IMF Calls On Japan To Raise Consumption Tax

by Mary Swire, Tax-News.com, Hong Kong

30 July 2008

While welcoming the efforts being made by the Japanese government to balance its budget by 2011, the International Monetary Fund (IMF) said on Tuesday that consumption tax may have to be raised to curb public debt and absorb rising social security costs.

"Larger fiscal adjustments than currently envisaged by the authorities will be required to stabilize the high public debt and make room for the fiscal costs of population aging," the IMF stated in its Article IV report on the Japanese economy.

According to the Fund, with limited scope for further expenditure cuts, future fiscal consolidation will compel the Japanese government to raise more revenues.

"In this context, Directors saw the merits of a comprehensive tax reform, and most Directors supported consideration of an increase in the consumption tax," the report stated.

The IMF regarded the government's intention to increase its contribution to the basic pension during the 2009 fiscal year as a good opportunity to raise the consumption tax rate, "as this could be viewed as a step supportive of the intention to ensure the funding of social security."

The IMF's recommendation is unlikely to be welcomed by the government, which has delayed a decision on raising the 5% consumption tax rate many times in view of its unpopularity with the voting public.

Last week, the Japanese government's tax panel began talks on reforms to fund an increase in the government's contribution to the state pension scheme. Panel Chairman, Yutaka Kosai revealed, however, that a concrete plan for increasing consumption taxes is unlikely to be included.