Big Deficits, Bigger Delusions: Tax Cuts, Tanks, And The Vanishing Monetary Theory Mirage

In the grand opera of fiscal policy, the overture is always solemn, the middle full of swagger, and the finale...? Well, that depends on whether anyone’s still paying attention. 

In 2025, the US budget deficit is ballooning past 6.5% of GDP, not due to war or pandemic, but because of legacy tax cuts marketed as “beautiful,” and a political appetite for more. Meanwhile, Europe, long allergic to deficits, has rediscovered fiscal profligacy through the morally righteous backdoor of rearmament, nudged by President Donald Trump’s NATO tantrums.

And then, like a ghost that whispered too loudly and was ushered out of polite society, there’s Modern Monetary Theory, the once-fashionable idea that sovereign governments issuing their own currency can run large deficits without fiscal constraint as long as inflation remains contained. In 2020, it had its moment. In 2025, it’s that forgotten guest no one dares mention at dinner.

This is the story of three deficits: one driven by tax cuts, one by tanks, and one by theory. Each alone is a policy debate. Together, they form a paradox: we may be living through the most deficit-heavy peacetime era in decades, with no coherent narrative holding it together.

Let us begin in Washington, where logic often goes to die.

The 2017 Tax Cuts and Jobs Act slashed corporate taxes from 35% to 21%, raised the standard deduction, and promised to unleash investment and growth. What it actually unleashed was a yawning fiscal gap. By 2019, corporate tax revenues fell by a third. By 2020, the federal deficit hit close to a trillion dollars, even before COVID-19 struck.

The Congressional Budget Office now estimates that extending the Act’s expiring provisions will cost another $3.5 trillion over the next decade. The US federal debt is estimated to have crossed 123% of GDP, and interest payments alone will exceed $1.1 trillion in 2025-26, soon to overtake defence and Medicare. Yet Trump is doubling down. Perhaps he’s counting on the theory once loved by progressives: Modern Monetary Theory.

Rather than worrying, lawmakers are locked in a surreal debate: not about closing the gap, but about cutting taxes further. One can almost hear the ghost of Dick Cheney whispering from 2002: “Deficits don’t matter.”

Across the Atlantic, Trump’s legacy lives on in the most ironic of places: the war rooms of European capitals. His incessant berating of NATO members to “pay up” has, belatedly, achieved results. Not via persuasion, but via Putin.

Since Russia’s 2022 invasion of Ukraine, European nations have scrambled to meet NATO’s 2% of GDP defence spending target. Germany, long fiscally conservative and militarily bashful, committed €100 billion in extra defence funding. France, Italy, and the Nordics are catching up. Poland now spends over 4% of GDP on defence, making it NATO’s new model student.

But this spending comes on the top of existing fiscal burdens: green transition costs, ageing demographics, and stagnant productivity. Public debt across the Eurozone is creeping upward. Italy’s debt-to-GDP is over 140%, and France’s over 110%, and even Germany has quietly suspended its “debt brake” rule, for the third time in five years.

This isn’t Keynesian stimulus to boost consumption or invest in infrastructure. This is defence-led fiscal activism: low multiplier effect, high political salience. The Stability and Growth Pact, Europe’s fiscal straightjacket, has become more suggestion than rule. 

The EU has invented euphemisms like “green golden rules” and “strategic autonomy budgets” to justify the loosening. But the truth is plain: fiscal caution melts like Arctic ice when the moral imperative is strong—climate change, Ukraine, NATO.

Even Keynes would blush.

In this age of expanding deficits, one would think Modern Monetary Theory would thrive.

Not long ago, it was on the ascent. Its core idea—sovereign governments that issue their own currency, such as the US, UK, or Japan, can never “run out of money” and that inflation, not debt, is the true constraint—challenged economic orthodoxy. Stephanie Kelton’s The Deficit Myth (2020) urged policymakers to stop worrying and love the deficit.

