We embed the budget constraints of the private, public, and external sectors within the aggregate budget constraint of the economy to examine whether valuation ratios in one sector forecast real returns and cash-flow growth in others. Exploiting the cross-sector restrictions implied by the aggregate constraint, we show that fluctuations in the government surplus-to-debt ratio robustly predict equity returns. The magnitude of this cross-sector predictability is on par with the own-sector predictability associated with the dividend–price ratio. We then develop a model in which distortionary taxes generate these patterns and use the cross-sector forecasts to calibrate the implied size of the tax distortions.