mobility of capital is linked to tax competition, in which sovereign countries lower their tax rates on income earned by foreigners within their borders in order to attract both portfolio and direct investment. Tax competition, in turn, threatens to undermine the individual and corporate income taxes, which traditionally have been the main source of revenue for modern welfare states. Thus, globalization and tax competition lead to a fiscal crisis for countries that wish to continue to provide social insurance to their citizens at the same time that demographic factors and the increased income inequality, job insecurity, and income volatility that result from globalization render such social insurance more necessary. The result is increasing pressure to limit globalization (e.g., by re-introducing exchange controls) which risks reducing world welfare.

Fiscal Crisis Resolution: Taxation Versus Inflation - Michael Kumhof 
Abstract: The paper presents a model of fiscal and monetary policy that evaluates the tradeoff between higher distortionary labor taxation and higher inflation in the resolution of fiscal crises. In the model government debt is domestically held and nominal. Data are presented to show that such debt is now at least as important as external government debt in many key emerging markets, and that it is a very important item on the balance sheets of domestic financial intermediaries, despite the disappearance of financial repression. In the model government debt correspondingly enters the economy's intermediation technology. The key contribution of this mechanism is that it makes unanticipated inflation costly. This permits a generalization of existing fiscal theories of the price level by making price level determination the outcome of an explicit government optimization problem over a tax distortion and an inflation distortion. Higher taxes have a distortionary effect on labor supply but a beneficial effect by lowering inflation and supporting a higher public debt stock that in turn supports intermediation and the capital stock. In such a model first period price level jumps generally do not contribute to the resolution of fiscal crises. Instead ongoing but modest inflation is used to levy seigniorage on debt. This gives rise to a fiscal theory of inflation whose transmission mechanism does not rely on base money seigniorage. It is found that a large contribution of inflation to the resolution of a fiscal crisis is only optimal when the fiscal shock is transitory, while a long-lived shock is optimally financed mostly through taxes.