COVID-19 seemed to prove it right: trillions were spent, monetised by central banks, and inflation remained tame, at first. By 2021, Kelton was on bestseller lists, and Twitter macroeconomists invoked Abba Lerner’s “functional finance” like gospel.

Then inflation gatecrashed the party. 

By mid-2022, US CPI crossed 9%, Eurozone inflation hit 10.6%, and central banks panicked. The Federal Reserve hiked rates to 5.5%, and the ECB followed. Suddenly, deficits were “fuelling demand” and the Modern Monetary Theory’s once-iconoclastic claims became politically toxic.

True monetary theorists protested: they never denied inflation risk; they just believed in spending until inflation, not before. But the public heard “deficits don’t matter” and concluded, in 2023, that they very much did.

By 2024, Modern Monetary Theory was out of fashion. Kelton’s disciples lost influence. No mainstream government embraced the full toolkit, particularly the part about raising taxes to curb inflation. Because, let's be honest, in the West, raising taxes is like asking billionaires to carpool.

Today, that theory lingers in academic journals and fringe policy circles, like a prophet who was both too early and too theoretical.

Fiscal Nihilism
Where does that leave us?

In the US, deficits rise, not for Keynesian stimulus, but to enshrine regressive tax cuts. In Europe, they grow not to build back better, but to build battalions. And the only framework bold enough to justify such deficits, the Modern Monetary Theory, has been quietly shown the door.

We now have spending without doctrine, borrowing without narrative, activism without anchor. A void filled by whatever is politically convenient.

Fiscal hawks are silent in power. Doves are sheepish post-inflation. And the centrists? They're busy renaming debt as “fiscal space,” hoping no one notices the oxymoron.

Markets are noticing. Japan’s yen has slid dramatically. US Treasury auctions are growing thinner. Credit ratings are flashing warning signs. Even the IMF, the high church of fiscal prudence, is back to preaching “medium-term consolidation,” code for: stop this madness before the bond market does.

What makes this moment unique isn’t just the size of the deficits, but the absence of intellectual scaffolding. 

In the 1930s, deficits fought depression. In the 1960s, they pursued full employment. In the 1980s, these were accidental consequences of Reaganomics; in the 2000s, they were driven by war and tax cuts.

Today, they just… are.

Trump’s “big, beautiful deficits” and NATO’s defence splurge may be politically expedient, but they represent a deeper intellectual drift, where fiscal tools are wielded without a framework, and economic choices are led by poll numbers, not principles.

Emerging markets don’t have luxury of that drift. 

For them, deficits are not academic debates but existential dilemmas. They don’t borrow in their own currency with impunity. Try monetising deficits in Argentina or Egypt, and you'll trigger a currency crisis, not a celebration.

While the Fed attempts soft landings and Congress debates extending tax cuts, emerging market central banks are forced to raise rates higher and faster. India, ever cautious, has kept a tight lid on fiscal slippage, even as elections tempt politicians toward populist splurges, and some states are in a sort of fiscal mess. So far, so good.

Emerging markets never got to experiment with the Modern Monetary Theory. Their fiscal rulebooks are less about ideology, more about external credibility. In Indonesia, a missed deficit target moves bond yields overnight. In South Africa, slippage sends the rand into a tailspin. Turkey... stopped pretending.

The IMF, meanwhile, plays a double game, urging fiscal consolidation in emerging markets while ignoring the G7’s spiralling debt ratios. “Do as we say, not as we spend.”

Even the global green transition exposes a fiscal divide: Europe borrows to subsidise clean tech; Africa faces rising debt costs to build climate resilience. Normalisation of interest rates may be global, but fiscal sovereignty is not.

If the West is fiscally drifting, emerging markets are in triage. There is no room for “beautiful tax cuts” or Modern Monetary Theory debates. Just spreadsheets, IMF staff visits, and rollover risk.

As one emerging market policymaker reportedly quipped at a recent IMF Spring Meeting: “The US runs 6% deficits and gets applause. We run 4% and get a downgrade.”