The fiscal problems that face almost all the high-income nations today seem to be multifaceted and formidable in scale. These problems emerged, broadly speaking, in the wake of oil shocks and inflation during the 1970s and became even more intractable during and following the Great Recession of 2007-9. Among the problems have been increasing budget deficits and public debt. The pace, extent and nature of these problems have varied among the high-income nations, but a common trend of increasing reliance on debt finance has led some students of the history of public finance and fiscal policy to declare the decline or end of the ‘tax state’, propose dating the beginning of that transition in the 1970s, suggest that ‘debt state’ is a better way to describe the financial core of the contemporary state in the advanced nations and to propose that this means a chronic loss of fiscal capacity. In this chapter we seek to understand the sources of the growing reliance on deficits and debt among high-income nations by examining the history of the fiscal policies of Japan and the United States since the Second World War. Studies of international fiscal affairs often tend to view the histories of the United States and Japan as exceptional and therefore difficult to incorporate into comparative analysis. However, we have coupled these two nations for several reasons. First, they are two of the three largest economies in the world and any interpretation of contemporary global fiscal policy needs to encompass their situation and histories. Second, each has a high level of national debt by any standard. In Japan, debt as a percentage of GDP has reached an all-time high in that nation’s history. Moreover, the level of 230 per cent in 2014 was the highest of any OECD nation at the time. In the United States, the debt-to-GDP ratio has risen to approximately 103 per cent of the level of GDP, or to a level approaching those attained during the aftermath of the American Revolution and Second World War. The current level exceeds the comparable ratios in Canada, France, Germany and all the Scandinavian nations. Third, both nations have relatively small public sectors and relatively low levels of public investment and expenditures for social services compared to nations in western Europe.
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