When there is a fiscal deficit, there is always a tax

OECD countries have run up an unprecedented fiscal deficit in 2020. It is therefore useful to remember that when there is a fiscal deficit, there is always a tax. This may be a traditional tax; but governments will avoid it. It should be remembered that the increase in the tax burden in the euro zone after the subprime crisis caused activity to fall again. In the past, this could be an inflation tax, which taxed holders of money balances; an expansionary fiscal policy led to an expansionary monetary policy, thanks to the monetisation of fiscal deficits, and an expansionary monetary policy led to inflation. But the link between monetary expansion and inflation has now disappeared. That leaves a third tax, which is the tax linked to inflation in financial and real estate asset prices. Monetisation of fiscal deficits leads to an excessive rise in asset prices, and this is a tax on asset buyers, i.e. on young people who have to build up assets and buy housing. The problem is that taxing young people through asset price inflation is certainly a less equitable tax than traditional taxation or an inflation tax.