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Today’s New York Times has an interesting story about how the cash starved states in the US are looking to raise taxes on everything from haircuts, funerals and dating services to fund their budgets.

Opponents of imposing taxes on services like funerals, legal advice, helicopter rides and dry cleaning argue that this push comes as businesses are barely clinging to life and can ill afford to see customers further put off by new taxes. This is especially true, they say, in states like Michigan and Pennsylvania, where some of the most sweeping proposals are being considered this spring.

But this is also a period of economic gloom for states. Pension funds are in the red, federal stimulus help will soon vanish, and revenues from traditional sources like income and property taxes are slumping ever lower, with few elected officials willing to risk voter wrath by raising them.

This story is being repeated in most western economies; chronic budget deficits coupled with the fiscal stimulus of the last two years has created a looming budget crisis for these economies that can only be met by raising taxes or drastically cutting spending.

Here is a very thoughtful analysis of the situation facing the British economy by John Lanchester in the London Review of Books.

[Britain has] a record deficit amounting to 12.8 per cent of GDP – that’s the gap between what the government is taking in revenue and what it is spending. That’s worse than Greece. In 2008-9, we had gross debt amounting to 55 per cent of GDP; by 2010-11 we will hit 82 per cent. In plain English, we’ve gone into debt at a speed never before achieved, and have built up debts never before seen in peacetime. The foot is on the floor and the needle is in the red. There’s no choice except to slow down – but nobody knows quite how to do it, because it’s never been done before.

John goes on do describe some of the “blood curdling” choices facing the next British government:

The reality is that the budget, and the explicit promises of both parties, imply a commitment to cuts of about 11 per cent across the board. Both parties, however, have said that they will ring-fence spending on health, education and overseas development. Plug in those numbers and we are looking at cuts everywhere else of 16 per cent. (By the way, a two-year freeze in NHS spending – which is what Labour have talked about – would be its sharpest contraction in 60 years.)

Cuts of that magnitude have never been achieved in this country. Mrs Thatcher managed to cut some areas of public spending to zero growth; the difference between that and a contraction of 16 per cent is unimaginable. The Institute for Fiscal Studies – which admittedly specialises in bad news of this kind – thinks the numbers are, even in this dire prognosis, too optimistic. It makes less optimistic assumptions about the growth of the economy, preferring not to accept the Treasury’s rose-coloured figure of 2.75 per cent. Plugging these less cheerful growth estimates into its fiscal model, the guesstimate for the cuts, if the ring-fencing is enforced, is from 18 to 24 per cent. What does that mean? According to Rowena Crawford, an IFS economist, quoted in the FT: ‘For the Ministry of Defence an 18 per cent cut means something on the scale of no longer employing the army.’

The situation in France is no better.

France has hardly begun to pair back the fiscal stimulus of the last year, though the car scrappage scheme is being phased out in steps. The budget deficit is expected to rise to 8.2pc of GDP this year, with no real austerity until 2011. The country faces the same risks as the UK in delaying retrenchment as public debt surges above 80pc of GDP this year. Fitch Ratings and Standard & Poor’s have begun to mutter that France may endanger its AAA status if it fails to act soon, though the Paris clearly has more leeway than London for now.

In sharp contrast, the Eastern economies of countries like Singapore do not confront such dire budget choices and are not raising their taxes.  This is likely to help these economies attract capital and talent from the west in the near term.

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