This is why public budgets in Europe and the United States will implode

Fairy tales are comforting because the protagonists usually possess a special power, allowing everyone to live happily ever after.
Across Europe and the United States, governments manage their budgets in these fantasy worlds.
You don't need to have a particularly austere view of public finances to know that this situation is unlikely to end well.
The Congressional Budget Office (CBO) warned that US government finances were on an unsustainable path.
The independent watchdog expects U.S.
government borrowing to be relatively stable over the next 10 years at about 6% of gross domestic product.
This level would far exceed the 3.7% average over the past 50 years, a period that included the global financial crisis and the coronavirus pandemic.
To make a more accurate comparison, potential US debt is also about 50% higher than former British Chancellor Kwasi Kwarteng proposed in his 2022 “mini” Budget, which blew up the bond market of the United Kingdom.
This alone would be worrying enough if we could take the CBO data at face value.
But we shouldn't do that because the Congressional Oversight Committee has been persistently too optimistic in recent years, in part because it has to base its projections on existing U.S.
government policy.
This assumes that most of Donald Trump's 2017 tax cuts will expire at the end of 2025.
It also assumes that restrictions on government spending under the Fiscal Responsibility Act of 2023 will continue to be felt after 2025.
These suggest that spending U.S.
government discretionary spending, including defense, will decline from 6.4% of GDP last year to 5.1% in 2034.
Over the past 50 years, these expenditures have averaged 8% of GDP.
These hypotheses are also not credible.
Add to this the slightly optimistic assessment that the US government will be able to borrow short-term permanently below 3%, and the truly fantastical nature of these predictions becomes apparent.
While CBO's headline projection is that U.S.
government debt is not on a sustainable path and will rise from 97.3% of GDP in 2023 to an all-time record in 2028 and 116% in 2034, the outlook is significantly worse .
Although not as extreme, similar stories about public finance dominate European debates.
Following the Kwarteng debacle and subsequent fiscal U-turns, independent forecasts from the UK's Office for Budget Responsibility show a stabilization of UK debt as a share of GDP towards the end of the decade.
But these forecasts are based on UK assumptions that the government will start to raise fuel taxes in line with inflation, that the revenue benefits from immigration will have no implications for public spending, that containment of public spending will come at a time of huge dissatisfaction in public services and that large cuts in public capital spending are consistent with accelerated progress towards net zero.
We do not yet know how Europe's new fiscal framework will work in practice, but the debt sustainability analyzes that will guide its work will be subject to the same Panglossian forecasting assumptions evident in the US and UK.
The situation will not be any easier if you add the dual structural difficulties of the eurozone: the European Central Bank will probably be slow to ease monetary policy, inhibiting European growth, and the fiscal differences between northern and southern Europe remain strong.
The bad news for all Western countries is that, beyond overly optimistic forecasting assumptions, maintaining the quality of health and social security programs with rapidly aging populations will require higher taxes without the prospect of better services.
This is a difficult electoral offer.
The good news is that the necessary budget consolidation is far from impossible until we begin to fall into new fiscal fantasies.
On the political left, the most widespread fiction is that all the necessary funds can be raised by the "rich" with close to zero consequences for the rest of the population.
To raise needed public funds, tax increases must extend much further down the income and wealth distribution.
The more concentrated they are, the greater the tax avoidance activity will be, limiting revenue.
The greatest illusion for centrists is that there is a way to persuade the public that higher taxes and greater public investment are necessary and that this is in the interest of all our collectives.
Examples of open, honest, and successful revenue raising programs that minimize distortions while also reforming taxes are conspicuous by their scarcity.
Even textbook attempts, such as the 2002 increases in national insurance in the UK, chose the tax least visible to the public but also with the highest labor market costs.
On the right, the long-standing fairy tale is that tax cuts raise revenue.
While true in rare specific cases, the overwhelming evidence is that broad tax cuts, such as those adopted in the United States in 2017, worsened public finances, even if they were good for growth.
But perhaps the greatest fantasy of all is the expectation that anything will happen to resolve unsustainable budgets without a crisis.
We are much more likely to just keep going, pretending that things are fine until something breaks.
The problem is that the tax system will collapse and there will be no happy ending.
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